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Investment views

How are golden retrievers like the equity market?

1 November 2016

By: Paul Hutchinson, Sales Manager

Long-term analysis of the performance of the various asset classes tells you that equities outperform over time. However, no amount of analysis will tell you what equities will do tomorrow, or over the next week, or in fact the next month.

Ralph Wanger, founding partner of Chicago’s Wanger Asset Management, came upon an analogy for the equity market while watching a woman walk her golden retriever through a park. While she walked at a steady pace through the park, the dog romped all around the grounds. Trying to guess where the dog would run next was difficult and predicting its ultimate destination was near-impossible.

“However, there is a simpler way to solve this problem.” Wanger wrote in 1997. “The dog came in with its owner and left with its owner. You know where the dog started and where the dog ended up, even though for the half-hour in the park the dog’s motion was unpredictable.”1 He concluded that while short-term market movements (the dog) may make for exciting reading in a newspaper, they actually mean little. However, remaining focused on long-term trends (the owner) leads to the correct conclusion.

The moral of the story being not to concern yourself with the short-term fluctuations of equity markets, as most uninformed observers do, but draw on history which teaches that over time equities will outperform other asset classes.

The power of doing nothing

Many investors profess to have a high tolerance for risk; that is until the value of their investment falls by more than say 10%. It is often at this point, and with much higher anxiety levels, that investors feel compelled to act by selling their long term growth investment seeking the perceived safety of cash, or similar conservative investment. However, as difficult as it is to do nothing in market downturns, it may just be the best investment strategy.

Morningstar recently showed the performance impact of the difference between staying invested in the equity market post a significant market correction, selling at the bottom and reinvesting a year later, and selling and staying in cash. The results are illustrated in the following line chart (using the FTSE/JSE ALSI to represent the equity market).

Figure 1: The importance of staying invested

Source: Morningstar and Investec Asset Management as at 30.08.16. (The graph is for illustrative purposes only.)

1South Coast Today, 04.01.98

Some observations:

  • As expected, remaining invested delivered the best outcome for investors. At end July 2016 the value of their investment was R279 142 (up from the R100 000 invested on 1 January 2007), which is approximately 37% greater than the investment value of those clients who sold at the bottom and then invested back into the market a year later (= R204 118). The worst outcome was for those clients who sold and then remained invested in cash (= R124 678), demonstrating the real risk of being too conservative.
  • The FTSE/JSE All Share TR Index fell approximately 32% from peak (May 2008) to trough (February 2009) – this in only 9 months. Investors need to factor in this possibility when deciding on their capacity to take risk.
  • The FTSE/JSE All Share TR Index returned to its previous high in only 29 months, whereas investors who switched to cash at the bottom of the market and then invested back into the market a year later took 54 months to return to their previous high
  • More than 8 years later those investors that switched to and remained in cash have still not returned to where they were at the peak!

Further evidence in support of staying invested is provided by American research company, Dalbar2. Since 1994, Dalbar has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds (US unit trusts or collective investment schemes) over both short and long term timeframes. The results consistently show that the average investors earns less – in many cases, much less – than fund performance reports would suggest. This is simply because of self-destructive investor behaviour – selling out of funds when their performance bottoms and buying into funds when their performance peaks.

Dalbar concludes that; “No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behaviour than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market.”

All the above clearly adds to the argument that it is never a good idea to respond emotionally to market movements!

The Investec Equity Fund may be an optimal long term investment solution

In our opinion, many investors seeking capital growth through long term exposure to equity markets may need look no further than the Investec Equity Fund.

The cornerstone of the Investec Equity Fund’s investment philosophy and process is identifying reasonably valued shares where expectations of future profits are being revised upwards (positive revisions). Conversely, the fund seeks to avoid shares where consensus profit expectations are being lowered (negative revisions) and where valuations are excessive.

As an overlay to the stock selection process, the fund integrates top-down views on macroeconomic variables such as the rand, interest rates and economic growth. The net result being a blend of bottom-up fundamental research with a focus on earnings revisions and macro-thematic market trends.

The success of this consistent and repeatable investment philosophy and process is evidenced in the fund’s attractive long term track record outperformance.

2Dalbar’s 21st Annual Quantitative Analysis of Investor Behaviour

Table 1: Long term track record of outperformance of the Investec Equity Fund

Investec Equity Fund A 15.0 16.5 17.5
87.5% FTSE/JSE All Share Index (ALSI) + 12.5% MSCI AC World NR (ACWI) (ALSI pre 15/07/2016) 11.0 14.7 16.3
ASISA SA Equity General 9.3 12.3 15.6
Peer group quartile rankings 1 1 1


Source: ©Morningstar, dates to 30.08.16. Performance figures above are based on lump sum investment, NAV-NAV, net of fees, gross income reinvested. All Investec A class funds where used, performance net of fees. Competitor Funds include funds in the same ASISA categories. Highest and Lowest refers to the highest and lowest 12-month rolling returns since launch. Investec Equity Fund A Acc (02.11.87): Highest 65.8 Lowest -34.8.

The value of independent financial advice

Finally, while there is increased noise and media commentary surrounding the ongoing instability in financial markets, investors must not panic. They must revisit and recommit to their long term investment goals and bear in mind that they are most likely to achieve these by ensuring time in the market, as opposed to trying to time the market. In addition, investors should recognise that the strong real returns delivered in the past are unlikely to be repeated. In fact, they should expect lower investment returns from all asset classes in the coming years and therefore plan accordingly.

In this environment the value of financial advice is even more pronounced. A good financial advisor can help investors understand their future cashflow needs and ensure that investment portfolios are set up correctly to cater for these needs. A correctly structured investment portfolio requires surprisingly little attention during periods of excessive market volatility. We therefore strongly recommend that investors seek professional investment advice, tailored to their individual circumstances.


Important information
Collective investment schemes (CIS) are traded at ruling prices and can engage in borrowing, up to 10% of portfolio net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the Manager, Investec Fund Managers SA (RF) (Pty) Ltd which is registered under the CIS Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. CISs are generally medium to long-term investments and the manager gives no guarantee with respect to the capital or the return of the Fund. Performance shown is that of the Fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax and past performance is not necessarily a guide to the future. The value of participatory interests (units) may go down as well as up. Performance figures above are based on lump sum investments, using NAV to NAV figures net of fees with gross income reinvested, in South African rands. The value of participatory interests (units) may go down as well as up. Different classes of units apply to the Fund and the information presented is for the most expensive class. Fund valuations and transaction cut-off time are 16h00 SA time each business day. This portfolio may be closed in order to be managed in accordance with the mandate. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. A higher Total Expense Ratio (TER) does not necessarily imply a poor return, nor does a low TER imply a good return. Where portfolios invest in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Fund prices are published each business day in selected media. Additional information on the Fund may be obtained, free of charge, at The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. Investec Asset Management (Pty) Ltd (Investec) is a member of the Association for Savings and Investment SA (ASISA). The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. All information provided is product related, and is not intended to address the circumstances of any Financial Service Provider’s (FSP) clients. In terms of the Financial Advisory and Intermediary Services Act, FSPs should not provide advice to investors without appropriate risk analysis and after a thorough examination of a particular client’s financial situation. Investec Asset Management (Pty) Limited is an authorised financial services provider.

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