Reversal of fortunes expected across unit trust sectors

For many investors, the past five years have delivered very disappointing real returns. It has been a particularly abnormal period of asset class returns in SA, which saw conservative assets, specifically cash, significantly outperforming growth assets like equities and property.

This goes against what is traditionally expected – over the long term, riskier assets, specifically equity, is expected to garnish an equity premium and in doing so, significantly outperform cash.

To illustrate the abnormality of the past five years, the diagram right, shows the relationship of the major domestic sectors of the Association for Savings and Investment SA over the past 15- and five-year periods.

Graph 1 reflects the past 15 years and represents the expected outcome: the further out you go on the risk spectrum, the bigger the reward in the form of higher returns.

Yet, the second graph shows that over the past five years, the risk-return relationship has inverted, with the least risky asset – cash – providing the highest return.

Thus, funds with high SA growth asset exposure struggled, and multi-asset funds across the risk spectrum suffered due to this abnormal period of returns, despite often allocating as much as 30% to offshore assets, which have generally done well. Beyond the offshore exposure, investors needed to allocate their South African assets to cash for a prolonged period in order to do well, which is counterintuitive to building wealth in real terms over longer periods.

It has been an anomalous period in South African equity markets. We firmly believe that this trend could reverse and that the various funds could have a significantly different experience over the coming five years relative to what was experienced over the past five years.

Cash rates are at 50-year lows, and if inflation exceeds cash rates, earnings will likely (broadly speaking) at least grow in line with inflation.

Additional optionality is provided on the upside should we see additional volume growth or re-ratings in domestic equities.

PSG has a range of advisers who understand this complexity and they are qualified to take these instances into account when planning for your goals and dreams.

For more information, visit www.psg.co.za.

PSG Multi-Management (Pty) Ltd. FSP 44306. 

This article was paid for by PSG Wealth.