Disappointing returns from South African shares and a huge fall in listed equity have resulted in even diversified investments such as multi-asset funds delivering negative real five-year rolling returns for the first time in 20 years.

Amid tales of corruption, political turmoil and expectations of muted economic growth globally, the question on almost every investor's mind is whether this time is really different — and should you switch to better-performing cash investments?

But many asset managers say the biggest risk now is that you capitulate and switch out of your investments. All indications are that "this is the darkest hour before the dawn", as Investec sales manager Paul Hutchinson puts it.

Releasing the unit trust industry statistics last month, Association for Savings and Investment SA board member and MD at Investec Asset Management Thabo Khojane says never in his 20 years in the industry has he seen rolling five-year returns that were negative in real terms.

But Investec's star multi-asset portfolio manager, Clyde Rossouw, says that after a number of years of muted returns, now is the time to sow the seeds of future returns from growth assets.

Hutchinson says that though some investment risks remain, local and global markets are now more reasonably priced and your future returns depend on what you pay into them. Managers who moved some money into cash are now buying back into equities.

Greg Hopkins, chief investment officer at PSG Asset Management, says the past five years have been hard for investors — and investor fatigue is creeping in.

"Our government finances are deteriorating on a daily basis and on the ground it is tough. We are in the middle of company reporting season and Shoprite, for instance, recently released a set of results that has been described as the worst in living memory, which is regarded as 40 years," he says.

However, the biggest risk for investors is not what will happen in the elections in a few months' time, or what will happen in the local or global economy.

The biggest risk facing investors at the moment is investor capitulation, says Hopkins.

Negative five-year
rolling returns shock
‘the darkest hour
before the dawn’.
Paul Hutchinson, Investec sales manager

Quoting Warren Buffett, Hopkins says every 10 years the dark clouds gather and then they briefly rain gold.

"When you get those dark clouds, which are associated with fear and uncertainty, [you don't see clearly]. Poor visibility of the future is often associated with low prices, but low prices bring opportunities for subsequent future returns," he says.

Monene Watson, chief investment officer at Old Mutual Multi-Managers, says South African equities have been an anchor tenant in most investor portfolios, yet over the past five years, cash delivered better returns than shares.

The question for most investors is whether the performance of South African equities over the past five years is a permanent feature of this asset class, Watson says.

Rolling five-year returns from the FTSE/JSE all share index to December 2018 have only been poorer than the most recent five-year period on four occasions over the past 40 years. Of the 289 local companies in this sample, 79% are down by more than 20% from their five-year highs, says Hopkins.

This indicates a deep bear market, Hopkins says, but also creates opportunity for strong potential returns in the future.

Analysis of past performance of the JSE all share index shows that rolling three-year returns subsequent to the low points in 1979, 1992, 1998, 2002 and 2012 have averaged about 24% a year. The best period followed the downturn in 2002 when the subsequent three-year rolling period delivered just over 40% a year — a period Hopkins describes as an outstanding one and which reminds him of the current situation.

Given past five-year annualised returns that we have seen, and given the risk of capitulation, moving into cash at this point in the cycle will severely affect your ability to earn returns in the future to achieve your long-term financial goals, says Hopkins.

Watson says South African shares are a volatile asset class but if you can stay invested and have the patience to stick to your investment strategy, then an analysis of rolling five-year real returns since 1960 shows that equities have outperformed cash 80% of the time.

So where to invest? Graham Tucker, a portfolio manager at Old Mutual MacroSolutions, says South African assets rather than their global counterparts offer a compelling story. SA has turned a corner, he says.

"We believe the change in SA is structural and it has the ability to drive SA forward over the next few years.

"South African bonds offer good value currently and while there are opportunities to be found in the South African share market, it is a bit too early to invest meaningfully there," says Tucker.

Though SA is not out of the woods, company share valuations are more attractive, with several reaching levels that offer opportunities for investors.

This is an attractive time to invest but active management is key to delivering returns under such market conditions, he says.