Stay calm, and stay invested

Over the past ten years, investors in South African-domiciled unit trusts have generally enjoyed fairly good returns. Excluding money market funds, 92.78% of all local funds with ten-year track records have delivered inflation-beating performance over this period.

However, this statistic looks very different over the short term. For the one year period to the end of December 2016, only 23.99% of funds produced real returns – in other words outperformed inflation.

 

All South African-domiciled unit trusts
Total number of funds Number of funds that beat inflation Percentage
One year 992 238 23.99%
Ten years 346 321 92.78%

Source: Morningstar

 

One could argue that this just shows that last year was quite poor for investors. However, it does also make the point that the longer you stay invested, the better your chances of earning a real return on your money.

This is particularly true for funds that invest primarily in growth assets like listed equity. When comparing returns over a number of time periods, it is quite apparent that your chances of seeing real returns are much higher if you stay invested for at least five years.

The tables below show the relative performance of funds in three local unit trust categories – multi-asset high-equity, multi-asset flexible, and equity general. These categories were chosen as they have the greatest exposure to equities. The analysis shows how many funds in each category delivered real returns over six different time periods.

 

South Africa Multi-Asset High-Equity
Total number of funds Number of funds that beat inflation Percentage
One year 157 10 6.37%
Two years 126 25 19.84%
Three years 104 68 65.38%
Five years 80 78 97.50%
Seven years 57 55 96.49%
Ten years 42 38 90.48%

Source: Morningstar

 

South Africa Multi-Asset Flexible
Total number of funds Number of funds that beat inflation Percentage
One year 65 17 26.15%
Two years 63 17 26.98%
Three years 57 28 49.12%
Five years 48 46 95.83%
Seven years 44 42 95.45%
Ten years 30 28 93.33%

Source: Morningstar

 

South Africa Equity General
Total number of funds Number of funds that beat inflation Percentage
One year 162 31 19.14%
Two years 143 14 9.79%
Three years 122 52 42.62%
Five years 98 91 92.86%
Seven years 82 78 95.12%
Ten years 59 54 91.52%

Source: Morningstar

 

Across all three categories, five years is a clear inflection point. It is from this period that an investor’s chances of seeing a real return go above 90%, and stay there.

There is admittedly a small shortcoming in this analysis in that it doesn’t take survivorship bias into account. In other words, funds that have closed down aren’t taken into consideration and in many cases those funds would have closed because they were poor performers.

However, the difference between short-term and long-term performance is still stark. Even though returns over one- or two-years may be poor, if you stay invested you are likely to be rewarded.

It is also noticeable that the multi-asset high-equity funds show much better relative returns over three years than flexible or pure equity funds. As they are generally more diversified across different asset classes you would expect their medium-term performance to be more stable, and the tables show that this is the case. Even in this category, however, the likelihood of seeing real returns increases significantly after five years.

The lesson here is that patience is a key part of successful investing. What happens over the short term might seem alarming, but if you stay invested and let time do its work, your chances of growing your real worth become a lot better.

 

Source: MoneyWeb