To Prosper in a Lower Return World, Stay the Course

With the local equity market having delivered below-average returns over the last three years, investors may be tempted to capitulate and make significant changes to their investment portfolios.

The temptation may be to switch managers, shorten your time horizon, change your investment strategy, or to cut your equity exposure; arguably precisely the wrong decisions to make in challenging markets, says Coronation Fund Managers. In fact, these actions are exactly the opposite of what the rational, long-term investor should consider in the current environment. Karl Leinberger, chief investment officer at Coronation, says: “The local share market has now failed to beat inflation for two consecutive calendar years – for only the second time in the last two decades. While this disappointing short-term outcome may make it more difficult to stay the course, especially for newer investors who only made their initial investment more recently, a long-term commitment to your chosen investment strategy remains the best way to optimise outcomes over meaningful periods.”

According to Leinberger, the following actions can help you achieve better returns:

Lengthen your time horizon and maintain appropriate growth asset exposure

“Studies show that investors give too much weight to recent returns, particularly if they are negative, and not enough to the long-term outcomes that are better aligned to their needs. This mental short-cut can end up costing you a lot of money. It is the return over the lifetime of an investment that really matters.”

The following table shows the returns for three Coronation funds with long-term growth objectives. “Based solely on their 2016 performances, you may conclude that it would be better to reduce risk. However, a more accurate picture of expected outcomes for the different risk profiles are the returns produced over the past five years.” According to Leinberger, it is also worth pointing out how quickly the short-term numbers can change. Returns for the 12 months to the end of January 2017 are markedly different to the prior 12-month period (end-December 2016), he says.

Short-term versus long-term returns


Source: Coronation – selected focused funds

Leinberger says that weaker historical returns increase the likelihood of stronger future returns. “The local equity market moved sideways in real terms for more than three years, while the earnings of the underlying companies have continued to grow.”

Active return becomes more important, not less, in a low return environment

According to Leinberger, Coronation strongly believes that skill becomes more valuable, not less, in challenging markets. “While investors may be tempted to switch to cheaper (passive) options during challenging times, we would argue that it is in declining markets that the truly active managers differentiate themselves.” In a high return environment, when the markets are returning for example 15% per annum, the manager who outperforms an already compelling return by 3% per annum, becomes a ‘nice to have’, explains Leinberger. “However, when markets are delivering 8% - 9% per annum, investing with a manager who can add an additional 3% per annum to your total investment return will transform your retirement.”

The power of active asset allocation

Asset allocation is the most important decision you make in investments, says Leinberger. “It dwarfs what any fund manager can achieve purely from security selection.” He argues that the value add from active asset allocation becomes more important, not less, during tough times. “Investors typically invest after returns have been good, and then sell out after returns have been bad.” Good asset allocation requires you to do the opposite, argues Leinberger. “You tend to achieve better results when you sell after a period of above-average returns as prices have gone up, and buy after a period of below-average returns and prices have fallen.” Leinberger believes the majority of investors are better off investing in a multi-asset fund offered by a skilled manager with a strong track record in asset allocation decision-making. “By giving your manager a bigger toolbox with which to create value, you can achieve a much better return at reduced levels of risk.” He says that in building their multi-asset funds, Coronation aims to achieve anti-fragile, robust portfolios that can handle the future playing out different to what you expect. “We diversify across sectors, industries, regions and currencies, and don’t allow an entire portfolio to hinge on a single view, no matter how much we believe in that view.”

To prosper, stay the course

“While long-term investing delivers compelling results – and intuitively makes sense – living it is tough, and you are likely to navigate several periods of poor short-term performance.” Leinberger concludes that as long as you own a fund with an investment goal, time horizon and risk budget that meets your needs, it makes sense to stay the course in your existing investment.

Karl Leinberger, chief investment officer at Coronation.


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