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Money Matters
Author: Warren Ingram*|
05 November 2013 23:47
Chasing performance
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A
sure-fire way to lose money in the long-term.
The
stellar performance of the JSE over the last two years is creating
understandable anxiety about a potential market crash. At the same time, it is
also luring some investors into dangerous territory as they start to follow
funds and shares that have already performed brilliantly in the hope that this
performance will continue. As history has repeatedly taught us, chasing
performance is a sure-fire way to lose money in the long-term.
THESE
HAVE BEEN THE “GOOD TIMES”
The
All Share Index has grown by more than 25% per year for the last two years and
by 17% per year for the last five. In anyone’s books this is a great return for
equity investors and represents some of the best growth we have seen for a long
time. This performance has created some major pitfalls that will catch
unsuspecting investors so you need to exercise caution with your next
investment decision.
DANGER:
POTHOLES AHEAD
To
illustrate these dangers, Resources unit trusts (those that invest in the
mining sector) have averaged 4% growth for the year ending September. Over the
same period, unit trusts investing in the Industrial sector have averaged 35% -
a brilliant return. When investors start reviewing the most recent unit trust
performance rankings, funds that have had a major exposure to mining houses
will look very sickly compared to those that are invested in Industrial shares.
Investors
will therefore be tempted to move out of funds with poor performance into those
that have shown recent growth of 30% to 40%. Unfortunately, this is likely to
be a bad investment decision. The valuations of the shares in the Industrial
sector are way above their long-term fair value. As an example, Naspers and
Remgro are more than double their long-term PE’s. This is not sustainable and
what goes up eventually comes down again. With shares, the correction is often
brutal. So if you decide to invest new money into a fund that has just achieved
a return of 35%, you need to be sure that you are not being overinvested in
shares that are completely overvalued.
WHAT
STRATEGY TO FOLLOW
If
you are invested in a fund that has delivered a return of 20%, you might feel
hard done by as the average equity unit trust has delivered a return of 22%
over the last year. However, you need to understand how your fund is invested.
You might be in a well-diversified portfolio with shares that are trading below
their long-term value. If that is the case, a return of 20% is brilliant
because your potential losses are limited and you might see great growth going
forward.
Successful
investing is about consistent returns – the more consistent your growth the
better. Here is an example, if you had invested R100 into two funds for the
last three years:
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Fund 1
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Fund 2
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Year 1
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20%
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35%
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Year 2
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15%
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-20%
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Year 3
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10%
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35%
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Value of R100 after 3 years
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R152
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R146
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Fund
1 has never achieved a return of more than 20% but it has also did not lose
money. It is this consistency of returns that enabled Fund 1 to outperform Fund
2. Over the longer term, greater consistency will ensure even more
outperformance. This does not mean you should invest all your money in a money
market fund which delivers VERY consistent but poor returns. Rather aim for
funds that have a long track record of delivering growth that comfortably
exceeds inflation.
