Financial markets go up and down. By now, we all know that – what we really expect from fund managers is to catch most of that performance, and never seriously underperform. However, the unfortunate reality is that many investors never get the full performance of their selected manager – because they frequently panic and switch between asset classes and fund managers.
Anne Cabot-Alletzhauser, MD of multimanager Advantage is fond of pointing to research which shows that most capital erosion is accomplished by switching assets and funds, by investors chasing the latest “top performing fund”.
She also points out that the bulk of performance comes from correctly choosing the right asset class (equities, bonds, property or cash) rather than from selecting a “good” fund manager.
Reinforcing this view, Trevor Abromowitz, head of Alexander Forbes
Asset Consultants, says: “Take, for example, the switching behaviour of members of South African retirement funds. In October 2008, the members’ switching rate was approximately 20% – following the 10% fall in markets that month – a tenfold increase relative to the 2% switching rate six months previously in April 2009 when markets were growing steadily and everything was running according to plan.” The problem is exacerbated as the evidence shows that not only do we switch out at the wrong time, but we do not switch back in at the right time either.
Abromowitz says that with the market producing returns in excess of 10% in May 2009 for example, the switching rate was back at the 2% level and many members lost out on the strong market performance that came through.
Approach global equities with caution.
However, others warn that holding back might be the right option until the economic outlook becomes more settled. Investment Solutions, one of South Africa’s leading providers of multimanager investment portfolios, has warned that equity markets globally are in risky territory – despite recent gains and significantly reduced volatility.
Glenn Silverman, global chief investment officer of Investment Solutions, says that many countries, and particularly the US and the UK, are still in deep economic trouble. “The debt and leverage excesses within the system, allied with typically low savings rates, are expected to create a massive headwind against which global economic growth, and presumably equity markets, may struggle for years to come.”
Silverman cautions that the recent global equity market rally which started in early March this year is simply a rally within a longer-term bear market and is likely to be unsustainable.
“Markets may well still grind higher over the next few weeks but investors should note that markets are approaching an over-bought level. And the historically dangerous month of October is only weeks away.
“Investors should avoid chasing the market at this late stage. The bear is still lurking out there somewhere,” says Silverman.
Such caution comes from the fact that this is not the first – or worst – crash that we have ever had. There could yet be more to come. The Wall Street Crash of 1929 saw an 89% fall in the market (as measured by the Dow Jones Industrial Average) over a period of 713 days. The Asian Financial Crisis of 1997 resulted in a 19% fall in the market over a 31-day period. Worse still, Black Monday – 19 October 1987 – saw a 23% fall in the market in a single day.
For anyone attempting to design a long-term plan for their retirement, this volatility – and volatility seems to be getting more severe every year – is disheartening. Should they even be looking at these short-term gyrations?
Build wealth before retirement.
No magical mix of investments will propel you to great wealth in retirement. You get rich before you retire, not afterwards, because a sudden and substantial increase in net worth cannot be achieved through investment without sizeable risks – and the vast majority of retirees simply cannot afford that level of aggression.
This view comes from Barnard Jacobs Mellet Private Client Services (BJM PCS), a specialist advisor to high net worth individuals and an advocate of prudent lifestyle decisions to support astute investment choices.
Retirees who enjoy acceptable living standards have usually made two key decisions before considering their investment options – the decision to live within their means and pay off debt.
“The sooner those decisions are made, the better the prospects for retirement,” says Jurie van der Merwe, a senior wealth manager at BJM PCS.
Wealth mounts when cash stops leaking out. The main drivers are then the timeframe (the longer the better), the size of monthly and annual commitments and the selection of a well-qualified wealth manager.
“The value added by a knowledgeable professional should not be underestimated,” notes Van der Merwe.
Time rapidly becomes decisive because the longer the timeframe to retirement the greater the potential recourse to growth assets like equities – a volatile asset class, but one with proven inflation-beating capacity.
The extent of short-term equity risk is highlighted by recent experience. The JSE peaked around 33 000 points in May 2008 before plunging to around 18 000 points in November. However, since March, the JSE has moved 25% higher, and there may be more growth to come.
“We see client inflows into equities; directly into shares by wealthy clients, but also into unit trusts and exchange traded funds. A 25% gain is substantial, but other emerging markets such as Brazil, Russia and China have strengthened even more, suggesting we have some catching up to do.”
Clients who had previously beefed up their cash positions appear to be inclining toward long-term growth.
The importance of diversification
Property, the other major growth asset, is also receiving attention. Van der Merwe adds: “Typical diversification for a moderate investor aiming for a comfortable retirement would be 40% to 50% in equities, 20% to 30% in property, 10% to 20% in bonds and 10% to 20% in cash.
“Stay in cash and you lose out in the end through tax and inflation. Interestingly, some conservative investors are moving from cash into income funds holding longer-dated corporate bonds as a way of locking in favourable rates.”
Diversification across domestic asset classes is usually complemented by offshore allocations, especially at times of rand strength.
“We generally advise a balanced mix across various geographies, Asia, Europe and America, with perhaps a tilt toward a specific theme – perhaps energy or Asian growth,” says Van der Merwe.
Wise entrepreneurs appoint advisors
John Kennedy, a Citadel Wealth Planner, has worked closely with many entrepreneurs over the past 15 years and understands their specific philosophy.
“Entrepreneurs have drive, confidence, and they never quit. They trust their instincts, are independent, think for themselves, have passion and don’t know the meaning of boredom.
“Unfortunately, the recipe required to protect their capital over the long-term is different to the risks taken to make it, hence, businesspeople are often heard to say, “I found it easier making money than looking after it”.
Indeed, many wealth managers report that entrepreneurs want to be more hands-on with their wealth management – just as they were with their business.
Kennedy says: “The long bull-run has now proven that for too long it was too easy. Preserving and growing capital was simply about taking more risk to get a higher return. Add in some gearing and the upside was exponential.”
Some high-risk investors came unstuck. “Often with entrepreneurs, cautious policies such as diversification, liquidity, objectivity, are the antithesis to what they’ve done to create their capital in the first place.”
That’s why a financial advisor needs to act as a counterbalance, especially for an entrepreneur. And herein lies a problem – many financial advisors took the route of least resistance by increasing their clients’ risk to increase the return.
“Unfortunately, the consequences of last year’s turmoil are that the trust which many had in their advisors is either being questioned or has been lost. Certainly, many people are feeling
“For a partnership to succeed there needs to be an alignment of interests. Proper planning, a pre-agreed upon investment strategy, a process with a proven track record and well executed implementation must support this partnership. The global industry is being questioned for its ability to deliver on independent and objective advice and ultimately to act in the client’s best interests,” explains Kennedy.