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Seed weekly - A Longer Term Perspective on Asset Class Returns

Because investors are inundated with news flow, which very easily results in myopic behaviour, it is often useful to take a step back from time to time and have a good look at the bigger picture. SBG Securities have produced an in depth report on the returns that the various asset classes have produced over time in South Africa.

With no shortage of opportunities, investors have a wide choice as to what to do with their savings. Within a South African context, some of the main asset classes include money market, bonds, listed property, and listed shares. Analysing history is but one part of the process in trying to determine what investors can expect into the future.

The chart below provides a long term view of the returns across the main asset classes. Over 54 years from 1960 to the end of 2013, the arithmetic total return from equities came in at 19.5%, far exceeding the returns from bonds and cash and producing an 11.2% real return. Over meaningful periods of time, the total return from equities has been found to be in a range from 17% to 21%.

Chart 1: Asset Class Performance (1960-2013)

When measured over the last 38 years, to also include the total return from listed property, listed equities still outperformed in most measured periods, except for over the last 15 years, where an investment into listed property would have produced 21.3% against the 20.7% for equities.

The chart below, over the shorter period of 38 years, also includes gold and the total return derived from “investing” into ones’ mortgage bond.

Chart 2: Asset Class Performance – 38 years (1976 – 2013)

What is noteworthy is that South Africa has had a tumultuous time against which these superior returns from listed equities were generated. Some of the negatives included inflation rising to double digits from mid-1970’s to early 1990’s, prescribed investments into government bonds from mid-1960’s to late 1980’s for pension funds, the debt standstill crisis in mid-1980’s and then the move from apartheid to a democracy in 1994. Over the last 20 years, while operating a democracy, there has also been no shortage of both local and global issues, including the Asian crisis in 1997, and then the 2007-2008 global financial crisis, which resulted in the single biggest decline in listed equities in a calendar year of 28.3%.

It is a common fact that the returns from listed equities are volatile - one year returns have varied from negative 28% (2008) to a positive 137% (1999). It is this single fact that continues to keep many investors from being adequately invested. However, for those investors that can afford to adopt a horizon of at least 5 years, there have been no 5 year rolling periods since 1960 where investors have experienced a negative return in nominal terms.

The cumulative effect of a truly long term investor is astounding. SBG Securities have calculated that R100 in 1960 adjusted for inflation would be the equivalent of R7 000 today. An investor that had kept his money in the money market and reinvested the interest (also assuming no tax) would have turned his R100 into R14 000, while an investor compounding his investment on the JSE would be worth some R520 000.

The material difference in returns between “low risk” cash and bonds, on the one hand, and listed equities, on the other, means that all investors must give serious consideration to including them as a core component of their portfolio. Just what percentage this should be is largely dependent on one’s time horizon. The longer that investment horizon naturally the greater that weighting should be.

Kind regards,

Ian de Lange

021 914 4966

Tue, 18 Nov 2014- 11:13

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