Seugnet de Villiers, Senior Investment Analyst at Nedgroup Investments, looks at the importance of having enough growth assets, such as equities, in a client’s portfolio, especially in times of market turmoil.
Over the last five years, clients have been de-risking their portfolios as their appetite for risk has decreased. Ten years ago, the equity sector (SA Equity general) accounted for 37% of the assets under management of the four major ASISA categories, while today it is only 21%. The multi asset (MA) high equity category (75% equity) experienced good growth over the first five years, but has gone nowhere since then with the multi asset income category, which is 10% equity, the only category to grow relative market share over the last five years.
Looking at the cumulative net flows from July 2010 to June 2015, the SA MA high equity category’s net flows were 4 times that of the SA MA income category. From July 2015 to June 2020, the SA MA income net flows were double that of the MA high equity category. A reason for this de-risking behaviour has, to a large extent, been driven by relative performance. The annualised returns of the ASISA category averages from July 2010 to June 2015 showed that the higher the equity exposure, the higher the return (15.5%), with the MA income category delivering the lowest performance of 6.9%. Over the period July 2015 to June 2020, which was a difficult period for domestic growth assets, this picture changed and we saw the MA Income category being the top performer at 7.3% with pure equity exposure delivering the worst performance at 0.3%.
The impact of the Coronavirus has compounded the situation. History has shown us that when volatility is at its peak, when it feels like the worst time to invest, the market very often delivers strong performance thereafter. On 16 March 2020, the global volatility index reached 83 and since then the equity market is already up 43% and at even higher, pre-Covid levels. This can represent a big opportunity cost to clients who panic and exit equities for a safe haven like cash.
Should clients invested in the income space remain there?
In the investment space, there is a strong relationship between time, risk and return. All three have to be in sync and will determine the weighting of growth assets in a portfolio. The more time you have, the more risk (exposure to growth assets) you can afford to take on. If you’re looking for a greater return, then you need to accept a greater level of risk. The more risk you take on, the higher your expectation of return but you need to stay invested for longer. Asset allocation is the key driver of long-term performance, especially in real terms. Over the last twenty years, the performance of equities has been close to double that of bonds and three times that of the cash index. The opportunity cost can be significant if you invest in cash when in fact time is on your side and you could be invested in equities.
Rule #1 - clients must stick to the plan
Clients must stick to their plan despite short-term market volatility. Long-term growth from equities is associated with short-term market volatility. Funds with an equity exposure can and will deliver weak and even negative performance in the short term (rolling 1-3 year period).
What about clients who are retiring?
The same investment principles apply when managing a client’s retirement portfolio. The main factors preventing a successful outcome are low exposure to growth assets, i.e. investing solely in income (10% equity) or low equity (40% equity) solutions, a drawdown rate of more than 5% and an increase in the expected retirement time horizon.
What clients need to remember
It’s important in times of crisis that your clients stick to the basic principles of investing.
• Your investment time frame is still the key driver of the levels of risk you can afford.
• Your tolerance for risk drives the asset allocation to suit your objectives and needs.
• Asset allocation is an important driver of expected return.
• Emotions erode value, so avoid knee-jerk reactions to short-term discomfort.
• Equity markets often deliver their best performance post a volatility peak.
• Growth assets play a very important role both before and after retirement.