Seugnet de Villiers from Nedgroup Investments looks at what the financial world learned in 2020 and how investors responded to the crisis.
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Getting clients to stay invested for the appropriate timeframe is as important as asset managers delivering on their long-term performance objectives. 2020 was a stress test for investors with the potential to make classic behavioural mistakes driven by emotion, short-termism and skewed risk perceptions never greater than over last year.
The performance of domestic and global equity markets
2020 was a performance roller coaster. At the end of Q1, the JSE All Share Index was down 33% while the global developed equity markets (MSCI World) were down 32% as Covid-19 was declared a global pandemic. At this point, investors were very negative and the outlook uncertain as most of the world went into lockdown to curb the spread of the virus. Nine months later, local markets were up 7% for the year with global markets up 16% in dollars. This means that, The JSE ran 60% from its lows in March while the MSCI World ran 70% over the same nine-month period.
The performance of major asset classes in 2020
The same was true for the major asset classes with the exception of property, which was very hard hit by the lockdown measures. All asset classes ended the year in positive territory, something investors had not contemplated during the Q1 panic.
How South African funds performed and local investors responded in 2020
The rolling 1-year performance, irrespective of a fund's appropriate timeframe, carries a lot of weight in investors' decisions. Over 2020, the ASISA cash and cash-like investments remained pretty steady and in positive territory throughout the year. The ASISA multi asset categories, which carry an equity weight, took a massive dip in Q1, took part in the strong recovery and, with a small dip in Q4 and despite the volatility and negativity, ended the year ahead of cash funds. The net flows into all the ASISA categories showed that the top three inflows were to money market, short-term interest bearing and multi asset income funds. The largest outflows were experienced by multi asset, low, medium and high equity funds. Even though the year ended on a positive note for these funds, the crisis and extreme negativity in Q1 dominated investors' decision making for 2020. With hindsight, we know that the equity market recovered. The rolling 12-month return of the average ASISA South African Equity Fund was down 21% at the end of Q1, ending the year up 7% after a very strong recovery. The Rand entered 2020 at about R14 to the dollar, peaking at close to R20 to the dollar. As investor sentiment improved, the Rand strengthened ending the year at about R14.60. Over the first 6-9 months of 2020, the cumulative net flows of the global and domestic equity funds were stable or low to negative. Towards the end of the Q3, after markets had recovered for about 6 months, there was a good uptake in risk appetite as clients returned to global and domestic equity funds.
How investors kicked off 2021
January's data shows that this increased risk appetite is still with us. The top three net flows are into SA equity, global equity and short-term income funds, while net outflows are being experienced by property and multi asset equity funds.
Key behavioural lessons from 2020
It's clear that South African investors also reacted to the panic with a big switch into cash and a delayed uptake of risk post the recovery. The data shows that making predictions are simultaneously very appealing and extremely difficult. Investors' predictions are seldom right. As more information becomes available, predictions migrate towards the result. If you look at 2001/2 and 2008, years of extreme market crashes, it's clear that no one saw them coming. Clients need to understand that market crashes are a by-product of being invested in the market. The Corona virus crisis at the start of 2020 was the quickest and sharpest downturn we've seen historically. This is the next honest conversation you have to have with clients to warn them about the volatility associated with equity exposure. They have to be able to endure short-term volatility to enjoy long-term gains. On seven occasions in the last twenty years, the equity market fell by more than 10% to sometimes as low as 40%. Bear markets are a test of temperament and not intelligence. Remaining calm and sticking to your plan is the best decision. If one looks at the annualised performance of the ALSI over the short and long term, even though the 15-year return included two bear markets (2008 & 2020) you still achieved 5.5% above inflation if you remained invested over the period. A long-term focus is easier said than done. Even though markets were down for a relatively short period in 2020, clients reacted and did panic even with 5-10 years of investment horizon remaining of their equity fund. Clients need to be reminded that the long-term fundamentals haven't changed and that their investments are still appropriate. Finally, it's important for clients to understand their own financial behaviour for long-term success. For future crises, they need to know their blind spots, any investment decisions can be taken rationally.
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