Real returns compared - a tale of two decades

Real returns compared - a tale of two decades

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Article highlights

  • One needs to keep up with inflation in order to maintain the purchasing power of one’s wealth, and ideally grow it at a faster rate to build savings and one’s overall wealth
  • We are aware that the past 3-5 years have been extremely tough on investors and financial advisors alike – with returns being low, an extremely tough economic climate and the world having to face a global lockdown due to the coronavirus

It has certainly been a fascinating past 3 months, with markets both globally and domestically falling rapidly in February and March with the outbreak of COVID-19, followed by a strong recovery period during April and May. This got us onto thinking about the past two decades – which have also been a tale of two halves.


If one looks at very long-term performance figures one can get a good sense of what to expect in terms of asset class returns. Over the past 75-100 years, the following average annual REAL returns (total return less inflation) per asset class have been achieved (as measured in Rands):
• Domestic equities: 6%-7%
• Domestic listed property: 6%
• Domestic fixed income: 2% - 3%
• Domestic cash: 1%
• Global asset classes: Similar numbers to above with a Rand depreciation factor built in (around 2%-3% being the inflation differential between SA and “the world”).

These are average real returns, and they are not achieved consistently every year in a straight line. Markets are erratic and deliver returns in a bumpy fashion. It is for this reason that one needs to be invested for the long term, stay committed to one’s investment plan and not get sucked into emotional, irrational behaviour. Reasonably one could expect these returns over rolling 5-7-year investment time horizon.

It is critical for investors to achieve real returns in order to grow their wealth for retirement. One needs to keep up with inflation in order to maintain the purchasing power of one’s wealth, and ideally grow it at a faster rate to build savings and one’s overall wealth.
We are aware that the past 3-5 years have been extremely tough on investors and financial advisors alike – with returns being low, an extremely tough economic climate and the world having to face a global lockdown due to the coronavirus. What will the future hold? 

The analysis below looks at the past 20 years of real returns that SA investors have experienced. It has been a tale of two distinct decades and certainly makes for some interesting lessons and observations.

The table above shows the real returns by asset class for the past 3, 5- and 10-year periods. The CPI + 3, 5 and 6.5% figures represent the targeted real returns that most multi-asset and equity funds in SA try and achieve.

  • Multi-Asset Low Equity (maximum 40% in equities): CPI + 3% return (normally over a 3-year time horizon);
  • Multi-Asset High Equity (maximum 75% in equities): CPI + 5% return (normally over a 5-year time horizon);
  • Average General Equity Fund (maximum 100% in equities/non-Regulation 28 compliant): CPI + 6.5% return (normally over a 7-year time horizon);

The above three real return targets are represented by the three horizontal lines across the table. It is how one combines the various asset classes together that one is then aiming to achieve the various return targets per risk profile. One should also bear in mind the constraints that one needs to work within when combining the various asset classes: namely, Regulation 28 (maximum 75% in equities), unit trust fund category limits (set out in paragraph above) and finally the direct offshore limit of 30%.

Summary comments of the decade 2010 - 2020

  • Real returns across all domestic asset classes have been disappointing and materially lower than long term averages;
  • Domestic equities have only given investors an average real return of 3.8% per annum the past decade, versus long term average of around 6.5%;
  • Domestic property is in negative territory of -1.7%. Try and imagine your real wealth losing value by around -1.7% every year for 10 years in a row – that is the experience that domestic property investors have had the past decade;
  • Domestic cash and fixed income have delivered just below their long-term real return averages of +3% and +1% respectively;
  • In terms of global asset class returns, measured in SA Rands, it has been a very different story. Global equities and global listed REITS (property stocks) have delivered real returns of +12% and +10% per annum for the past decade – allowing one to grow one’s wealth considerably;
  • It should be noted, that during this decade the SA Rand depreciated by on average 6% per year to the USD, adding that amount onto annualised returns.

Finally, for the 3- and 5-year period, domestic equities and listed property have been particularly poor performers. They have delivered real returns of around -3% and -18% for the last number of years, which has created much anxiety within both investors and wealth managers. Global asset classes, largely driven by Rand weakness as well as a strong US equity market have provided reasonable Rand denominated returns;
Investment solutions have also as a result struggled to meet their return targets or inflation beating return mandates – placing the whole industry under pressure.


Summary comments of the decade 2000 - 2010

  • This decade is very close to being the complete opposite to the decade that followed it;
  • Domestic equities and domestic property delivered real returns of 11.5% and 19% per annum respectively – well above the long-term average of around 6.5%;
  • These assisted investors achieving very high rates of growth and hence wealth creation. The result was happy investors and advisors with not much pressure on advisors to make portfolio changes;
  • Domestic bonds and cash also provided very high real returns as South Africa was structurally in a slowly declining interest rate environment;
  • Global asset classes delivered poor results. Only listed property achieved reasonable real returns, again spurned on by decreasing interest rates and strong growth;
  • Over this decade the SA Rand on average strengthened by 2.5% per annum to the USD, thus detracting from global asset class returns as measured in Rands.


Looking at the real returns across asset classes over the past twenty years provides an interesting outcome. All domestic asset classes have delivered their expected long-term real returns – namely 6%-7% for equities and property, 3% plus for fixed income and 1% plus for cash. It has been two very contrasting periods – with each decade providing very differing return outcomes. Ironically, it is just global equities, as measured in SA Rands that has disappointed, delivering a real return of only 4% versus expected 7% plus. Remember, these returns are after taking rand movement from USD into account.

The table above sets out the 10-year real returns per asset class, per respective decade since 2000. The first decade of this century was very much a decade of SA asset class returns, and the second decade much more orientated towards global asset class returns.

The real question now is – what will the next decade bring?

Well, we all know the answer. We don’t know. But what we do know is the following:
• Markets tend to move in cycles, something very clear and evident from the tables above;
• Often periods of poor performance are followed by periods of strong performance, as valuations adjust;
• The SA Rand is volatile and can materially detract or add to ZAR returns across global asset classes;
• Like equity markets, the SA Rand is cyclical, and often after extreme weakness and depreciation it shows signs of appreciation. Do not put all your eggs in one basket – whether it be domestic or global;
• Many investors act emotionally and chase shorter term performance. It would not have been ideal to have positioned your portfolio with heavy domestic tilt in 2010 after a period of solid SA equity performance, rather one needed to increase your global exposure – the under performing part of the portfolio;
• Diversification across asset classes, and across domestic and global assets is critical to smooth performance and achieve improved performance on a risk adjusted basis;
• Stay invested for the long term. Stick to your investment plan long term. Over time asset classes deliver their expected real returns, allowing you to grow your wealth and hopefully retire gracefully.