To switch or not to switch?

By Seugnet de Villiers

The global outbreak of the covid-19 virus at the start of 2020 has led to a fair amount of chaos in the markets since.

The combination of extreme volatility across all asset classes, and lack of clarity on when the global pandemic will come to an end, has been a difficult environment for investors to navigate. Especially given the fact that growth assets (like equity and property) have been underperforming income assets (like cash and bonds) since 2016.

There are many lessons investors can learn from their own behaviour in 2020, simply by understanding what their mindset was going into 2020, as well as how they traded around the 2020 volatility.

The five years ‘pre-2020’

The two largest (ASISA) multi-asset fund categories, the multi-asset low equity and multi-asset high equity categories, used to be the ‘Steady Eddy’ of the market. These categories received net inflows for more than 10 consecutive calendar years. A large driver of this demand is the fact that these funds (being Regulation 28 compliant) commonly form part of investors’ retirement savings. Saving for retirement is tax-efficient, sticky due to the long-term nature and something most South African investors contribute to on a monthly basis.

However, as per the chart on the left below, there has been a clear shift in demand since 2016. The multi-asset low equity category went from being net positive, to losing R 52 billion in net outflows from June 2016 to December 2020. The multi-asset high equity category suffered R 30 billion in net outflows from October 2018 to the end of December 2020.

Over the same period, the (ASISA) short-term interest bearing and multi-asset income categories combined received close to R 300 billion in net inflows over the past 5 years. This far outweighs the not even R 100 billion withdrawn from the multi-asset low and high equity categories. This gap suggests that not only did investors switch out of multi-asset equity categories and into enhanced cash funds, but also that new money was invested in enhanced cash funds instead of multi-asset equity funds.

Why have investors been de-risking?

The switch of assets across categories, and in other words across risk profiles, are often driven by the short to medium term performance of these funds relative to each other. Due to equity markets mostly underperforming cash since 2015, the 3-year performance of the multi-asset equity funds started to underperform the enhanced cash funds in 2016. This resulted in many investors losing interest (and faith) in the multi-asset equity categories – on both current investments and new investments made.

Investors who switch across risk profiles can, at a high level, be grouped into three buckets:

  1. Investors who are in an incorrect risk profile moving to a more suitable solution;
  2. investors who are correctly invested according to their financial needs, choosing to switch to a lower or higher risk profile solution; and
  3. natural rebalancing as investors’ investment goals approach their maturity.

The first two scenarios are usually brought on by short- to medium-term performance of equity vs cash deviating from what clients expected given these asset classes’ behaviour over the long-term.

  • The first group of investors would have possibly got away with too much risk in their portfolio while equity markets were strong and didn’t experience any drawdowns, but then realised their need to de-risk (by increasing cash exposure) when equity markets turned.
  • The second group of investors are in the one situation we always encourage investors to avoid. In this scenario investors believe the grass is greener on the other side, chase recent performance and in the process destroy value. These investors usually sell out while markets are weak, locking in a loss, and then only reinvest once markets show clear signs of a recovery, missing out on a large portion of the uptick in performance.

But, what about investors not taking on enough risk when they first invest?

The risk of not including enough exposure to growth assets presents itself in the form of an opportunity cost. Over the past 3 years many investors missed out on good growth by choosing enhanced cash funds over multi-asset funds with equity exposure. The charts below reflect the opportunity cost per R 1 million invested at the start of the respective periods in the respective enhanced cash categories instead of multi-asset low or high equity.


  • For example, for every R 1 million an investor - who could afford the risk profile of a multi-asset low equity fund - invested in a multi-asset income fund instead one year ago, lost out on R 60 000 in growth. In other words, 6%.
  • Similarly, for every R 1 million an investor - who could afford the risk profile of a multi-asset high equity fund - invested in a multi-asset income fund instead two years ago lost out on R 40 000 in growth, or 2% per annum in return.

So, with that backdrop, how did investors fare in 2020?

The most notable trend in 2020 was by far the demand for global equity funds. This (ASISA) category received R 36 billion in net inflows over the past 13 months, after a total of R30 billion over the prior 199 months.

Offshore investing can, however, be tricky to ‘get right’ as investors’ success (growth) is subject to both the performance of the global equity markets and the US dollar–rand exchange rate. Often these two drivers move against each other.

The chart below compares the net monthly flows to global equity funds and the US dollar–rand exchange rate at month-end, giving us some insights into the impact of the currency on investors’ 2020 behaviour.

When global equity markets were at the bottom in March 2020, the rand was at its weakest level – adding more than 20% return since the start of the year to investors’ rand-denominated portfolio. As a result, investors were shielded from selling global equities at rock bottom (in hindsight) by currency weakness netting off a large portion of the loss.

On the contrary, many investors started to re-invest in global equity markets from July 2020 as investor sentiment improved and equity markets recovered, while the rand was still very weak (i.e. expensive). To quantify the impact of investing while the exchange rate is weak – the strength of the rand to the US dollar over the 1-year period ending July 2021 detracted 15% from investors’ rand-denominated portfolio.

These two scenarios remind us of the importance of being clear on our reason for including global assets in our portfolios. It’s close to impossible to time the entry point of global investing perfectly – so instead of reacting (emotionally) to current market conditions, be guided by your reason for adding global exposure.

How did investors behave through SA volatility?

There has been a huge amount of volatility over the past few years in the domestic equity market for investors to deal with. This is clearly illustrated on the chart below. At two occasions since 2014 we went through extended periods of flat performance and experienced a drawdown of more than 30% in the first quarter of 2020, followed by an uptick of more than 80%. Again, tempting investors at numerous occasions to chase or hide from short-term performance.

Even though many investors did (in hindsight) buy while equity markets were at its low point in March 2020, we saw more investors disinvest from July to October 2020 while equity markets were performing poorly again. Just to reinvest after the good recovery that kicked off at the end of 2020. The impact of switching in and out of a high-risk asset class that should be a long-term investment can be severe. Let’s quantify this by comparing three investors who started 2020 with R 100 000 in the equity market:

  1. Investor A who remained invested in the equity market today has R 124 000 (+24%);
  2. Investor B who switched out of equity to cash at the end of March 2020 today as R 71 000 (-29%);
  3. Investor C who switched out of equity to cash at the end of March 2020, and returned to the equity market at the end of October 2020 today has R 92 500 (-8%).

What can we learn from the past 18 months?

  1. Always stay true to your investment plan that is based on your financial needs and risk profile;
  2. It really is about time in the market and not timing the markets, especially when it comes to ‘high risk-high growth’ asset classes like equity;
  3. Be clear on why you are including offshore exposure in your portfolio and let that determine your allocation and timeframe, rather than getting swept up in the currency and timing