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James Downie of MitonOptimal South AfricaIn South Africa, recent pedestrian investment returns have made life extremely difficult for advisors advocating long-term strategies to their clients when planning for retirement. For the last year or more, 3-year and 5-year returns in traditional multi-asset retirement fund portfolios have barely matched inflation, much less achieved a real margin. In a country where Money Market funds have achieved 2%-3% real returns over the last 3-5 years, the client refrain is “I could have done better in cash!”.

However, canny investors who ride out the long term at the behest of their well-informed advisors have achieved extraordinary returns as the chart below shows:

Rolling real returns for South African retirement funds

Source: Alexander Forbes, Assetbase, StatsSA

The average real rate of return of the typical retirement fund in South Africa over the last 25 years has been nearly 10% per annum.  Even allowing for fees of under 1% p.a. that is a heady reward for patience!

As can be seen from the chart, even the 10-year returns have been tough to bear in the recent past but are recovering quickly as the shocks of the Global Financial Crisis are cast off the back end of the 10-year period and replaced by a surprisingly good start to 2019. The 10-year real return has never been below 4% and is currently nearly 8.5%. To reiterate, that is 8.5% per annum better than inflation for the last 10 years!

But, if the “long-term” retirement investor shortens the time horizon to even 3 years, the volatility of returns around the 9.7% long-term average can keep one awake at night and have cause to question the wisdom of the chosen long-term strategy. As recently as the end of 2018, the real 3-year return dipped below 0% and had threatened to breach the flat line for a while before that. The trend since 2015 is evident and has caused some robust debates between clients and advisors and until the end of November, the client would have been winning the argument.

Since December 2018, however, according the Alexander Forbes Large Manager Watch (a survey of the majority of South African retirement fund assets), the average South African retirement fund saver has achieved a return of over 7% for the 4 months (i.e. not annualised), causing both 3-year and 10-year lines above to tick upwards.

Suddenly, the cash prophets would be looking enviously at the returns foregone because, as all investors know, the principal thing missing in the markets is the bell that should be ringing to warn us of the tops and bottoms in the market.

The “swallow” of a sunny four-month period does not make a “summer” of sustained good returns but it should remind us that time in the markets has always rewarded investors and timing the markets is a fool’s errand and bound to end in tears (and penury).

Download: Weekly comment, James Downie – 220419


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MitonOptimal International Limited is registered in Guernsey (Registration No. 51561) and is the overlying holding company of the companies that make up the MitonOptimal Group.
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