The last two years have taken investors on a journey of extreme highs and lows. From the top of the roller-coaster at the turn of 2007, they were flung toward the bottom when equity markets lost over 23% in 2008, and once again shot upwards with returns of over 32% in 2009.
While these extremes may be forgotten in time, they have forced investors to take stock and rethink their investment strategies, especially as many were happy to sit back, no questions asked, in the 2003 – 2007 bull market.
Local asset class returns (2000 - 2009)
Teal indicates highest return in that year. Grey indicates the lowest return in that year
As the table shows, 2009 and its spectacular returns made investors forget how turbulent the world has become. The adjustment in asset values was inevitable given the massive selloff in 2008, and the improved outlook for the global economy at the beginning of 2009. The market currently trades on a trailing 12 months PE of 17.5X and on a consensus FPE (Forward PE) of 11X (Market average PE since 1995 13X). The question is whether the market (JSE All Share Index) offers value at current levels.
Looking at the PE at first glance, one would be inclined to think there is value in the market. While we continue to find value among selective retailers and industrial companies, by and large, valuations look stretched. In our view, the market trades on a 11.8X FPE. Thus while we expect earnings growth to be 40%- 50% over the next 12 months, we are less optimistic on the extent of the earnings growth compared to broad analyst consensus (60%). Whether the market looks expensive or not depends on whether earnings expectations materialise. The biggest risk for our market going forward is the level of earnings delivered. On a relative basis though, equities (including property) are still the better asset class compared to bonds and cash, in our view.
The uncertainty in the short term means we have to accept share price volatility. Investors become more risk averse as negative sentiment increases. Recent concerns have been around Greece’s debt woes and the potential contagion from it; the threat of inflation and subsequent increases in interest rates as the global economy continues to grow; and the global economy losing growth momentum.
If clients do not have the stomach for volatility, it is time for them to think again. As we stand ready to face a new decade of investing, these are some of the questions they may be asking:
- How can I grow my wealth without the risk of being too heavily weighted in one asset class?
- Can my portfolio have flexibility, adapting to different market conditions?
- How can I simplify my portfolio so I can better understand and measure its progress?
The answer to these questions lies in a balanced fund (also called an asset allocation fund). Balanced investing is not a new concept, yet investors tend to forget about the diversification – the golden rule of investing – when things are a little too good. It takes a year like 2008 to reinforce the benefits of a balanced approach to investing.
A balanced fund can invest in all the asset classes (cash, bonds, property, equities and offshore assets) within a single fund. Having access to all the main asset classes reduces the risk of being invested in a single asset, while also providing a portfolio suitably matched to an investor’s goals, time horizon and risk appetite.
Markets change, making investment decisions fairly complicated. Equities can become more or less attractive, interest rates can change, offshore markets can come calling. The vast choice of investment options can be confusing, and the fear of making the wrong choice often causes the investor to procrastinate and avoid making decisions. Balanced funds remove the pressure of making these calls, with a dedicated team of investment professionals managing the fund and investing where they find value. It is this flexibility that can prove extremely beneficial in a variety of market conditions.