Shifts And Emergences Of Asset Classes Over The Last Half A Century
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Against the backdrop of a constantly changing macroeconomic environment over time, certain asset classes have managed to significantly outperform others over different periods. However, the fundamentals of these asset classes remain the same and, for investors, this means maintaining focus on long-term performance – ultimately riding out the short-term market volatility and diversifying wherever possible.

This is according to Graham Tucker, Fund Manager of the Old Mutual Balanced Fund, who, when reflecting on the last 50 years of investing, says “what has been observed over long-term periods is that investors are rewarded for taking on risk. “Fund managers will aim to meet a client’s long-term investment goals by taking advantage of this risk budget, removing unnecessary risk through diversifying across a range of assets and by actively allocating between asset classes that are offering better growth prospects.””

In the context of reward for risk, Tucker says that growth assets such as equities and listed property tend to gravitate to the top of the list when it comes to performance over longer periods, while holding cash typically delivers very poor long-term returns. “You don’t get rewarded for keeping your money in the bank over time; you’re probably better off buying shares in that bank instead.

“Cash is a poor long-term investment vehicle having produced an average annual real return of just 2.1% since 1966.”

However, as he also points out, riskier asset classes will have distinct periods of out- and underperformance within these longer periods. “Property underperformed between 1983 and 1998, but has been the best performing asset class since 2002. Equities, on the other hand, have produced an average real return, via the SWIX, of 7.7% a year since 1966, but in nearly one in every three years, investors have lost money in equities in real terms.”

Peter Linley, fund manager of the Old Mutual Investors’ Fund – South Africa’s longest running unit trust which celebrates its 50th anniversary this year – adds that equities have also proven to be the asset class that beats inflation, investors’ number-one enemy, by the largest margin in the long run. “Long-term data compiled by our MacroSolutions team shows that it took 92 years to double the real value of a cash investment, based on historical average return, while equities needed only nine years.”

Linley adds that, while equities are often the most volatile asset class, the long-term story is best illustrated by market performance over half a century of market, economic and political events. “Over the past 50 years we have seen several bull and bear markets, including some severe market crashes; various interest rate cycles; a regime change, the oil crisis, the Rubicon Speech and more recently the global sub-prime crisis and 9/11,” he explains. “And yet, when you look at the All Share Index over this period, it still delivered compelling long term returns, despite often extreme shorter-term volatility along the way.”

According to Tucker, property has also proven to be one of the best performing asset classes over time. “It’s important to understand that property is essentially a hybrid asset class, bringing together characteristics from equities and bonds. We have been active in this asset class on our client’s behalf since the early 2000’s, when the property sector was still considered relatively insignificant. In our view property is a key component in building a multi-asset class solution for our clients.”

Looking MacroSolutions’ latest market outlook, given the current environment and increasing market volatility, Tucker believes that local bonds are offering adequate reward for the prevailing risks. “Bonds are offering a very attractive real return relative to their history, but part of this is due to the increased risk that South Africa’s political tensions result in a delay in much-needed structural reforms, which leads to downgrades from the ratings agencies and a rise in funding costs.”

Tucker adds that emerging markets are also looking attractive. “After many years of pain thanks to falling commodity prices and a strengthening US dollar, emerging markets look to be on surer footing, at least for now. Their currencies have weakened sharply and, similar to South Africa, their inflation rates look to be rolling over., having peaked and are now moving lower”

That being said, Tucker concludes by reiterating the power of compound growth when it comes to time. “When dealing with riskier assets that offer the potential of higher returns, history teaches us that investing over very short time periods is akin to flipping a coin. Equities, for example, should deliver superior returns over the next 10 years, but it’s not going to be a smooth ride. Your likelihood of losing money decreases as you extend your holding period, assuming the fundamental basis of your asset selection remains sound.”

The writers - Peter Linley & Graham Tucker, are with Old Mutual Investment Group Equities and MacroSolutions respectively.

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