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Political noise is making investors nervous and, in turn, markets are giving very little back to the “farmers” or investors who have been sowing seeds or investing and are looking at this year’s harvest. Like many farmers awaiting the rain to provide good crops this year, generally speaking, disappointment seems to be the norm rather than the exception with this year’s “crop” of investments. Some investors may have made gains in the Property sector or possibly in other areas in the world outside of South Africa.

How to respond to a bad year

So, what do “farmers” do when this season’s crop offering is withered and dry? Well, they plant for next year’s season and realize that we can only hope that next year’s crop will more fruitful. If they pull out of farming, it doesn’t change the result of a bad crop, it just means that they end off with a bad crop. The wise farmer will put grain away during good harvest for the time when a bad harvest does come around. Markets will always have their good and bad years. This, unfortunately, is a bad year so far. If we move out now, we lock in the loss. But just as we had a drought last year, the rains were good this year and the knock-on effect was an improvement in the food pricing and returns farmers made this year. For the investor or “farmer”, you need to be invested for a time, to make returns. The farmer doesn’t plant crops or buy land for one season, he buys and plants for many seasons to come.

True value lies in long-term investing

Too often we look at a one-year return to judge our overall investment experience and decide how to go forward based upon this limited viewpoint. We forget two things; one being the good returns made prior to the low returns, and secondly, the mandate or agreed time-frame we agreed to invest our funds. If we invested for a year or shorter, one should be invested in a bank instrument such as Money Market or fixed deposits. If one is invested for a period of 3 years plus, some equity exposure would be added to outperform inflation. The longer the period you have, and the higher the return expectation, the more equity one may have in the portfolio. However, you may be a conservative investor wanting no risk. In which case, bonds and cash would be asset classes you may choose to invest in, no matter the period selected. The risk, however, would be that the return may not be above inflation as required. So, to say that cash has no risk would be untrue. As inflation may grow more than the return in cash. Hence, the future value may see the buying power of the capital invested reduced over time. That is where the risk lies, your cash may not grow at the same rate as the cost of living. You may have a guarantee of capital, but that is not a guarantee of the buying power it has when first invested.

When looking at a return, look at the annualized return over the period the investment is intended for. So, if you are investing for a 5-year period as an example, look at the performance averaged over that period. To look at 1-year return, would be unfair, as the mandate of the fund is 5 years. Also, past performance is not a guarantee of future returns. However, history is an indicator of style and achievements to form part of your due diligence when selecting a fund to invest into.

A fund that has not been achieving any of its benchmarks since inception, may be at a low price but hasn’t given any reason to believe this may change going forward. Sometimes, low will remain low. I would suggest also using rating companies such as Morningstar or Plexicrown, to give you an indicator of the fund. We use 5-star Hotels for the experience we are expecting, based on an independent trusted rating, so why not do the same when selecting funds.

 

How do you select the best

Funds that have won awards such as a Raging Bull also have a habit of repeating results. This too is an indicator of a good fund. A poor performing fund would not have won any awards. We select our wines based on awards, so why not do the same in terms of fund selection too.

These are but a few ways we can do a due diligence on the funds that we invest in when we look at investing. The best way is to appoint a specialist advisor who has a good track record of not just managing funds and giving advice and communicates well. It’s his or her job to keep their eye on the ball. Asset managers tend to have a philosophy they follow, and they try to not deviate from that direction unless something changes drastically in the fundamentals. Most good advisors will know what the philosophy is of those asset managers is, what their mandates are, and how their management style will best suit your need or goals. Good advisors will also keep in touch through good and bad and not only manage the expectation, but also the funds they are responsible for.

Spread the risk

A diverse portfolio also spreads the risk. Having more than one fund manager with assorted styles, and in various sectors, means you have less exposure to any specific sector and more stable returns. The Income funds at the moment are giving better returns over the short term, due to their exposure to the asset classes of bonds and cash. The equity sector has taken the hardest hit over the short term. However, don’t make the mistake of trying to time the market. Chasing return and not doing the homework, will usually end with the opposite effect and capital eroding. A good example of this was the Coronation Top 20 Fund. In 2015, the fund had a negative 9.8% return, and in 2016 the same fund had an 18.3% positive return. If you had moved out in 2015, you would have locked in the loss, however, if you had remained in the fund, it would have recovered and outperformed most other funds. One must also note in this example; the Coronation Top 20 Fund is an aggressive fund, with the majority of its assets in stocks. The same fund has given a return of 7.87% year to date as of 2017/7/17.

The overall goal is to be in the market. You should be invested to make returns, and the investment must suit the needs and risk that you want to take or can afford to take. Just like a suit is tailored to fit the person, so should your portfolio be made to suit your needs. Get the right tailor and plant the right crops.