Optima Brokers

Specialist Financial Planning

Disappointing markets call for a cool head

May 22, 2018

Written by Louis Niemand (Investec Asset Management)

Most investors have been disappointed with returns over the past three years. For example, multi-asset portfolios have struggled, with the average SA Multi-Asset High Equity unit trust posting 3.4% per annum over the three years ended March 2018. While disappointing, this is unsurprising given that the available asset classes have delivered low returns individually. As can be seen in Table 1, four of the seven primary asset classes came in with negative real returns (absolute return less inflation).

Table 1: Annualised returns from the primary asset classes over the three years ending March 2018



SA equities (ALSI)


SA bonds (ALBI)


SA cash


Listed property (SAPY)


Offshore equities (MSCI ACWI, ZAR)


Offshore bonds (Barclays Global Aggregate, ZAR)


Offshore cash (US Libor, ZAR)


SA inflation


Source: Bloomberg, Investec Asset Management as at 31.03.18. All returns are gross of fees.

The traditional engines of portfolio growth, equities (both local and offshore) fell below 10% per annum over the period. Domestic bonds surprised on the upside on the back of a last-minute reprieve from downgrade to junk status by global rating agencies. Although global equities delivered above-inflation returns in dollars, rand strength sapped the returns of local investors.

With these disappointing returns from markets, despondent investors may be wondering why they should stay invested. History shows that a negative real return from equity markets over the short to medium term is not that uncommon, but over the long term equities remain the primary driver of investors’ wealth. Over the last 27 years (since the start of 1990), the local equity market delivered a return of 13.9% p.a., well above inflation of 7.4% p.a. We acknowledge that factors such as income requirements mean most investors do not have a 27-year investment horizon..

Examining rolling three-year periods is more useful for such investors. Figure 1 below puts the last three years’ real return of -0.7% p.a. (5.1% return p.a. minus 5.8% inflation per year) in perspective when compared to returns since the start of 1990.


Figure 1: Rolling three-year real return p.a. on the FTSE/JSE All Share Index January 1990 to March 2018

Source: Bloomberg as at 31.03.18. The graph depicts the three-year annualised nominal return on the FTSE/JSE All Share Index minus the three-year annualised inflation.

The average real return of all three-year periods was 8.4% p.a. However, a closer look reveals that there were a number of periods where investors experienced negative real returns over the medium term.

Table 2 highlights some of the historical performance trends. Investors have needed to tolerate negative real return periods, in order to enjoy the long-term benefits of equities. The average real return (p.a.) over the three years following all negative three-year periods is 13.7%. Abandoning the market at the point of discomfort is a traditional mistake and we urge investors to seek advice before taking action on the basis of regret or fear.

Table 2: Real return profile of the ALSI over all three-year periods since January 1990

Average real return (p.a.) over all three-year periods


No. of periods receiving negative real returns over three years

 72 out of 268

Percentage of all three-year periods that real returns were negative


Average real return (p.a.) over the three years following all negative three-year periods


No. of periods receiving negative real returns three years after a negative three-year real return period

 4 out of 72

Source: Bloomberg as at 31.03.18.

There will always be periods of disappointment where investment returns fall short of inflation over the medium term. When looking at domestic equities, it happened approximately 27% of the time over all three-year periods since 1990. Equity markets are by their nature volatile – but equally, have rewarded persistent and patient investors with attractive real returns over the long term. Now is not the time to lose courage, but to cleave to long-term plans drawn up with cool heads – plans intended to help investors weather these uncomfortable times.

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