Issue: December 08/February 09

Panic by some spells opportunity for others

Market turbulence will be cause for concern for many trustees. A reassuring perspective is provided, however, by Thobelani Maphumulo. He’s the head of STANLIB’s multi-asset team and lead manager on its core equity portfolio, a franchise that assists many pension funds with their long-term equity strategies...

by Thobelani Maphumulo*

A substantial retreat by domestic equities and turmoil in world financial markets will be disturbing for many pension fund members and trustees.

When fear takes hold, over-reaction becomes the norm and significant value can be depleted. Concern by members is therefore understandable.

How should trustees react to volatility and uncertainty like this?

It is important to maintain a sense of perspective. Staying alert for opportunity is not a bad idea, either. Panic by some can spell opportunity for others.

This is not to say the situation is not grave.

Between the start of the year and mid-October, our equity market had lost about 30% of its value.

A major cause of JSE weakness is the sell-off by foreigners. On a year-to-date measure to mid-October, foreigners had sold a net R22,6 billion in South African equities.

In view of our country’s sound fiscal position, low government debt, reasonable corporate earnings and banks unencumbered by dubious debt, this sell-off seems over the top – suggesting that level-headed South Africans (including pension funds) may be well placed in the coming weeks to benefit from offshore jitters through selective JSE buying at favourable prices.

Fear can be contagious and effects can be catastrophic. However, it is possible for investors to ‘inoculate’ themselves against panic.

The remedy is an appropriate investment horizon. This isinvestment industry-speak for making decisions based on a reasonable timeframe.

Worried pension fund members will be relieved to learn that this is standard practice at most well-advised pension funds.

Equities are a long-term instrument. The minimum investment horizon when developing an equity-based strategy is at least three years and usually would be five to 10.

The calming effects of a five- or 10-year view – even in the current equity maelstrom – can be seen by reference to resources and a counter like Anglo American.

The bull-run in resources peaked in May after several years of sizeable gains. The Anglo American share price reached R557.

As the resource slide accelerated, Anglos fell below R500, then R400, then plummeted way below R300. A respite followed and by mid-October the share was being quoted at R255.

Had you entered the sector in May with a six-month horizon and had to liquidate your position in Anglos in October, the consequences would be severe. Your capital would have been reduced by more than half (which is why equities are unsuitable as short-term holdings). If we back-track and use a five-year investment horizon, a very different picture emerges.

In mid-October 2003 the Anglo share price was R130. Five years later it was nearly twice as high at R255. That’s a solid five-year performance, giving investors a steady inflation-beating return, especially when dividends are added on top.

A five-year investment strategist might be disappointed by recent falls (though a good strategist would have taken a little profit along the way). However, he would not be in a panic.

JSE history confirms that time in the market is a great risk manager.

STANLIB has scrutinised JSE performance since 1960, applying the yardstick of a five-year rolling return (a return measured over any five-year period). The study shows five-year returns have never gone negative and usually remain north of 10%, often by a substantial margin.

When the yardstick is a three-year rolling return, the JSE All Share Index has only moved into negative territory three times; at the end of the 1960s, marginally in the mid-1970s and in1998.

Long-view pension fund investment managers benefit from market and industry cycles that take years to play out as the economy gradually grows.

Cycles of growth and contraction within a general upward trend are reflected in the earnings of quality companies that grow as South Africa grows. These companies are characterised by robust business models and strong management.

Businesses like these are strongly represented in the JSE All Share Index where the long-term record indicates consistent growth.

Growth of the JSE all-share index over 40 years averages 14% per year. Over 20 years, the average is again 14%. Over 10 years it’s 15% and over five years it’s 22%.

Over the long term, share prices follow earnings.

This explains another facet of investment management in the institutional sector. It’s the focus on quality companies with good earnings records. Many of these companies pay solid dividends while achieving steady growth in their share prices.

Recently, we’ve seen short-term weakness in both financials and resources. But compound the returns of quality performers in these sectors over 10 years and extremely strong performance is evident.

For example, the total annual return achieved by Standard Bank is 21,9%; at Absa it’s 20%. A total return of 38% was shown at Angloplat, and 50% at Implats.

These factors indicate that pension funds which apply an appropriate investment horizon and keep long-term faith with quality companies should be reasonably placed to withstand short-term shocks.

Furthermore, those that took a little profit after four straight years of equity growth may have sufficient cash to take advantage of the recent sell-off.

Asset managers with the benefit of in-depth fundamental research are well placed to identify value opportunities, i.e. shares that have been oversold and represent great value at current levels.

As we have seen, buying quality at cheap prices and holding them for the long term is a proven method of growing wealth.

Those who keep a clear head and a sharp eye for value opportunities will not only survive, they might even thrive – given an appropriate investment horizon.

STANLIB’s award-winning multi-asset franchise undertakes segregated mandates for leading retirement funds.