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Following up on Mike Browne’s article from last week, which highlighted the Seed processes, model and how we calculate expected returns, I have decided that this week I will be sharing the exact numbers of the current market and also highlight one of the most important factors :  Investment Time Horizon.

A Brief Recap of 2018

The All Share index went up in December by 4.25% but still ended the year on -8.53%. Despite the Resource sector being up 15.55% for the year, this helped little with financials being down -8.76% and Industrials down a massive -17.55%. If you were not exposed to the whole market but only to the Top 40 companies, your portfolio would have been down by -8.31%.

Property was hit hard with the Resilient/Viceroy debacle, with the SA Listed Property Index (SAPI) down -25.26% for the year..

If all your money was invested in bonds, the ALBI index returned 7.74% for the year and if all your money was in cash you would have returned 7.29% (the STeFI index.)

On a global perspective, the MSCI World Index was down -8.71% in dollar terms and up 6.07% in Rand. USD/ZAR finished at R 14.39 and trades today at R 13.29.

Local Unit Trust:

  • The average Income Fund return was 7.33% (SA Multi-Asset Income)
  • The average Low Equity Fund (Stable Funds) return was 1.09% (SA Multi-Asset Low Equity)
  • The average Balanced Fund return was -3.51% (SA Multi-Asset High Equity)
  • The average Equity Fund return was -9.23% (SA Equity General)

You would agree that this paints a bleak picture, given the fact that over the period it was only the average Income Fund which outperformed inflation. The “nay-sayers” can be heard around the weekend braai’s expressing that they should have all their investments withdrawn and kept in the relative safety of a bank, because returns have been terrible for a few years now. To a certain degree, they may be right. However, it is very easy for us to forget that successful investing is something that takes time, and by time, I mean time in the market – not timing the market.

Below is an extract from the Seed Prescient Fund Fact Sheets, indicating the investment time horizons (here named Return Horizon):

Source: Seed Investments (31 January 2019)

It is clear that the investment horizon of a Conservative Fund, like an Income Fund, is 1 Year. As such, and given the market information for 2018, the average Income Fund achieved around its benchmark of cash plus. It is then an accurate assessment to compare the Income Fund with this time horizon of 1 Year.

Our problem as investors is that most of the time, we will compare our investments with a period like 2018, or 1 Year, when our specific funds have an investment horizon of 5 years plus (Balanced Funds). After 1-3 Years with mediocre returns, we want to disinvest, realise our loss and move to a fund with an investment horizon of 1 Year. After a big market uptick, we want to move back into more aggressive funds.

Chart 1 (below) illustrates that expected returns for the Seed Balanced Prescient Fund can range between -12% to +30% over a 1 Year time horizon. However, evaluating the Fund over its correct time horizon of 5 Years, the expected returns are all positive, and if you stay invested for 10 years, you should achieve consistent inflation-beating returns.

Chart 1: Seed Funds – Expected Returns

Source: Seed Investments (31 January 2019)

It is crucial to know your investment time horizon at the start of investing – this will keep you from disinvesting in the short term when markets are volatile and not performing. Indications are there that 2019 will be much better than 2018, and we have started well with the All Share Index up by +2.81% for January.

Kind regards,

Renier Hugo

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