This is a real-life client question I had recently. The client had invested for 2 1/2 years, the actual return after fees is 0.5% annualised. Understandably the client questions why staying invested in the same funds if the actual returns have been poor. Most clients will invariably compare the return to what they could get in a safe bank deposit. A bank deposit would have easily given the client at least 7% interest per annum over the same period. In comparison, the mere 0.5% is hard to accept. It is important to pay attention to the following: 1. What was your original investment objective? What was the initial time horizon? If the original investment objective has not changed, the investment funds are in line with the objective, then you should listen to your financial advisor and do nothing. 2. Are the fund managers still fit for the job? Fund managers are questioned and criticised a lot when they under-perform, especially in a long-period of under-performance. The things investors should ask are: Does the fund manager follow the same investment philosophy and process? Does he have the experience to manage the money? Does he follow the investment mandate? If the answers are yes, then leave the fund manager to do his job. 3. Active fund managers do go through periods of under-performance. True active fund managers do not hug a specific benchmark, their portfolio make-up most of the times do not look like index constituents. There will be periods of under-performance and periods of over-performance relative to the benchmark. It is human nature (me included) that when fund managers do well, investors are happy. When fund managers don't do well, investors are unhappy and want to switch out. However, in investments, we need to be counter-intuitive. When good active fund managers seem to be down and out, we should increase out investments, to maximise returns thereafter. Buy low, sell high. It is a lot easier said than done. 4. Fund managers do make mistakes. Fund managers employ highly intelligent people armed with relevant qualifications, such as CFA, CA(SA), Actuary and MBA, with years of experience to manage your money. Despite their best research, analysis and efforts, good fund managers will be honest and tell you that not all of their investment ideas work out. In fact, even best fund managers only get 60% to 65% of their stock picks right (making money for investors). 5. Equity funds are volatile and go through cycles. Equity funds invest in shares listed on the stock markets. They will be affected by market ups and downs. Performance from equity funds, or any funds with a significant exposure to growth assets, do not come in a straight line. The worst an investor can do is to sell at the bottom, when he feels this investment is not working out. 6. South African economy has been struggling. The South Africa GDP growth rate has been 0.6%, 1.3% and 0.8% for 2016 - 2018 respectively. The average was 0.9%. This year Finance Minister Tito Mboweni projects to be 0.5%. With the Eskom debt burden and electricity capacity constraint, increased tax burdens for consumers, the economy has been sluggish. This will filter through to the earnings (profits) of domestically focused companies. Hence the JSE has produced mediocre returns over the last 5 years. This will also lead to equity funds producing mediocre returns.
7. Patience is required when investing in equity funds. Equity funds and other aggressive risk profile funds require time, to allow fund managers to invest in their ideas and reap the rewards from these investment ideas. Investors should stay invested for at least 5 years. It is human nature to want to react and take action when something is not working as expected. In the case of investing with good fund managers, the best action to take is - do nothing!
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