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Investment Strategy
Wednesday, July 1, 2009
Risking inflation erosion

The third week of May was the one year anniversary of the day the ALSI topped: one year to the day since our All Share Index (ALSI) closed at 33 232 before commencing its precipitous decline.
Between 22nd May 2008 and 20th November 2008 the ALSI fell 15 418 points to 17 814 - a decline of 46.4%. Over this period, cash (as measured by the Alexander Forbes Short Term Fixed Interest (STEFI) Index) rose by 5.63%.
“The obvious and significant divergence in performance has seen the traditional stampede to the ‘safety’ of cash,” comments Mark Cliff of Alphen Asset Management. According to quarterly statistics compiled by the Association for Savings and Investment South Africa (ASISA) during the first quarter of 2009 the Collective Investment Schemes (CIS) industry attracted net quarterly flows of about R23billion. Of this sum, R14.4billion went into Money Market Funds, with a further R3.4 billion into other Fixed Interest funds. Thus more than 63% of new flows into domestic unit trusts went into cash during the first quarter of this year.
Over this period, Asset Allocation funds attracted just R4.7billion in net flows and Equity funds a mere R104million.
Since the most recent market low on 20th November 2008, the market has risen to 22 425 (as at 22nd May 2009). Whilst this ‘recovery’ has hardly been slow and steady (on the contrary, volatility has been the order of the day), the ALSI (without taking into account dividends) is up by about 26% since the low. During this time, cash has returned just 5.21%.
ASISA CEO Leon Campher hits the nail right on the head when he says that Money Market Funds are ideal parking bays for savings that need to be readily accessible, like money set aside to pay for school fees or the provisional tax due to the Receiver of Revenue. “But long-term investments require equity exposure if inflation beating returns are to be achieved."
For long-term investors, those people with at least a 5-year or longer investment horizon, it is critical to remember that whilst cash has barely managed to beat inflation after tax over the longer term, equities have been the consistent inflation-beater over time.”
Campher says investors who have held R1-million in money market funds for the past five years to the end of March this year would have seen an annual pre-tax return of 8.56%, meaning their lump sum would have grown to R1.5-million. However, investors with a R1-million lump sum invested in general equities over the same period would have received an annual return of 15.46%, and their investment would have grown to R2.1-million. The end values in these examples include interest and dividends.
Comments Cliff, “Most investors, brokers and advisors are aware of these basic facts, but the overwhelming fear of losing capital - particularly on the part of retired clients - can tend to blind investors to the fact that what may be ‘safe’ over the short-term, is not ‘safe’ over the longer-term.
“Inflation remains the greatest challenge to the spending power of long-term investors' savings. Few investors have sufficient savings that they can put the money in the bank and live off the interest for the rest of their lives. Ensuring that the average investor has an appropriate exposure to assets which out-grow inflation over time is thus critical.”
The longer that clients continue to put their savings into cash investments like the Money Market (or, even worse, those clients who have not been investing at all and have been hoarding their money in savings accounts which have even lower returns), the greater the risk that their safe money is eroded by inflation.
“Whilst at Alphen we do not advocate immediately switching all the cash investments into equities, we are always mindful of investors moving too far away from the long-term allocation to the various asset classes each individual requires,” he says. “It is always a good time to examine a client's portfolio and see how far it is away from the long-term (strategic) allocation which is required and, where necessary, to re-balance from time to time.”
Small tweaks are usually easier to effect than large adjustments and getting the timing of the former right is always significantly easier than the latter.
“As autumn becomes winter, we should be mindful of the squirrels that need to have collected enough nuts to last them until spring. So too should investors ensure that their asset allocations are sufficiently aligned to get them to their final destinations.”

Copyright © Insurance Times and Investments® Vol:22.7 1st July, 2009
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