| The
following position piece was issued on Tuesday 23 January, subject
to the sudden sharp stock market slumps in the preceding days.
Dear Reader
Black
Monday and Why We Like Typical Pension Fund Portfolios!
Did you foresee
the recent blood-letting in global financial markets? We didn’t
exactly either, but for the past two years we were adamant that,
certainly our local markets, had grown inexplicably, way out of
line with inflation and economic growth, and seemingly tracking
the increase in the price of oil.
Our
immediate advice is:
- Hold your
pension fund portfolio.
- If you have
sold, there may soon be an excellent window of opportunity to
buy back in.
- Assess your
portfolio performance on a minimum of 12 months from this point
on.
Read more
to find out why…
Taking a ‘bird’s
eye view’, we noticed that the price of crude oil shot up
beyond any reasonable expectation and without any good reason. We
expressed our expectation that at some time or other one should
see an unravelling. Is this what is now happening in global financial
markets?
By today the
Allshare declined by close on 20% since its high in October and
the ALSI 40 by around 15%! If you have been carried along with the
slump, it is too late to get out now. Yes, you might still avoid
a further sentiment driven decline, but when are you going to move
back in? Probably too late once again and you will then find that
what you have gained on the ‘swings’ you will have lost
on the ‘roundabouts’!
Being in the
pensions industry, we promote the pension portfolio because it remains
our conviction that balanced portfolios are a sound investment for
the cautious long-term investor.
What should
you, as a pension fund member, expect of your retirement investment?
Until last
night, we would expect the average prudential balanced portfolio,
as is typically employed by pension funds, to have declined by ‘only’
around 11% since the peak at the end of October 2007. This represents
an ‘out performance’ of the ALSI 40 of around 4%, and
of the Allshare of around 9% over this relatively short period of
only 3 months.
Measuring
a 12 month period to last night, your pension portfolio should still
return a positive 3% for the year.
Of course you
would have done better in cash, over this period. But would you
have earned 14.5% p.a. over the past two years, as the typical pension
portfolio would have?
If this does
not convince you of the wisdom of the typical pension portfolio,
consider the calendar years since 1978. Over this 30 year period,
the average pension portfolio incurred negative returns in only
2 years, namely 1998 (minus 1%) and 2002 (minus 3.6%). The Allshare
index in contrast, experienced 6 years of negative returns ranging
between minus 2% and minus 10%. On the positive side, the average
pension portfolio returned close on 20% per annum over the 30 year
period!
Taking our
statistics as far back as we can track the Allshare index (January
1998), a normalized starting point for the Allshare index is May
1999 when it stood at 6,500 while it stands at 25,500 this afternoon,
down from a high of just over 31,000 at the end of October 2007.
This represents an annualized growth of 17.1% compared to inflation
of 7% p.a. over the same period.
A normalized
starting point for the ALSI 40 is April 1989 when it stood at 2,600
while it stands at 24,100 this afternoon, down from 28,400 at the
end of October 2007. This represents an annualized growth of 12.6%
compared to inflation of 8.7% p.a. over the same period. This index
grew by 18.1% p.a. from 5,700 in May 1999.
Had the economy
grown by 3% p.a. since April 1989 and had the top 40’s kept
pace with the growth of the economy, the ALSI 40 should now be at
20,700. Had the economy grown by 4% the index should now be at 24,500
(last night’s level).
In our view
markets are still a bit high for those who want to invest, and an
ALSI 40 level of around 22,000 and Allshare level of around 25,000
would be more comfortable for re-entering. There is a fair chance
though of sentiment driving the markets down even further from current
levels, to present really good buying opportunities.
Our advice
is not to sell out now if you have not done so a while ago. If you
have, the time is nearing to consider moving back in and if you
believe in ‘Dollar cost averaging’, now is not a bad
time to start moving. We would also advise that you extend the time
horizon for measuring your portfolio performance to nothing less
than 12 months for a much less blurred perspective.
Finally if
you are a speculator investing for the short-term, you should not
cry over what has happened. Investing for the short-term is certainly
not for the faint hearted. If you are not a speculator, do not try
to speculate but rather stick to the principle of investing for
the long-term and do consider investing, or remaining invested,
in the typical pension portfolio!
Best regards
Tilman Friedrich |
