BellRyck Investment Feedback February 2017
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Dear <<First Name>>

On the backdrop of a relatively flat and volatile 2016, I thought it would be fitting for me to remind you that investment returns don’t come in a straight line.

When we setup an investment portfolio the first step is to create a benchmark, so what do we want this portfolio to achieve?

For instance: The BellRyck Income Growth portfolio has a Benchmark of Inflation + 5% over a rolling 5-year period. So, if we look back 5 years from today, we would expect to have achieved returns of inflation + 5% for every single year over the last 5 years.


if the Inflation + 5% return per annum is the average, it might be that our returns were achieved as follows:
Year 1: 6%
Year 2: - 3%
Year 3: 16%
Year 4: 13%
Year 5: 22%
Inflation: 6%
Inflation +5% = 6% + 5% = 11%
Avg for investment: 11% / year.

We can clearly see that the returns were volatile; there was even a period where we had negative returns, however we achieved our goal after a 5 year period.

This concept is the most basic, but also the most important concept to understand when investing.

Acting on emotion is the biggest killer of long term performance, on the contrary research has shown that sticking to your investment plan and strategy will reward you in the long term.

So when you open a statement of your investment and the returns are not in line with the investment strategy, the concept I have just explained is what should be running through your thoughts, the opposite is also true,

When markets outperform the benchmark significantly we tend to get over excited and expect those same returns forever, the same concept should be remembered in exceptionally good times.

Below I have elaborated on my comments above in more technical detail courtesy to Allan Gray for their comments.

We believe that a long-term approach to investing is the best way of delivering superior performance, while at the same time minimising the risk of capital loss.

But how long is long term?

Graph 1 shows the difference in the returns between our clients’ share returns and the FTSE/JSE All Share Index (ALSI) benchmark on a yearly basis*.
*Although our long-run average performance is satisfactory, our relative performance in any single year is very unpredictable.
Graph 2 shows the real (after-inflation) annual performance of the ALSI over the same history. Again, although the average annual real return from investing in shares is attractive, the outcome is dramatically different each year.
After inflation, Allan Gray clients effectively get the red bars shown in Graphs 1 and 2 added together, minus fees. Our investment philosophy means that we tend to protect capital better than the market, and therefore outperform when the market is in decline (and regrettably also sometimes vice versa). This helps to improve the chances of investors making long-term positive returns despite the variable graphs.

By far the most powerful way for our clients to reduce the uncertainty and variability in their returns is to stay invested in our funds for a long time.

Patience helps, but equity returns are variable.
Graph 3 shows the standard deviation of the real equity returns, before fees, in Allan Gray portfolios over holding periods of one year or longer, since 1974. The graph shows that the longer the period of investment, the narrower the spread of returns.
For example, for three-year periods, roughly two-thirds of the returns in our history were within 15 percentage points of the average return. This is a wide spread. As the years accumulate, the variability of returns becomes narrower and the chances of a substantial good or bad outcome become lower. Over 10 years, approximately two-thirds of the returns lie within seven percentage points of the long-term average. Even with our track record in stock picking, a South African equities portfolio requires a longer term mindset than many may realise.
SA Economic Status
Locally, the most anticipated event for December, was the potential downgrade of SA debt by ratings agency Standard and Poor’s (S&P). In the end, S&P kept the foreign currency debt rating at one notch above sub-investment grade, but downgraded the local currency debt to BBB, still two notches above junk. Also during December, Q3 2016 GDP growth data was released: SA eked out only 0.2% of economic growth during the quarter, with mining, finance, real estate, business services and general government services being the main contributors. Despite the low growth, headline consumer inflation accelerated to 6.6% year-on-year up to the end of November.

On a more positive note, a total of 93 000 jobs were created in SA in the third quarter of the year, according to data released in December. These were mainly in the community and social services, and in institutions such as technikons. Also, according to the FNB and Bureau of Economic Research (BER) consumer confidence with regard to South Africa has improved to the highest level since Q4 2014.

As it Stands Globally
Globally, the biggest event was most likely the US Federal Reserve’s announcement that it would be hiking the federal funds target rate from 0.25-0.50% to 0.50-0.75%. This is only the second rate hike this decade. This decision was widely priced in by markets, especially as US unemployment has hit a nine-year low, but it’s worth noting that the median of FOMC participants now foresee three hikes rather than two during 2017.

European monetary policy is still moving in the opposite direction from that of the US, with the European Central Bank announcing that it will extend stimulus beyond March 2017. The Dow, the S&P 500 and the Nasdaq all reached fresh records after the European Central Bank’s announcement. The European Union’s statistics office also released that Eurozone unemployment had unexpectedly declined to the lowest level in more than seven years, signalling that companies are confident in the region’s slow but steady recovery.

In the UK inflation jumped from 0.9% in October to 1.2% in November, the highest since October 2014 due to the sterlings’s post-Brexit demise. UK import prices increased by almost 15% in November, the most in five years.

Most markets were buoyant in December.The FTSE/JSE All Share Index (ALSI) gained 0.97% on a total return basis and the SA Listed Property Index 4.2%. The All Bond Index (ALBI) returned 1.57% during the month and cash 0.63%. Among the main indices, the Inflation-linked Bonds Index was the only loser for the month at -0.29%. The MSCI World Index gained 2.4% in dollar terms and the MSCI Emerging Markets Index ($) eked out 0.05%.

In conclusion
2016 was an exceptional year for bonds, with the ALBI the clear winner at a 15.45% total return for the calendar year. Listed property kept up the pace at 10.2%, while the ALSI disappointed with its 2.63%, lagging SA inflation and the 7.37% performance of cash. The MSCI World Index ($) and the MSCI Emerging Markets Index ($) returned 7.51% and 11.22% during 2016. However, the strong appreciation of the rand during the year meant that most South Africans invested in these global indices would have experienced a negative net return after taking into account the strengthening of the rand in 2016: 13.21% against the US dollar, 34.93% against the British pound and 16.67% against the euro. According to investment economist Arthur Kamp, the rand was overvalued against the pound towards the end of 2016.
Below is a table of our latest model portfolio returns.
In essence, what this means is that your specific portfolio would have achieved similar returns over the indicated period (as at December 2016),

Please do not hesitate to contact me for copies of all of our latest model portfolio fund fact sheets, which explains this in more detail.

Yours sincerely,
Du Toit van den Bergh CFP®
083 308 2949 |
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