Evaluating the Risk-Return Tradeoff in Multi-Asset Equity Funds. South Africa’s investment sphere presents an intriguing paradox, inviting an incisive exploration into the multi-asset equity funds landscape. Our research, “Evaluating the Risk-Return Tradeoff in South African Multi-Asset Equity Funds: A Case for Skillful Fund Selection in High Equity Portfolios,” ventures into this maze of investment dynamics.
In this labyrinth of risk and return, the conventional wisdom of a linear risk-return tradeoff appears challenged. Data shows that moving from low to high equity allocations, and thereby increasing investment risk, does not necessarily yield proportionally higher returns. Specifically, our analysis reveals that low, medium, and high equity funds delivered an average return of 6.85%, 7.18%, and 7.39% respectively over the last five years (in a context where inflation averaged 5.9% and the ALSI returned 6.28%). This marginal return increase for additional risk defies traditional investment theory, warranting a deeper exploration.
Yet, within this intricate investment landscape, there lies an enticing prospect. Within the high-risk environment of high equity funds, there emerges a potential for higher returns – with the right strategy. Our research indicates that specific funds within the high equity category have the potential to yield over 10% annualised return over five years, diverging from the broader trend and underscoring the power of astute fund selection. At Virtual Adviser we pride ourselves on our in-house skills in identifying winning funds.
Why did we chose the last 5 years as a benchmark?
The last 5 years have been particularly tough for South Africans. Zuma, Guptas, Loadshedding, Covid, Ukraine war. So, if a fund delivered more than 10% on an annualised basis, it is a superstar performer. Not just in South Africa, but compared internationally too. 5 years is also the minimum accepted timeline to come out positive from the equities market, Jitesh explained this in detail in a previous blogpost entitled Inesting – The Long Term Key to Wealth Accumulation.
However, the precise details about these high-performing funds and the successful investment strategy are reserved for a more exclusive audience. Jitesh Jairam, CFP, is willing to share these insights, but only upon request by those seeking tailored investment advice. This approach ensures that bespoke investment recommendations are provided, aligning with the understanding that successful investing is not a one-size-fits-all journey. Email Jitesh now.
Join us as we delve deeper into the world of South African multi-asset equity funds, aiming to demystify the complexities and illuminate the path towards fruitful investment decisions.
The greater than 10% winning muti-asset high equity funds do not include Discovery, nor Allan Gray nor Alexander Forbes nor PPS nor Stanlib (Liberty). In fact, the ETF driven passive fund, Sygnia, delivered returns as good, and in some instances even better returns, than the aforementioned active fund managers that come at a premium in terms of costs. Active funds do not necessarily outperform passive funds. There are also a few new kids on the block making big waves!
– Jitesh Jairam, CFP, MBA, etc.
South African Equity Funds Are Outperforming Global Ones
There are a few reasons why South African equity funds have outperformed offshore funds in recent years.
- Strong performance of the South African economy: The South African economy has been growing steadily in recent years, which has created a positive environment for businesses and investors.
- Low interest rates: Interest rates in South Africa have been low for several years, which has made it cheaper for businesses to borrow money and invest. This has also made it more attractive for investors to invest in equity funds.
- Weak performance of some of the major global economies: Some of the major global economies, such as the United States and Europe, have been struggling in recent years. This has made it more difficult for investors to find attractive investment opportunities in these markets.
Here are some additional details about each of these factors:
- Strong performance of the South African economy: The South African economy has grown at an average rate of 2.5% per year over the past five years. This growth has been driven by a number of factors, including:
- A strong mining sector: South Africa is a major producer of gold, platinum, and other metals. The strong performance of the mining sector has helped to drive economic growth.
- A growing services sector: The services sector is now the largest sector of the South African economy. The growth of the services sector has been driven by factors such as the expansion of the telecommunications and financial services sectors.
- A rising population: South Africa’s population is growing at an annual rate of 1.2%. This growth is providing a source of new workers and consumers, which is helping to drive economic growth.
- Low interest rates: Interest rates in South Africa have been low for several years. The Reserve Bank of South Africa (SARB) has kept interest rates low in order to stimulate economic growth. Low interest rates have made it cheaper for businesses to borrow money and invest. This has also made it more attractive for investors to invest in equity funds.
- Weak performance of some of the major global economies: Some of the major global economies, such as the United States and Europe, have been struggling in recent years. This has made it more difficult for investors to find attractive investment opportunities in these markets. The United States economy has been growing at a slow pace in recent years. This has been due to a number of factors, including:
- The aging population: The United States population is aging, which is putting a strain on the economy.
- The trade deficit: The United States has a large trade deficit, which is draining money from the economy.
- The national debt: The United States national debt is now over $20 trillion, which is a major burden on the economy.
The European economy has also been struggling in recent years. This has been due to a number of factors, including:
- The sovereign debt crisis: The sovereign debt crisis in Greece and other European countries has caused uncertainty in the European economy.
- The refugee crisis: The refugee crisis has put a strain on European economies.
- The Brexit vote: The Brexit vote has caused uncertainty in the European economy.
Overall, the South African economy has been performing better than some of the major global economies in recent years. This has helped South African equity funds to outperform offshore funds.
For more financial insights make sure that you Learn with Jitesh!
It is important to note that past performance is not a guarantee of future results. Investors should always do their own research before investing in any fund. Virtual Adviser is an authorised FSP #51419.