Somehow we have already come to the end of the 1st quarter of 2019, a period which once again has provided us with one clear lesson about investing – don’t frikkin’ panic!!!
I will be honest, there were some dark days over the festive season from an investment perspective. Equity markets both locally and abroad took a beating in December, wiping out all the gains from the rest of the year – and then some.
I tried to stay positive but it was hard to enjoy some cocktails on my newly renovated (and costly) deck when the press was full of talk of trade wars, Brexit and a slowing economy.
Technical analysts were screaming that graphs were inverting (whatever that means), pointing to a further cataclysmic collapse of the markets. Each day, my stock market app was displaying a whole lot of red, which as my wife knows, means it’s a bad time to talk to me about that new rug that would look just amazing in the lounge.
I’m telling you, it messes with your mind, man. That little voice in my head was whispering; “The end is near! Sell everything! You’re going to lose it all!”
In the end, I had some good conversations with my financial advisors, who reassured me that while we can never forecast what the markets will do, I had a sound long-term investment strategy in place, a highly diversified portfolio and sufficient cash and fixed interest income on hand to ride out any further market collapse that could occur.
So I hunkered down for the most part, even increasing the equities weighting in my portfolio slightly.
Lo and behold, the JSE All Share Index is up a whopping 11.5% since the start of 2019. Global equities too have done well, with the MSCI World Index up 12.5% year to date to the end of March and 4% over a 12 month period. Even most fixed interest investments have rebounded somewhat as the cycle of increasing interest rates slowed.
Look, I’m not saying that Armageddon is not around the corner. No-one, and I mean no-one knows what is coming, but trying to time the markets is just a fool’s game. We just have to ensure we have a good strategy in place and trust that over the long term, we will prevail.
Having said all that I have made some tweaks to my investment portfolio over the last few months.
Locally, I topped up my contribution to my RA fund to make full use of the tax advantages. At present I am invested in a blend of funds comprising the Allan Gray Balanced Fund, Coronation Balanced Plus Fund, Foord Balanced Fund and Investec Opportunity Fund.
Over the next few months, I will be making some changes here. The combined investment and administration fees on this portfolio are around 1.8% per annum, excluding advisor fees. I’m really struggling to justify this when I can access index trackers like the Sygnia Skeleton 70 Fund, which has a 0.65% total cost. In my case, switching to this kind of fund would save me over R20 000 per year in fees – and it’s not like the actively managed funds have been outperforming of late.
On analysis of my offshore portfolio, it was clear that my equity component was quite heavily weighted towards developed markets, particularly the US and Europe. This mostly worked in my favour in 2018, with the US in particular performing relatively okay (the S&P 500 was down 4.4%) compared to emerging markets, which got pummelled (the MSCI Emerging Markets index dropped 14.5%).
However, this was mostly fortuitous, rather than smart. I believe that while emerging market equities may technically have a riskier investment profile, failing to hold any is a risk in itself.
Lazard Asset Management sums it up quite well when it says; “Investors can hold emerging markets for tactical reasons, but we believe the emerging markets “story”—characterized by higher growth potential, stabilizing institutions, a rising middle class of consumers—remains valid, regardless of higher volatility and relatively short-term changes in investor confidence.”
At the same time, emerging markets look good from a valuations perspective. At the end of March 2019, the MSCI EM Index was at 13.4x trailing earnings, a discount of about 35% compared to US equities. This discount is wider than the average, which has historically hovered around 20%.
Lazard says that emerging markets equities also offer opportunities to pick up dividends for yield-hungry investors—the emerging markets dividend yield is about 2.9% compared to 2.1% for the S&P 500 Index.
I tend to agree with this so in early January, after consulting with my offshore financial advisor, I invested roughly 5% of my overall offshore equity portfolio in the Vanguard FTSE Emerging Markets UCITS ETF. Last week, I increased that stake by an additional 3%.
This Fund seeks to track the performance of the FTSE Emerging Index, a free float market capitalisation weighted index of large and mid-cap companies in multiple emerging markets in Europe, Asia, Africa, Central and South America and the Middle East.
The fund has about 65% of its investments in Asia, which suits me just fine as let’s face it, that’s the future of the world’s economy. The rest is in Latin America (15%), Africa (8%) and emerging markets in Europe (6%). Best of all, because its an ETF, the fees are low at .25%
I also have further exposure to emerging markets of around 7.5% of my equity portfolio through the Veritas Asian Fund, which invests in Asian equities, excluding Japan.
Over the last week I have also invested about 5% of my equities portfolio in the SPDR S&P Global Dividend Aristocrats UCITS ETF, the objective of which is to track the performance of high dividend yielding equities globally. This investment serves to provide me with an income stream and increased diversification to countries like Canada and Sweden.
On the flip side, I sold 50% of my holdings in the JO Hambro Capital Management Continental European Fund, an actively managed fund, which invests in European equities. This was done to reduce the overall weighting in my portfolio to European equities from 20% to around 15% as well as to decrease my exposure to actively managed funds. I realised about a 2.5% gain on this fund since I acquired it about a year ago.
I also sold my entire holdings in the Invesco Dynamic Building and Construction ETF (which invests in US building and construction stocks). This was done as part of my strategy to slightly reduce my exposure to US equities. There is also a possibility that a future slow-down in the US will have immediate impact on demand for new apartments, which will impact the construction of new buildings.
Hopefully the next quarter is as profitable as the first!! Happy investing to all and remember to keep calm and carry on.
By Elian Wiener – Founder of Wealthwoke (www.wealthwoke.com) – a community of people who aim to redefine their concept of wealth
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