Traditional thinking is that high risk drives high returns, but this is not always the case and it’s vital South Africans become better acquainted with the exceptions if they wish to build sufficient wealth to withstand tax and inflation.
The ‘heads-up’ comes from Imara Asset Management South Africa, an Illovo-based wealth-builder that is increasingly concerned about anti-equity sentiment and its effects on relatively cautious saver-investors.
Chris Botha, the firm’s director, fund management, says an enduring theme of 2014 – locally and internationally – was that equities were expensive and pull-backs were to be expected. In addition, equities are traditionally branded as risk assets, even high risk assets.
“Risks can be managed,” says Botha. “Yet returns above 15% can still be achieved.
“Most South Africans have insufficient funds for comfortable retirement and suffer the self-inflicted wound of excessive caution as they grow older, further reducing the chance of a meaningful nest-egg.
“However, it’s possible to achieve sizeable returns without undue equity risk. Equities are the route to wealth not the poorhouse. By nature, South African saver-investors incline to caution so it is especially important they absorb the message.”
Proof is provided by products like the Imara MET Equity Fund. Its equity exposure is always above 75%. Despite occasional share market volatility, its five-year annualised return is nearly 19%, the three-year return is just under 22% and one-year returns top 15%.
Performance is assisted, says Botha, by refusing “to make bets on sectors or popular themes”.
He adds: “Consistent long-term performance at relatively low levels of risk is a priority rather than chasing short-term performance. Long-term gains have mainly been driven by stock selection with a strong macro overlay.
“We focus on stocks in companies with quality management, a proven track record through business cycles and sustainable free cash flow. We tend to favour industries with high barriers to entry, a strong franchise with low risk of product obsolescence and high levels of product innovation. We prefer companies where management are part-owners of the business.”
To reduce volatility risks, the fund is style and benchmark ‘agnostic’.
Botha explains: “Indexation based on capitalisation increases the risk that poor share-price performance by a mega-capitalisation company will impact the entire index. Therefore, we don’t tie ourselves to any specific index. Our goal is the highest possible return per unit of risk – the yardstick captured in the Sharpe Ratio.”
The Sharpe Ratio of the Imara MET Equity Fund Fund is 1.85.
“Most South Africans need better-than-average returns to compensate for years of low saving and under-investing,” says Botha. “That’s why it is vital they pay close attention to the issue of inflation-beating performance for acceptable equity risk as equities have the best record for delivering real growth.”