Are you enjoying excellent returns from equities?

If you were invested in local equities for the whole of 2021, you’d likely have reaped an unusually high reward.  This is because the FTSE/JSE All Share Index (ALSI) ended the year with a total return of 29.2%, the highest in a decade.

At the same time, the Consumer Price Index (CPI) averaged 4.5% for the year, so equities would have given you a real return (above inflation) of 24.7%.  This was also an exceptional result, particularly when you compare it to the roughly 7% real return that South African equities have delivered over time. And if you hadn’t simply tracked the market, but instead invested via an active asset manager like M&G Investments, you could have earned returns well above the market: in 2021 the M&G Equity and M&G Dividend Maximiser Funds delivered 36.5% and 35.3%, respectively, after fees.

Advantages of equities
One of the main benefits of an equity investment is that equities have historically produced the highest returns of any asset class over time, and as such are the asset class most likely to beat inflation. This is a key goal of longer-term investing so that the spending power of your savings doesn’t start to go backwards.

Equities also have three drivers of value creation: capital growth, dividend growth and re-rating. For the first, capital growth occurs when the prices of your shares rise on an absolute basis. In the second, investor dividends grow as company profits expand and shareholders receive larger dividend payments. Finally, re-rating occurs as a company’s quality or expected performance improves: investors are willing to pay a higher share price relative to its earnings and/or the value of its assets.

In comparison, fixed income investments like nominal bonds and cash primarily offer investors one source of income: the regular interest payments companies make in return for borrowing cash, with the promise to repay in full at the end. There is no potential for capital growth as such (if they are held to maturity) or re-rating.

Are equities for you?
If you are a longer-term investor who wants to save towards retirement, financing your children’s secondary and tertiary education, or other expensive goals, then the answer to this question is a resounding ‘yes’. However, as with any investment your personal situation, time horizon (the amount of time you will stay invested) and your risk appetite all need to be considered.  These factors will help to determine the proportion of equities you should hold in your overall portfolio.

At M&G Investments, we recommend you stay invested in our Equity and Dividend Maximiser Funds for at least seven years to reap the best rewards from these funds through different economic cycles. This is because, while equities will generally appreciate over time, their performance comes with a high degree of volatility in the shorter term – all investors will experience drops and rises in the value of their assets as they reflect changing economic conditions. It takes time in the market to smooth out these returns.

This makes it key to take a long-term view and stay invested in your equity fund no matter what the market conditions. It’s also important to be prepared for volatility so that you don’t panic when you experience a big market drop and sell at a low price. This will result in actual losses, rather than keeping them on paper only.   

To benefit from the advantages of equity investments, M&G Investments offers a tailored selection of equity unit trusts, the primary two being the M&G Equity Fund and M&G Dividend Maximiser Fund. The M&G Dividend Maximiser Fund focuses more on companies that can generate high-quality dividend growth, but in both we aim to add above-market value to our clients consistently over time, through the application of our prudent, valuation-based approach. Both also have lengthy track records for outperforming their benchmarks (the ASISA SA Equity General category mean), as can be seen in the table below: 

In closing, although past performance is never a guarantee of future performance, investing in equities is likely to be a sound decision for most investors, unless you have a very short-term financial goal to meet. Why not try out our Past Performance Tool to see what your investment might have been worth had you been invested in either of these funds over the longer term?

For more information on investing with M&G Investments, please feel free to contact our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.