Investing during Coronavirus: Cash has been a poor choice

In the volatile market conditions of the past two years, it may have seemed like the wise thing to do to hold more cash in your portfolio than you normally would, because of the safety it appeared to offer. And many South African investors did move into cash and away from riskier assets, according to ASISA data. The bad news is that, because of the record-low interest rates that have prevailed, those cash holdings have instead presented a significant risk, especially to longer-term investors: by opting for cash over equities and bonds, investors have been foregoing higher returns and the inflation protection that comes with them, as well as the ability for those higher returns to compound over time. The good news, on the other hand, is that those who consistently stuck with their “higher-risk” assets have managed to earn strong returns.

The graph illustrates how over the past two years the M&G Equity Fund and M&G Balanced Fund have both delivered significantly higher net returns than cash, as represented by the STeFI Composite Index. If you had invested R1,000 in cash before the Coronavirus crisis, you would have avoided paper losses during the market crash, but you would also very likely have missed out on the recovery, earning only R97 (or a 9.7% return) in the process. Meanwhile, if you had kept your R1,000 investment in either an equity fund or a diversified high-equity “balanced” fund, as represented by the M&G funds, you could have earned R472 (a 47% return) or R258 (a 26% return), respectively, after fees. 

Timing the market gives you inferior results

If you are thinking that you could have perfectly “timed” the market by buying equities and bonds just after the market crash (thereby avoiding the big downturn but benefiting from the recovery), history has shown that this is extremely difficult for anyone to do (especially doing it consistently over time), and inevitability results in inferior returns. It is human nature to dislike uncertainty and be reluctant to take risks in highly uncertain conditions, and it is impossible to predict exactly when the cycle will turn. In this particular crash, equity markets rebounded exceptionally strongly and quickly, and there were few (if any) signals that could have indicated such a rapid future recovery.  

As such, the graph shows how clients of M&G Investments who stuck with their same longer-term investments that did include riskier assets like equities have benefitted from the active management of their funds over the past two years. The M&G Investments team opted to add more equity assets to client portfolios when valuations were falling, recognising the opportunity to buy high-quality assets at cheap valuations. We followed our long-established process in the knowledge that, although one never knows how long a market recovery will take, buying quality companies at attractive valuations will very likely deliver above-market returns over time. Our subsequent fund performance is the most recent evidence that this is indeed a successful investment strategy.

Cash still likely to underperform for some time

We are now past the worst of the crisis (hopefully) and global equity markets – including the JSE – have surpassed their pre-pandemic levels. Interest rates have begun to rise in response to quickly rising inflation. Some investors may now worry that they have missed the lion’s share of the equity rally, and be tempted to avoid equities and bonds while staying in cash.

However, in our view you are likely to be adding to your risk (the risk of not beating inflation) if you decide to keep your SA cash exposure high. This is because of the very low base off which our rates are rising – potential cash returns are still very unattractive compared to those from SA equities and SA bonds, especially in real terms with rising inflation. The latter offer excellent return potential compared to their histories, even after accounting for the strong gains they have already recorded. In our view, it will still be some time before cash becomes a viable option for longer-term investors, relative to other local assets, and then mostly for its diversification and liquidity benefits. By contrast, both SA equities and bonds still offer attractive prospective returns over the next three to five years, based on their current valuations. Negative investor sentiment has weighed on our markets more than many others – excessively, we believe – so that current yields are compensating us very well for the risks involved.       

In conclusion, there’s no doubt that resisting the urge to build up cash in a portfolio is difficult in falling markets and highly uncertain conditions like the Coronavirus crisis. However, the most successful investors have avoided moving to cash, and not attempted to time the ups and downs of the equity market. As demonstrated by our M&G Equity and Balanced Funds’  strong performance (among other unit trusts we manage) over the past two years, over time longer-term investors will be rewarded for their consistency in staying the course with their somewhat riskier, but higher-returning, portfolios. 

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