A new investment world has dawned in which you will have to save more, work longer or revise your retirement lifestyle, or all three, the managing director of one of the world's largest investment managers told the unit trust industry this week.
Paul McCulley, the managing director of Pimco, the United States-based global manager of more than US$1 trillion, conveyed this bad news at the Raging Bull Awards ceremony in Cape Town.
McCulley was the guest speaker at the ceremony, which celebrated the success of local unit trust funds and fund managers who have made money for their investors over the past three to five years.
Speaking after a year in which equity markets around the world made a good recovery following what he termed "a cardiac arrest" in 2008, McCulley warned that if you think the investment world has returned to normal, you are wrong.
Many people thought that 2008 was a nightmare, and after last year they think the nightmare is over, he says.
But like a heart attack victim has to adapt his or her lifestyle after such an event, investment markets will be different after the credit crisis, and a "new normal" will prevail, McCulley says.
You should not engage in wishful thinking about returning to the old normal. The investment world is different now, and the era of earning double-digit investment returns of 10 or 11 percent is over, he says.
Returns in the next three to five years will be in single digits: five, six or seven percent, he says.
The old normal was characterised by deregulation, globalisation and leverage (borrowing to invest), McCulley says.
More and more economic activities became part of the capitalist system without government regulation, and this enabled more activities to be financed with borrowed money (leveraging), he says. "These were tailwinds for economic growth and investment returns. It was fun."
But, McCulley says, the problem was that we did not know when to stop. As a result, between 2002 and 2007 bubbles developed in the property market and the equity market.
The US property market bubble grew as financial institutions gave loans to people who could not really afford them, without requesting down-payments on properties and without proof of the lenders' income or ability to repay the loans. The belief was that rising property prices "would cover all sins", because loans in default could be refinanced as house prices rose, McCulley says.
He says the loans were packaged as investments and passed on through the financial system, causing other asset prices to become over-inflated.
When high loan defaults exposed the losses on sub-prime loans, it started what McCulley calls a global run on the financial system.
"The underage drinking party at which the rating agencies Moody's and S&P handed out fake identity documents ended in tears," he says.
McCulley says the new normal will be to reverse the three things that provided the tailwinds under the old normal.
The new normal will therefore involve reregulating, deleveraging (reducing borrowing) and pulling back from globalisation, he says. "This will provide headwinds for economic growth for the next three, five or seven years."
McCulley predicts that as a result economic growth in the developed world will be about four percent. He says you should expect that companies will produce market returns at a similar rate.
A slow-down in economic growth in the developed world will, by implication, mean slower economic growth in the developing world, McCulley says.
Emerging markets did a great deal of piggy-backing on the economic growth of the US, he says, and they will have to work harder in future to keep growing their economies on the back of their own home-grown consumerism.
Bond yields will be about three or four percent, McCulley says, and the best yields will be from bonds in the developed world, where growth and hence interest rates will be weak. Rising interest rates are generally bad for bond yields.
McCulley says some investors still mistakenly think they will get more good returns when markets rerate and the price-to-earnings ratios of shares (the shares' prices divided by their earnings - indicating how expensive the shares are) rise rapidly. But, he says, we have already had those good returns this past year, when market sentiment improved from expecting Armageddon to accepting that the global economy was still functioning.
"And you can't go to heaven twice for the same good deed," he says.
McCulley says the new normal may spawn new investments. In particular, he expects investments with benchmarks that will reflect the greater role of emerging markets and investments that include more asset classes, such as commodities and private-funded (rather than government-funded) infrastructure.
Investors now realise that, in the market crash of 2008, equities and corporate bonds both suffered, and investors did not benefit by being diversified across these two asset classes, he says. Investors will now look more to managers to understand the risks and allocate their portfolios in a way designed to minimise those risks.
Finally, McCulley says, investors are realising that with globalisation and a less US-centric world, the market disasters - such as the Russian, Mexican, Brazilian, Asian and 2008 crises - that they expected would happen only once every 100 years are happening more frequently, and perhaps investors need to have investment insurance against these disasters.
New products for the new normal may offer you some ways to protect your investments, but they will not be able to give you the high returns of the old normal.
You must therefore adjust your expectations and plan to save more, work longer or revise your lifestyle in retirement.
You should accept this, make your plans and get on with your life, McCulley says.
ABSA SELECT EQUITY FUND
RMB STRATEGIC OPPORTUNITIES FUND (A)
STANLIB INDUSTRIAL FUND (A)
STANLIB FINANCIALS FUND
OLD MUTUAL MINING AND RESOURCES FUND (R)
RMB SMALL MID-CAP FUND
NEDGROUP INVESTMENT VALUE FUND (A)
BLUEALPHA ALL SEASONS FUND
DOTPORT STABLE PRUDENTIAL FUND OF FUNDS
OASIS BOND FUND
STANLIB CASH PLUS FUND
STANLIB PROPERTY INCOME FUND
CORIS CAPITAL INTERNATIONAL BOND FEEDER FUND
FRANKLIN EUROPEAN GROWTH FUND
ORBIS SICAV ASIA EX-JAPAN EQUITY FUND
ORBIS SICAV JAPAN EQUITY FUND (YEN CLASS)
FRANKLIN US OPPORTUNITIES FUND
INVESTEC GSF GLOBAL BOND FUND
FLAGSHIP WORLDWIDE FLEXIBLE FUND OF FUNDS
ALLAN GRAY-ORBIS GLOBAL FUND OF FUNDS
ABSA BALANCED FUND (A)
ALLAN GRAY STABLE FUND
ALLAN GRAY BALANCED FUND
NEDGROUP INVESTMENTS BOND FUND (A)
RMB INTERNATIONAL EQUITY FUND OF FUNDS
STANLIB PROPERTY INCOME FUND
INVESTEC GSF GLOBAL BOND FUND
ORBIS GLOBAL EQUITY FUND
The Raging Bull Awards recognise the top performers in the collective investment, or unit trust, industry.
The top funds on outright performance over three years in most domestic, rand-denominated foreign and offshore unit trust sub-categories receive a certificate.
A Raging Bull Award is made to the top-performing domestic equity fund over three years among all the funds in the three sub-categories that invest across the JSE: general equity, value and growth.
The top performer over three years in the domestic fixed-interest bond and income fund sub-categories also receives an award.
Two awards are made for straight performance over three years to funds that invest in foreign equity markets: one to the top-performing rand-denominated fund and one to the top-performing offshore fund. An offshore fund is not domiciled in South Africa but is registered with the Financial Services Board (FSB) as a fund that can be marketed here.
Other certificates and Raging Bull Awards - particularly for the asset allocation funds and the more popular sub-categories - are awarded on the basis of risk-adjusted returns over five years, as measured by the PlexCrown ratings. This is because risk management is a major factor in determining a fund's success.
To qualify for a Raging Bull Award or a certificate, or for a management company to have the performance of a fund included in the calculation of its average PlexCrown ratings, a fund must:
- Be available directly to retail investors.
- In the case of an award made on the basis of straight performance, be in a domestic unit trust sub-category (including South African-domiciled foreign funds) that has at least five actively managed funds with histories of three years or more.
- In the case of an award made to a foreign-domiciled (non-rand-denominated) fund on the basis of straight performance, be in a sub-category that has at least nine actively managed funds with histories of three years or more.
- In the case of an award made on the basis of risk-adjusted returns, be in a major domestic or foreign-domiciled asset allocation sub-category, or in one of the other larger domestic sub-categories. Sub-categories that have at least five actively managed funds with histories of five years or more are included in the awards.
- Not be a passive, or an index-tracker, fund. These funds are excluded from the awards because their performance reflects market movements and not fund manager expertise.
- Not be a money market fund. These funds are excluded because of the limitations on them in terms of duration and the types of instruments allowed.
- Not be in a varied specialist sub-category or in the domestic asset allocation targeted absolute and real return sub-category. Funds in these sub-categories have different investment mandates and objectives, and ranking them would result in false comparisons being made.
- Not have changed sub-categories during the past year. Funds that have changed sub-categories are not eligible for sub-category awards even if the Association for Savings & Investment South Africa has allowed such funds to retain their performance histories.
- In the case of offshore funds, they must have been registered with the FSB for at least a year.
PlexiCrown ratings use four different measures to calulate the investment performance of a unit trust fund on a risk-adjusted return basis.
The ratings measure the fund's volatility compared with the benchmark, the risk of under-performing the benchmark and the manager's skill in adding value above that achieved by the market. Funds in each sub-category are then ranked on those four measures over five- and three-year periods.
The ratios are time-weighted by applying weights of 60 percent and 40 percent of five- and three-year periods are used, or 100 percent of the measures for three years (in the case of younger funds). From these ratings, a composite rating is calculated, and the fund with the highest score in the relevant sub-category is regarded as the winner.
To decide the leading fund managers, an average PlexCrown rating for each manager is determined from the ratings of all their funds in all the qualifying sectors, with a higher weighting given to the manager's domestic fund ratings.