Real Estate Investor Magazine South Africa September/ October 2019 | Page 63

PERFORMANCE CHASER PORTFOLIO
Morningstar recently conducted research into the area of
investor returns and created a hypothetical ‘Performance
Chaser’ portfolio. This portfolio sees investors switching their
investments into the best performing fund from the previous
year at the start of each calendar year. This is then compared
to two portfolios managed by Morningstar – the Morningstar
SA Multi-Asset Low Equity and SA Multi-Asset High Equity
portfolios.
The research aims to illustrate, by means of comparison,
the returns achieved by the performance chasers versus the
returns achieved by investors that remained invested in their
respective portfolios over the same time frame.
REASONS FOR UNDERPERFORMANCE
The selected funds’ good ideas have all paid off
and the returns have been realised.
They may have had an aggressive view that
played out in their favour. It’s unlikely that the
view will continue for the foreseeable future and
could potentially be the top of the return cycle
when an investor invests into the fund.
This view could have been pure luck and not
a solid investment thesis that the manager
followed. For example, the fund could have
been underweight offshore and then the rand
strengthened due to a global risk on trade.
What does this mean for investors?
Returns don’t happen in straight lines and it
seldom occurs when one expects it to.
Fig 1: Low Equity: Performance chaser vs Morningstar
Cautious
It’s vital to separate emotion/sentiment from an
investment portfolio. Often the most beleaguered
investments turn out to be a great opportunity
for future returns, as investors can access these
investments at a good price.
Volatility creates opportunity and short-term
underperformance can translate into a solid,
longer-term upside.
Fig 2: High Equity: Performance chaser vs Morningstar
Adventurous
As can be seen in the above two graphs, the difference in the
returns was quite astonishing.
The Morningstar low equity portfolio returned 6.3% more
than the Performance Chaser portfolio over a period of four
years. In other words, an investor with an investment of R1
million that stayed the course (and remained invested in the
Morningstar low equity portfolio) would have gained an extra
R63 095 in returns.
The difference is even more pronounced in the high equity
portfolio. In this case, the Morningstar Adventurous portfolio
returned 13.93% more than the Performance Chaser portfolio
over a period of four years. In other words, an investor with an
investment of R1 million that stayed the course would have
gained an extra R139 269 in returns.
The above scenario clearly highlights the benefits of staying
invested in a robust and consistent strategy as opposed to
backtracking and chasing yesterday’s winners.
Trying to chase performance can be extremely harmful
to an investor’s returns over the long-term. It’s rare for even
professionals to consistently time investment in to and out of
the market over time. In addition, one needs to consider the
costs of trading funds, which is likely to only make matters
worse.
A well-diversified portfolio that is designed to meet your
investment goals whilst remaining within your risk tolerance
is a far better solution, and much likelier to result in long-term
investment success than trying to buy yesterday's winners.
THE BOTTOM LINE
Investing is a marathon and not a sprint. If you
have a five-year investment horizon, remember
to keep a long-term view - don’t worry too much
about your returns for the first three to five years.
When it comes to investing, patience is rewarded.
VICTORIA REUVERS director and senior portfolio
manager at Morningstar Investment Management
South Africa
SA Real Estate Investor Magazine SEPTEMBER/OCTOBER 2019
61