Five lessons learnt in 2016

It has been a while since I last posted – 2016 has been a year to remember…I think that this post by Anet Ahern from PSG pretty much sums it up. Happy holidays and here’s to a better 2017!

1.   The best investment decisions aren’t always the most comfortable

During the first two weeks of 2016, the S&P 500, Dow Jones and Nasdaq Composite indices were down between 8% and 10% – the worst start to a year ever. All three indices would eventually add to their losses after a modest rebound, hitting their lows for the year in mid-February.  The US market then staged the biggest quarterly reversal since 1933 from these lows.  Here in SA, our All Share index had a similar start, and rose by 16% in just four months to reach its high for the year in June.  But that’s only part of the story…

It was during those panic-stricken weeks that shares such as Imperial, Glencore, Anglos and FirstRand were on sale at levels which subsequently provided returns of between 30% and 300%.  What was needed to make the right decision to invest in these shares at that point?

  • A calm, unemotional, measured approach.
  • Deep knowledge of the companies in question.
  • A solid assessment of their long term value.
  • Cash to invest, whether in a separate income portfolio or as part of the asset allocation of a multi asset or flexible fund.

During 2016, PSG Asset Management’s funds were invested in the shares mentioned above as well as other undervalued shares. Our ability to do so was backed by research, and funded by cash holdings which were intended to help us take advantage of opportunities to add more of these shares to portfolios at a time when others were fearful to act.

2.   Shares in good companies don’t need a good economy to show excellent returns
It would be fair to say that economic conditions have not been ideal for the likes of Imperial.Yet, an investment in this company at the low in January 2016 has produced a return of around 70% to the end of November 2016. This is because the market is often short-term oriented and frequently extrapolates current events and conditions into the future, creating extreme under- or overvaluation.In other words, investors often fail to take a long-term view, and they overreact to short-term pressures. This creates opportunities, as is evident with Imperial, a share held across our funds.

3.   Fixed Income can work hard towards your long term goals too
It was a long-term view on inflation that helped us to recognise the attractive real yields on offer from time to time during 2016, enabling us to lock-in returns of up to 4.5% above inflation in parts of our funds. We view cash and fixed income instruments as hardworking portions of a portfolio, providing income, diversification, stability, real returns and fire-power for opportunities during uncertainty. At PSG Asset Management every single part of the portfolio is an active decision and has to bring something that will take our investors closer to their long term goals.

4.    Our institutions are holding up so far
By the skin of our teeth, I hear some say.  But the fact is that the institutions which served to help us retain credibility in the eyes of the world mostly worked for us in SA this year when it really counted.  We had a peaceful and fair election and our finance minister managed to hang on to his independence. The Reserve Bank delivered on their inflation targeting mandate. While there are many instances of poor delivery and corruption, we learned this year that our key institutions stood the test of 2016, which was no mean feat.

5.    All countries have their issues, and major events will happen
Italy’s referendum led to the resignation of their prime minister. Brits voted in favour of leaving the EU, and Trump amused, horrified and surprised the world. We saw a failed military coup in Turkey. Oil hit a 12-year low this year, and gold had its best quarter in 30 years. Japanese bonds traded at a negative interest rate for the first time ever while Apple sales fell for the first time in almost 13 years. While investors around the world try to get their mind around these as they happen, at PSG Asset Management we try to focus on seeing the bigger picture and taking a longer-term perspective, while doing most of the work from the bottom-up. We believe this approach will continue to work as it has in the past.

As always, hindsight can serve to make us forget how hard it was at the time to stay calm and make the right decision.This is only possible if you have a solid framework to start with, be it around the way you research and assess shares, or the way your long-term investment strategy is crafted.

 

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