REVIEW OF THE YEAR
At the start of 2014 we said to our clients that we felt 2014 was a year where 10% returns could be expected as opposed to the high returns of previous years. The main reason for this was that we felt valuations of equities had become stretched and that investors would have to accept lower returns for the year unless they wished to take on excessive risk. Our two asset allocation funds, the Rezco Value Trend fund and Rezco Prudential, achieved a return of close to 10% for the year, slightly above the average for the sector. The South African shares in the portfolio achieved a return of 17.7%, well ahead of the Johannesburg Stock Exchange (JSE) Overall Index at 10.9% (with income reinvested). With hindsight, having a larger exposure to cash during the year cost performance but given the risks faced by the market, we feel that this was warranted. Longstanding clients will know we would rather err on the side of caution in high risk markets and remain true to our investment philosophy of preserving capital and creating wealth.
The performance of the foreign shares in the portfolio were relatively subdued at 10.6% behind the MSCI World index at 16.5%. The three year performance of this part of the portfolio was however 35.9 per year% in Rands compared to the Rand return of the MSCI World index at 30.9% per year
Many of our holdings had a roaring 2013 and started the year in expensive territory, hence the subdued performance for 2014. Three year performance for both funds remains near the top of the sector at 21.6% per year for the Rezco Value Trend fund and 20.0% per year for the Rezco Prudential fund. The average for the sector over this period was 14.5% per year.
Our South African equity fund, the Rezco Equity fund, which started at the end of March 2014, did exceptionally well for the nine months to December 2014 with a return of 12.6% compared to the JSE Overall index of 6.3%.
We are now almost six years into the bull market, which, going on history, is near expiry. This has made shares that are attractively priced and display value, hard to find in our local market.
In cricket parlance, this will prove to be a low scoring pitch. Take runs were you can get them, but swinging for the stands is likely to result in a humbling walk back to the team bench. In short, we feel that this will be a stock-pickers market. Flexibility and maneuverability will be deciding factors.
Quality shares are expensive but low interest rates and lack of alternatives will force investors to invest in this asset class. Markets however return to intrinsic value over time and therefore overpaying for equities is a dangerous exercise.
In our note to clients at the depth of the market plunge last October we stated that this was not the start of a bear market but rather a case of amplified market volatility. We took our own advice and used it as an opportunity to increase our equity holdings. We expect that 2015 will not be much different and that quite a number of such events could occur. Investor’s nerves will be tested in 2015, so we would recommend having a portfolio that is robust and able to withstand these downdrafts.
Bonds have been the surprise star outperformer. We have retained our position in not holding any longer durations and remain focused exclusively on high quality issuers only.
IMPACT OF THE LOW OIL PRICE
The financial press has commented extensively of late that the fall in the oil price from $110 per barrel to under $50 per barrel is highly deflationary and thus bad for the world economy. We strongly disagree. The $60 fall in the price of oil essentially translates into a $1.5 trillion per year economic stimulus. It is extremely powerful in that much of it is instantly in the consumer’s pocket. Further it enables central banks to keep interest rates lower for longer. This is important as a fast rising interest rate environment will not be good for equities.
Lower fuel prices may be just what the world economy needs to accelerate global growth. The oil exporting countries have, over the past 5 years, been hoarding a significant portion of the windfall from high oil. Much of this $1.5 trillion has now been transferred into the hands of consumers who are likely to spend it on goods and services. As a result the consumer driven economy of the USA will accelerate and Europe may even be lifted out of recession.
THE WORLD KEEPS PRINTING MONEY
At the time of writing the European Central Bank (ECB) looks set to join the world of large scale quantitative easing or money printing. The total amount of new money that has been created by the world’s central banks now stands at over $10 trillion. A large scale quantitative easing program by the ECB could take this amount significantly higher. Whilst the longer term impact of this program must certainly give investors pause, the short term impact will certainly extend the equity bull market.
Investors can again expect lower returns this year with increased volatility. Opportunities exist, but stock picking will be key, along with strong nerves to manage the expected volatility in the market.