Notes from my inbox

Streaming services such as Spotify have been revolutionary for music lovers. For less than R60 a month for the ad-free version, you have access to 70 million songs, or three lifetimes’ worth of continuous listening before you need to repeat a song. A further 60 000 tracks are added every day. It offers the pinnacle of instant gratification, personalisation and choice. While you can make your own playlists, most users tend to rely on the curated and personalised playlists available as part of the service. From two weekly mixtapes (one of new releases by artists you like and another with carefully selected songs you have not listened to before) through six daily mixes of old favourites and music new to you, to a wide range of tracks curated by mood, era, genre, artists and other tastemakers, the service is exhaustively comprehensive.

In applying the lessons learnt from the music-streaming revolution to investing, it is easy to draw the wrong conclusions. There are more than 100 million active app-based stockbroking accounts in the US, allowing effortless buying and selling of thousands of securities, including complex leveraged derivatives. The smartphone-based brokerage model optimises the choice and immediacy elements of the streaming experience. Unfortunately, when applied to investment, this approach also incentivises more trading activity and risky short-term performance-chasing. This increases the probability of poorer long-term outcomes through timing-related errors: the likelihood of buying high and selling low is increased when trading is on tap and perceived as free.

In my view, recent studies have highlighted a more applicable analogy to the world of long-term investment. Faced with overwhelming choice, listeners have become reliant on the playlists built by the recommendation engines. These systems effectively become active agents shaping music tastes and listening habits. Streamers increasingly respond in typical relationship-driven emotional terms to the recommendations received, valuing credibility and trust, and expressing a sense of betrayal if they get the sense that their streaming service’s recommendations are optimised for their own commercial interests rather than their customers’ personal satisfaction. This is the same expectation that we know you have of your fund manager: that we always remain committed to making decisions that are in your best interests, not ours.

2021 in review

Last year was generally a good one for financial markets. As you can see in more detail in the market performance table, most asset classes did well in absolute terms. The US equity market had another very strong year (S&P500 Index +29% in US dollars, as are all the return data in this paragraph), outperforming the rest of the developed world (MSCI Europe, Australasia and the Far East Index +11%). The exceptions were global bonds (Bloomberg Barclays Global Aggregate Bond Index -4.7%) and emerging market equities (MSCI Emerging Market Index -2.5%). The South African (SA) market did well too (FTSE/JSE All Share Index +19%) and local government bonds produced the best performance among all major bond markets.

Our multi-asset funds such as Balanced Plus, Capital Plus and Balanced Defensive had a good year, benefiting from good asset allocation and security selection decisions in the domestic equity and bond building blocks. Top 20 had a mediocre year relative to benchmark. While its concentrated nature added significant value over the longer term, it detracted last year as it meant that the Fund was not invested in some of the ‘long-tail’ holdings that added value in our multi-asset funds. Our longer-term global funds such as Global Optimum Growth and Global Managed had a poor year, due to positions in China and long-duration growth shares that came under pressure in the second half of the year. We continue to have high conviction in these funds’ current holdings and expect relative returns to improve from here. For more detail on specific funds, please refer to the fund commentaries here.

Outlook

With a rand return of 20% p.a., global equities have performed exceptionally well over the past decade. Over this period, US equity markets have consistently outperformed the rest of the world, increasing the US weight in the MSCI All Country World Index from 45% to 60%. The unfortunate side-effect of this strong performance is elevated starting valuations in the world’s biggest equity market, which, coupled with increasing economic and geopolitical headwinds, mean that it is prudent to expect a significant moderation in global equity returns over the next decade.

Domestically, we view the situation somewhat differently. While we continue to remain concerned about the structural headwinds facing SA and expect economic growth to remain anemic for the foreseeable future, a lot of pessimism is reflected in asset prices, even after the strong recovery post the 2020 Covid-19 crisis. Attractive valuation levels mean that it is reasonable to expect returns over the next decade in line with the double-digit rand returns produced over the last 10 years. Local bonds also offer much more attractive starting yields than global bonds.

Changes to Corospondent

This will be the last time that our quarterly update will be published in its current magazine form. From next quarter, we will publish content on our website as and when produced. Look out for an updated, more user-friendly publication and investment views section on our website. Our aim is to make it much easier for you to find relevant content when you need it. We will continue to send you the best of each quarter’s content in digest form via e-mail, and we remain committed to report back to you in increasingly more comprehensive and useful ways. Thanks to all the regular readers for your ongoing interest – we hope you do not miss the old way of doing things too much.

As always, please do not hesitate to contact us via clientservice@coronation.com if any aspect of our delivery to you failed to meet your expectations.