Best-performing investment in South African history

South African equities have significantly outperformed other asset classes over the past century, generating an average annual return of 13.5%. 

Crucially, this significantly outpaced inflation over the same period, with prices rising at an average annual rate of 6%. 

This was revealed by Meryl Pick, the head of equities research at Old Mutual Investment Group (OMIG), who outlined why South African investors need equities in their portfolios. 

Pick’s analysis was in the asset manager’s annual Long-Term Perspectives report, which focuses on investment trends over the past century. 

Apart from analysing these trends and how the global economy has changed over time, OMIG emphasises the importance of a long-term mindset when investing. 

A significant part of this is investing in the right assets over respective periods, to ensure that the return on investment consistently beats inflation. 

Pick explained that a key part of this is managing volatility, with many investors being unable to stomach extreme volatility, leading them to minimise their exposure to equities. 

Saving and investing can be challenging, requiring difficult decisions. However, many focus on putting money away and not necessarily on where that money is being invested. 

Pick said this can be very dangerous, as there are no guarantees that the rate of return on investment will outpace inflation. If it does not, this will impact your standard of living as your purchasing power will be eroded by inflation. 

In effect, an investor has to make sure that the value of their savings grows over time at a rate above inflation to have a sufficient pot of assets to meet future goals. 

To this end, OMIG studied 95 years of data to better understand which asset classes provide the best long-term performance relative to inflation. 

It is clear that SA equities have delivered significantly better returns than bonds and cash, outperforming inflation by 7.5%. The portion above the line represents real returns. 

This is the part that is helping you grow your savings pot faster than the rate at which prices are going up, enabling you to improve your standard of living. 

The performance of various asset classes relative to inflation over the past 95 years is illustrated in the graph below. 

Bumpy ride

While it seems easy to then invest in equities and enjoy superior returns over the long term, it is difficult to remain invested amid the volatility inherent in stocks. 

Pick said that the trend is clearly upward, but it is not a smooth ride, and there are times of extreme volatility. 

During these periods, investors typically flinch and sell out of their investments, breaking the compounding process and locking in worse financial outcomes. 

However, the data over the past 95 years also shows that the longer one stays invested, the less one has to worry about capital losses from equities. 

In effect, if you ride out the short-term volatility, an investment in equities is generally likely to appreciate at a rate well above inflation. 

Pick explained that the consistent appreciation of equities is partly due to their volatility, with creative destruction ensuring different companies drive returns at different times. 

Over time, companies grow at a faster rate than the economies in which they operate – company earnings are leveraged plays on the growth prospects of economies in which they do business.

At the same time, superior companies can generate above-average profit growth over a sustained period, thereby becoming a larger portion of the equity market. 

Equity investors allocate capital to companies and are ultimately rewarded through leveraged growth and increased market share.

Over time, new companies with better growth prospects enter the market, while stagnant companies and dying industries exit. This is what is called ‘creative destruction’ in financial markets. 

Leveraged economic growth and the process of creative destruction are largely why equity markets tend to rise over the long run. 

Thus, to grow wealth over the long term, one cannot simply leave one’s money alone. Active management is crucial to ensure investors benefit from the creative destruction of markets. 

The volatility of investing in South African equities over the past 95 years is evident in the graph below.