A WORD FROM OUR CIO - PSG

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But it is by no means a fool- proof approach – especially without the appropriate guidance to support it. We often see
A WORD FROM OUR CIO How to reach your long-term wealth creation objectives

Adriaan Pask PhD CIO PSG Wealth

We have argued in previous editions of The Wealth Perspective that behavioural biases are often investors’ biggest downfall. When investors are unable to control their emotions, they are more likely to make impulsive and ill-considered decisions. This is why we believe that emotions – or rather the impact of stressful emotional states on decision-making – are the biggest enemy of building wealth.

Our investment research team is committed to understanding investor behaviour, and the potential impact of that behaviour on wealth creation. We use these insights to design strategies to optimise our clients’ probability of reaching their long-term wealth creation goals. Our client-centric approach to managing money and providing advice helps to manage investor behaviour more effectively, and could ultimately ensure better client outcomes.

Common mistakes made by novice investors Novice investors often act reactively rather than proactively. An event occurs and, due to inadequate research and preparation, the novice investor will often feel insecure and may react by moving into an overly conservative investment position. It is easy to only see the shortterm risks and lose sight of the long-term payoffs.

The key to managing emotional decisions is preparation It’s only natural – especially for novice investors – to feel the urge to react when portfolios are under pressure. It is easy to only see the short-term risks and lose sight of the long-term payoffs. This is especially true in times of increased uncertainty. While it may be unrealistic to expect novice investors to stay the course, the reality is that emotional decision-making based on short-term market movements could mean losing out on the long-term benefits that might be gained by choosing to weather the storm. Our experience has taught us that the best way to manage this risk, is to entrust these decision-making responsibilities to an experienced person who looks at facts objectively, and who is therefore better equipped to avoid emotional decisions. Professional money managers and wealth managers fit this bill.

The following graph shows how emotions cause investors to react nervously to price fluctuations. This research shows that when a product’s performance starts to dip, investors frequently make the mistake of selling low and buying high. They sell out of the poorly performing assets, and when the asset starts to perform better again they buy back in – but this time at a higher price.

Emotion is the biggest enemy of investment success $300 000 Euphoric

$250 000

Why are professional investors less emotional? But, you may ask, “Why are professional money managers and wealth managers less emotional about short-term volatility?” In our opinion, the reason lies in preparation. Managing money objectively is a skill. It requires training and experience. Professional investors do extensive research to gain insights, and use this information to sketch a landscape of facts from which a framework of possible outcomes can be built. Once a framework is in place, further research is done to enhance the understanding of what the potential outcomes of an event could be, and whether these outcomes present a risk or an opportunity.

Euphoric

$200 000 $150 000 $100,000

Thrilled

Posi ve

Encouraged Confident Posi ve Surprised Nervous Thrilled Encouraged Surprised Worried Hopeful Hopeful Confident Nervous Cau ous Panic Stricken Worried Cau ous Posi ve Defeated Defeated Panic Stricken

$50 000 December 1996

December 2001

December 2006

December 2011

Source: BlackRock Investments. S&P 500 Index

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A WORD FROM OUR CIO

A related wealth-destroying habit of novice investors is chasing past performance. The graph below clearly illustrates how money flowed into a well-known domestic fund when it performed well. However, as soon as the fund started to underperform, investors started to pull out their capital.

Flows versus returns over a 1-year rolling period 10 000

15.0

8 000

13.0 11.0

6 000

9.0

Millions

4 000

7.0

2 000

5.0

0

3.0 1.0

-2 000

-1.0

-4 000 31-May-12 31/05/2012 31-Aug-12 31/08/2012 30-Nov-12 30/11/2012 28-Feb-13 28/02/2013 31-May-13 31/05/2013 31-Aug-13 31/08/2013 30-Nov-13 30/11/2013 28-Feb-14 28/02/2014 31-May-14 31/05/2014 31-Aug-14 31/08/2014 30-Nov-14 30/11/2014 28-Feb-15 28/02/2015 31-May-15 31/05/2015 31-Aug-15 31/08/2015 30-Nov-15 30/11/2015 29-Feb-16 29/02/2016 31-May-16 31/05/2016 31-Aug-16 31/08/2016 30-Nov-16 30/11/2016 28-Feb-17 28/02/2017 31-May-17 31/05/2017 31-Aug-17 31/08/2017

-6 000

-3.0

Flows

-5.0

Excess Return

Source: PSG Wealth research team; flows and returns in well-known fund in the ASISA SA Multi-Asset High Equity category

It is well known that chasing performance rarely leads to long-term investment success. In an uncertain market, clients tend to become anxious and overlook the dangers of this approach.

Our solutions can combat these emotional decision-making behaviours Firstly, our products have been developed to directly manage volatility. They are designed to prevent situations which could cause investors to feel uncertain, and make emotional decisions as a result. Our focus on quality research and the consistent application of our investment philosophy has paid off. The PSG Wealth Moderate Fund of Funds (D) has outperformed the peer average over 100% of the last 96 rolling 12-month observations. The increased consistency in PSG Wealth multi-manager fund performances has seen our investors give us a ‘vote of confidence’ in the form of consistently better fund flows than peer funds in the same sector. The PSG Moderate Fund of Funds (D) has seen positive net flows in every one of the last 96 months (a 100% record), compared to the peer industry average of 70 months of positive net flows over the same period (a 72.9% record).

Flows over the last 96 rolling 12-month observations Industry

PSG Wealth solutions*

Number of months over last 8 years

96

96

Positive net flow months

70 (72.9%)

96 (100%)

Negative net flow months

26 (27.1%)

0 (0%)

*Note: PSG Wealth solutions are only available through PSG Wealth advisers Sources: PSG Wealth research team; ASISA

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Secondly, we offer solid advice processes. Using reliable products, like our PSG Wealth solutions, is a start. But it is by no means a foolproof approach – especially without the appropriate guidance to support it. We often see that investors flip-flop in and out of reliable products, because no-one is contextualising events and guiding them. A reliable product only partly manages the risk of emotional decision-making. Over the years we have invested a significant amount of time and effort into refining our advice process, which is now a world-class solution in its own right. Our reliable PSG Wealth solutions, supported by our advice process, are a formidable counter to emotional decision-making.

Performance of PSG Wealth Moderate Fund of Funds (D) versus ASISA sector average 350.0 300.0 250.0 200.0 150.0 100.0 50.0

01/12/2008 23/02/2009 18/05/2009 10/08/2009 02/11/2009 25/01/2010 19/04/2010 12/07/2010 04/10/2010 27/12/2010 21/03/2011 13/06/2011 05/09/2011 28/11/2011 20/02/2012 14/05/2012 06/08/2012 29/10/2012 21/01/2013 15/04/2013 08/07/2013 30/09/2013 23/12/2013 17/03/2014 09/06/2014 01/09/2014 24/11/2014 16/02/2015 11/05/2015 03/08/2015 26/10/2015 18/01/2016 11/04/2016 04/07/2016 26/09/2016 19/12/2016 13/03/2017 05/06/2017 28/08/2017

0.0

PSG Wealth Moderate FoF D

(ASISA) South African MA High Equity

Source: PSG Wealth research team

Consistent performance leads to trust and confidence By way of example, if you had invested R1 million in the PSG Wealth Moderate Fund of Funds in 2008 (at the start of the financial crisis), and stayed the course, your wealth would have grown to R2.90 million this year. The average fund in the same sector would have reached only R2.42 million. The value added by our investment process was close to 20%, and almost 50% higher than the growth of the average fund. When it comes to achieving your long-term investment objectives, managing emotional reactions to market developments is key. Finding a reliable and consistent investment solution that manages volatility can help investors do this. However, to achieve truly successful outcomes, it is important that this should be combined with sound financial advice.

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FOURTH QUARTER 2017