The unpredictability of markets

In the face of imminent economic downturn, it is very tempting for investors to try to avoid market drawdowns by disinvesting their funds and move to more secure positions. If implemented perfectly, such a strategy may indeed offer asymmetric return profiles by minimising losses and capturing most of the returns; however, the problem is that markets are notoriously difficult to predict with any degree of consistency.

A practical example illustrating the difficulty in predicting equity price movements is shown in the following figure. The true price movements of the S&P 500 for the first half of an unknown year are shown in orange. Thereafter follows four possible outcomes of the price level for the second half of the year. All four of the possible outcomes look highly plausible because they are—each of these are the actual price movements observed in the second half of some year for the S&P 500. It is easy to convince oneself that any of the options match the preceding graph, so an investor faces a difficult decision at the end of June: do they remain invested and suffer a potential loss, or do they take their money out of the market and take the risk of missing out on returns?*

*Follow this link to vote on the outcome

New Road Capital (Pty) Ltd, is an Authorised Financial Services Provider. FSP License Number 50488 “asymmetric return profiles by minimising losses and capturing returns

The unfortunate truth is that most active decisions made by investors to enter or exit a market turn out to be incorrect. By considering the nett fund flows of the largest ETF tracker in the US, the SPDR S&P 500 ETF Trust, one can estimate what percentage of investors correctly predicted market downturns, and conversely, market upturns. The nett fund flows in the first half of the year were compared to the subsequent returns in the second half of the year between 2000 and 2022 to establish market participant sentiment. In only 8 of the 22 years did investors accurately predict upcoming market swings by investing more when future returns are positive, and by withdrawing before market downturns. What this means is that, on average, most active investors underperformed the market to some extent and would have been better off not adjusting their position at all.

Considering the alternative, staying invested in the market regardless of one’s intuition about what may come, would appear to be the more logical approach. Even though it sounds less safe not to protect one’s wealth from downturns, or even less exciting by not being able to attribute some of the gains to personal predictive skills, it is the statistically optimal strategy. To support the idea of remaining invested further, the following figure illustrates the likelihood an investor had to grow their capital, or to experience a loss over a given holding period. It can be seen that, in the very short term, the chance of an equity index going up or down is almost equal. Over any one day holding period between 2000 and 2022, the S&P 500 only had a 54% chance of closing in the green. However, the longer an investor stays in the market, the more certain the positive outcome becomes—in fact, over the period considered, if the investor decided to invest for 10 years or longer, they would be 100% certain of receiving a positive return.

If an investor truly seeks to avoid losses, it is clear that they should remain invested regardless of their current market sentiment. Not only are active decisions more likely to be wrong than right, but given enough time, the buy-and-hold strategy is virtually guaranteed to yield a positive return and would most likely outperform any alternative.

BY GARRETT NEL, NEW ROAD CAPITAL

Disclaimer: New Road Capital (Pty) Ltd, 2017/650486/07 and FSP number 50488, is an authorised discretionary financial services provider under the Financial Advisory and Intermediary Services Act (No. 37 of 2002). The information and any opinions displayed herein are of a general nature and do not constitute advice. New Road Capital takes all care to provide current and accurate information as at the date of publication but accepts no liability for errors, omissions or subsequent changes. Any references to data, assumptions, targets, benchmarks or examples are as indicators or illustrations only and are not fixed or guaranteed and clients should not assume any performance or guarantees apply unless such has been explicitly confirmed in writing. Past investment performance is not necessarily indicative of future performance. As clients remain responsible for the investment, product and counterparty risks of their decisions, they should consult with their advisors and independently assess and confirm all material information before taking any action. The NEW ROAD CAPITAL co-named funds (as defined in BN 778 of 2011) are registered under Boutique Collective Investments (RF) (Pty) Ltd (“BCI”), a registered Collective Investment Schemes Management Company in terms of the Collective Investment Schemes Control Act 45 of 2002, supervised by the Financial Sector Conduct Authority (‘FSCA’). New Road Capital (Pty) Ltd, is the FSCA approved and appointed investment manager of the co-named CIS funds. Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No. 45 of 2002 and is a full member of the Association for Savings and Investment SA. Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. The Manager does not guarantee the capital or the return of a portfolio. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request. BCI reserves the right to close the portfolio to new investors and reopen certain portfolios from time to time in order to manage them more efficiently. Additional information, including application forms, annual or quarterly reports can be obtained from BCI, free of charge. A fund of funds is a portfolio that invests in portfolios of collective investment schemes that levy their own charges, which could result in a higher fee structure. Income funds derive their income from interest-bearing instruments in accordance with Section 100(2) of the Act. The yield is a current yield and is calculated daily. Boutique Collective Investments (RF) Pty Ltd retains full legal responsibility for the third party named portfolio. Performance figures quoted for the portfolios are from Morningstar, as at the date of this document for a lump sum investment, using NAV-NAV with income reinvested and do not take any upfront manager’s charge into account. Income distributions are declared on the ex-dividend date. Actual investment performance will differ based on the initial fees charge applicable, the actual investment date, the date of reinvestment and dividend withholding tax. Annualised return is the weighted average compound growth rate over the period measured. Investments in foreign securities may include additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information. Although reasonable steps have been taken to ensure the validity and accuracy of the information in this document, BCI does not accept any responsibility for any claim, damages, loss or expense, however it arises, out of or in connection with the information in this document, whether by a client, investor or intermediary. This document should not be seen as an offer to purchase any specific product and is not to be construed as advice or guidance in any form whatsoever. Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of BCI/the Manager’s products.

CEO GLOBAL MAGAZINE.COM ISSUE 1 VOL 23 29

ROBOTS ENSURE 80% COST SAVINGS FOR BUSINESS PROCESS OUTSOURCING SERVICES

FIRTECH HAS INTRODUCED ROBOTICS-AS-A-SERVICE (RAAS), A FORM OF OUTSOURCING WHERE FIRTECH DEPLOYS CLOUD-BASED SOFTWARE ROBOTS THAT USE MACHINE-LEARNING, ARTIFICIAL INTELLIGENCE (AI) AND DOCUMENT UNDERSTANDING TO HELP BPO COMPANIES AUTOMATE REPETITIVE AND HIGH-VOLUME TASKS.

RaaS is a cloud-based automation system that allows users to select the capabilities they require when they need them. It’s the perfect solution for SMEs that offer outsourced finance services, largely because of its flexibility, scalability and lower cost of entry than traditional business process outsourcing platforms. FIRtech CEO Ugan Maistry says it is 80% cheaper to automate. “It’s a no-brainer, customers only pay for what they use. They consume bot hours as required by their processes - there is no software, infrastructure setup or procurement required.”

“This means a short time to deployment, most often only days to convert to the RaaS platform. More importantly, no investment in software, hardware, in-house maintenance teams or security. It is the easiest way of scaling your operations without incurring capital expenditure,” he adds.

According to a report published by Coherent Market Insights, the global Robot as a Service market is expected to surpass $41.3-billion by 2028. It says the ongoing advancement in technologies is propelling the market growth during the forecast period. Typical operational finance processes that can be managed with RaaS include:

• Accounts Payable, Accounts Receivable

• Statement Reconciliation, Bank Reconciliation

• VAT 201 Submissions and Reconciliations

• EMP 201, EMP 501 submissions

• Data migration and data entry

• Mass emailing campaigns

• Data extraction and validation from documents (legal, contracts, etc.)

Maistry says RaaS allows SMEs to benefit from robotics, AI and automation without the initial investment or knowledge on robotics. It gives them the ability to scale up and down rapidly and easily in response to client needs and changing market conditions.”

BY UGAN MAISTRY, FIRTECH CEO