How has the buy and hold strategy worked? asks Prieur du Plessis

Prieur du Plessis of Plexus Asset Mangement writes that equity investors who have followed the buy-and-hold strategy in the US market have lost big money over the last ten years in both nominal and real (after adjusting for in-flation) terms. How does this compare with South African investors?

Despite a substantial recovery in global equity markets since the March 2009 lows, with the S&P500 up by 60,7% from its 6 March low to the end of November 2009, the scary truth is that investors lost money over this period. An investment of $10 000 in the S&P 500 made ten years ago would have been worth $9 136 at the end of November 2009. When taking inflation into account, the $10 000 investment's buying power is reduced to a mere $7 076.

Over the longer term, however, investors have been rewarded for their patience. The accompanying Graph A shows the nominal and real returns achieved by the S&P 500 Composite Index over various periods ended November 2009.

However, the strong growth experienced in emerging markets over the past number of years up to the middle of 2008, and a recovery in commodity prices and specifically metal prices since the end of February this year thanks to strong demand from mainly China, resulted in a totally different scenario for investors in the local stock market. The accompanying Graph B shows the nominal and real returns achieved by the FTSE/JSE All Share Index over the past five, ten, 20 and 30 years. South African in-vestors have earned strong returns in rand terms, with all periods delivering real re-turns of at least 6% per annum.

But the picture for foreign investors in the South African equity market looks a little different. The accompanying Graph C shows the returns achieved by the FTSE/JSE All Share in US dollar terms.

Over the longer term the picture is rather dismal due to our history of high inflation and a weak rand. The real return achieved by the JSE in US dollar terms over the 20-year period is a paltry 0,6% per annum (i.e. a difference of 8,0%) and over the 30-year pe-riod it is negative, coming in at -0,4% per annum (i.e. a difference of 10,1%).

However, the significant changes in economic policy over the last ten years have led to less rand weakness and lower inflation, which detracted less from the US dollar re-turns. Over the five-year period the annual real return was 6,1% (i.e. a difference of 5,3%) and 7,3% over the ten-year period (i.e. a difference of 2,0%).

Commodity currencies such as the South African rand are primarily driven by com-modity prices and in particular metal prices. With commodity currencies likely to re-main strong in the light of the expectation that metal prices are likely to hold up in the foreseeable future, the outlook is relatively good for a more stable rand.

However, that said, foreign investors tend to be very fickle when it comes to investing in the local stock market and any increase in risk aversion tends to lead to a flight by foreign investors. This exodus is aided by the fact that the rand is one of the most tradable emerging-market currencies. While we do not have any control over events that occur beyond our borders, it is imperative for us to create an environment that is conducive to a stable rand to attract long-term foreign investors to our stock market. This includes responsible fiscal and monetary policy, a sound economy and a healthy political climate.