‘LONG TERM INVESTING’- THE FUNDAMENTALS RETURN BACK

DATE: 22 APRIL 2007

Seen the volatility in the stock markets , investors may feel that the returns from stock markets in the long run may not seem to be impressive . But before we make our conclusions it is necessary to consider the returns of Mutual funds in the past few years.
Firstly, it can be noticed that the past five year inflation can be expected to be around at 3%. However, more than 4000 MF operating in US have been posting impressive returns. The last five years have shown a handsome return of more than 11%. Thus the fundamentals, equity markets are the best earning asset in the long term is true.
Emerging Markets diversified funds have been the winners of the day, and have posted returns as high as 24% y-o-y since April 2002. Even the Mutual funds in the arena of real estate and natural resources have shown good performance by giving an annualized return of around 20%. The only losers have been bear market funds down 9.5% in their pursuit to profit from market declines. Apart from it the hedging funds have returned a return of 5% annually. Looking 5 years back , when the stock markets were crashing for two consecutive years and the good times for bears was still expected to come , an commitment of 5 years seem t be demanding a lot. The US economy was in a suppressed mood with growth seen at 0.8% and the growth in coming years was also not expected to be more than 1.6%. This was further emphasized by Standard and Poor’s 500 where the earnings ratio stood at 45 to 1, which further emphasized the bear taking controls. Even the future was not expected to be bright primarily attributed to geo political situations like US-Iraq war and business scandals in MF industry.
The net inflows to equity funds declined from whopping $310 bn to a negative $27 bn in 2002 due to pessimism prevailed in the economy. But the positive point was the amount already invested stayed around estimated at $2.7 trillion down from $4 trillion 2 years back. From this it can be clearly noticed that long term investors possess no knack foe buying at the bottom or getting out of the markets at the top. It’s a game of endurance and not quickness or agility. Even the Indian markets have delivered a return of more than 15% since inception. Thus in the long term from 5-10 years equity led investments will always be ahead of other investment classes.