Equities historically yield 14%, while providing protection against inflation – CT CLSA

CT CLSA Asset Management, Chief Investment Officer Kuhan Vinayagasundaram extolled the virtues of equity investments, particularly in the Sri Lankan market, where they have outperformed other asset classes over the past 15 years. He noted that company earnings adjust to inflation.

“We conducted a comprehensive analysis of returns over the last 15 years, focusing exclusively on investable asset classes available to Sri Lankan investors, excluding real estate due to its liquidity constraints. During this period, equities emerged as the top-performing asset class, delivering an impressive compound annual growth rate of about 14%. In comparison, other popular investment choices like fixed income securities, including treasury bonds and bills, and the average weighted fixed deposit rate, offered returns between 11 to 12%,” explained Vinayagasundaram. The LKR depreciated by 6% annually over the time period.

Vinayagasundaram was speaking on October 19 as part of the CT CLSA Education Webinar Series. During the webinar, Vinayagasundaram addressed the misconceptions surrounding the risks associated with equities. “While it’s true that equities come with their set of risks, understanding and managing these can significantly tilt the scales in favor of the investor,” he stated. He elaborated on strategies such as diversifying portfolios and investing in high dividend-yielding stocks to mitigate risks and stabilize returns.

Unlike fixed income, equity has a strong inflationary hedge. Vinayagasundaram said, “Price increases in the general economy is reflected in company revenue.” He went on to explain that these increases in revenue increase the returns from equity.

A key advantage of equities, as outlined in the webinar, is their agility. Companies represented in equity portfolios can swiftly adapt to economic changes, benefiting from periods of economic expansion and more effectively navigating downturns. “You are not just investing in stocks; you are buying into businesses with the potential to adjust and grow through varying economic phases,” Vinayagasundaram commented, highlighting the dynamic nature of equity investments.

Moreover, equities provide substantial protection against inflation. “As general price levels rise, so too do the revenues of companies, which eventually reflects in their stock prices,” Vinayagasundaram noted. This characteristic makes equities an attractive asset class for preserving purchasing power in inflationary times.

He introduced two key approaches to self-managed equity portfolios: concentrated and diversified. He described a concentrated portfolio as one where “you’re essentially having a few select shares with the main goal to optimize returns.” However, he noted that this often leads to increased volatility, which is a significant aspect of the risk involved rather than just the potential loss of capital.

Vinayagasundaram recommended concentrated portfolios for experienced investors who can dedicate significant time to understanding a business’s fundamentals. (TP)