Given the events of the past three or four years, it might come as a surprise to learn that over the 20 years to the end of 2011, Australian shares were the second-best performing asset class.
The June 2012 Russell Investments/ASX Long-Term Investing Report says the gross return from Australian equities was 8.7 per cent a year – implying that a $100,000 investment would have grown to more than $530,000 over the period.
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This placed the asset class marginally behind Australian residential real estate, which posted a 9-per-cent annual return (which would have turned a $100,000 property into a $560,000 property).
Over 10 years, Australian shares ranked third, with an annual return of 6.1 per cent. Residential property was again the best performer at 8 per cent, while Australian bonds snuck in at number two at just 6.4 per cent.
(It should be noted that the figures quoted above are gross returns and do not take into account the effects of tax. See the chart on page 27 for relative performance results.)
These analyses highlight at least two things. First, things always tend to look better for shares over long periods of time. And second, it’s easy to pick the best performing asset class after the event.
There’s growing acceptance among advisers, as the Reserve Bank of Australia cuts interest rates and clients start to contemplate lower returns on cash holdings and term deposits, that a move towards growth assets may be appropriate.
A survey of advisers by Zurich Financial Services found that more than two-thirds of advisers intend to move client portfolios back into equities in the coming 12 months.
The Zurich survey stated that “of those advisers who said they would rebalance their customers’ cash holdings, 94 per cent said they would move to growth assets”.
“Specifically, 40 per cent said they would move to Australian shares, 25 per cent said they would move to
international shares, 19 per cent said they would move to direct equities and 10 per cent said they would move to property securities.”
In a statement, a senior investment strategist for Zurich, Patrick Noble, said that “as the market goes through its cycle, it is likely the dependence on cash will eventually diminish. How long that cycle will be, of course, depends on timing – something that we all acknowledge is notoriously hard to do.”
When money moves back into equities, a key decision will be whether to hire active fund managers to do the job, or to use lower-cost index alternatives, such as exchange-traded funds (ETFs). There are many reasons why a financial planner might choose an ETF to implement Australian equities exposure for a client: uncertainty about the ability of “active” managers to actually add value; cynicism over the fees charged by so-called active managers who really just hug a market index; and the relative cost of ETFs compared to actively managed funds, to name just three.
Ella Brown, head of fundamental equities for AMP Capital Investors, says a fundamental, active approach to managing money is clearly different from passive and from quantitative management.
“Passive is robotically going out and buying a benchmark or an underlying index,” Brown says.
“Quant, obviously, is looking at – this is going to sound trite – the ‘non-fundamentals’: much more formulaic analysis; repetition of patterns; et cetera.
“And then the fundamental products are built on in-depth company research, with a starting point or an underlying premise that if you do enough analysis and do the correct analysis, it is possible to identify stocks that are mispriced, based on those fundamentals, and exploit that for a client’s portfolio.”
