If you were to draw conclusions about the likely long-term return from Australian shares based on what they’ve done in the recent past, you’d get a very misleading picture.
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Mark Hancock, an actuary and director of Precept Investment Actuaries, says the past five years have been quite unusual, and he recently published a paper designed to put the past five years into context.
“We felt there’s a bit of an excessive focus on the recent volatile and unfavourable history of returns, and we thought it was worth putting returns into a longer-term context – over a 10- or 20-year period,” Hancock says.
“You want to capture a good data period without going too far back, to get a more reflective indication of what the underlying trends might be going forward.
“In my opinion, 20 years is long enough to be indicative.
“It probably would not be long enough to be exact in a statistical sense – you probably need to go back 100 or 200 years. But the economy changes so much over that time, so you start to ask, well, is it the same sort of economy now?
“Going back before 1983 means you’re operating in a pre-deregulated currency market, and under the gold standard, and things like that.
“We’ve had a brief look at the 30-year numbers and they’re not that different. They’re actually slightly better on a 30-year basis.”
Hancock says there are several key messages from a sober analysis of long-term returns.
“The key messages are [that] patience is rewarded; and not to panic; and not to confuse daily volatility with long-term volatility,” he says.
“And more so for a retiree, a separate message would be [that] the biggest risk is not what your shares are going to do, up or down, today or tomorrow, but what are
they going to be worth in 20 to 30 years, in your retirement?”
THE ACTIVE RATIONALE
While the Australian sharemarket has produced solid returns over the past two decades, despite the experience of the past five years, there remain good reasons to seek out fund managers who can consistently generate returns better than the market.
Michael Price, co-head of fundamental Australian equities for AMP Capital, says the rationale for employing active fund managers is simple: “You employ active fund managers to do better than that.”
“I think that’s what’s changed in the industry over the past 10 years,” Price says.
“When you invest in the market you get the market return and you get an active return as well. If you’re an individual, you probably do not measure your active returns, but you do get one. And in the past when you went to a fund manager we probably blurred the two – probably a fair chunk of the return was the market return, not the active return.
“As an individual, if you pick 10 stocks, you do not get the exact market return. You will get the market return and you will get the difference between your 10 stocks and the market return.
“If you go to a pure index fund then you will get the market return; but unless you’re investing exactly the same as the index you will get the market plus an active component to your return – which may be positive or it may be negative.
“Exposure to the market is valuable, and as you can see from those returns, the market does deliver a very good longer-term return. But these days most people
are aware you can get exposure to the market reasonably cheaply – or you do not have to go to an active manager to get exposure to the market.
“So the way we speak about things is very much, if you’re going to choose to pay a little bit extra to go to an active manager, we have to deliver some outperformance. In Australia if you look at the history of returns, Australian active managers have a good track record in aggregate of outperforming the market return.
“So we do deliver something for that active fee. But you’re not coming to us to get the market return.”
