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Overview of the Asset Classes. Time to reduce US share exposure?
4 April 2019

For several years now I have highlighted to many Hudson members that having been overexposed to the Australian sharemarket (compared to international shares) may have “hurt” them with respect to their returns. This is especially prevalent in SMSF’s. The bottom line is that “international shares” have performed significantly better than Australian shares post-GFC.

If you look at the widely used global share index, the MSCI, which tracks the largest 1,500 companies in the world, you will see that the US makes up over 62%, while the next largest economy (Japan) makes up just 8.2%.

So the real truth behind the fantastic returns for global shares is almost solely due to the US. Australia’s performance actually doesn’t look too different to most other developed countries.

In the last 12 months there have actually been some striking differences in the various asset classes and the sectors within those asset classes.

So where you might you be overexposed, and where may the opportunities lie?

Cash.

What I like to call the most boring of the asset classes. I often find myself telling members that Cash is the worst performing asset class over any timeframe – 1 yr, 5yrs, 10 yrs or 3o yrs. And if you look at the macro perspective, over the last 30 years (as at 30 June 2018), Cash has returned an average annual return of 6.2%, where shares and property have trended closer to double figures. This figure of 6.2% is also very “generous” because the first 3 years that make up this period (‘89, ‘90 and ’91, i.e. a period of recession) had Cash returning 15.7%, 18.5% and 13.5% respectively. Check back in 2022 and it will be a very different story. Barring one year (2008, i.e. GFC year), it hasn’t broken 6.5% since 1997. The average annual return over the last 10 years has been about 3.35%.

Bonds.

As expected from the “risk and return” curve, bonds have done a little better than Cash, but not as good as shares. 30 year figures for these show an annual average of 8.1% for Australia and 8.9% globally (hedged against currency movement). Just as with Cash though, this is hugely skewed by returns early on in this period. Barring 1 year, the first 10 years (’89 to ’98), global bonds returned between 11% and 16.3, while Australian bonds between ’90 and ’92 returned 17.8%, 22.4% and 22% respectively. Again, check back on these 30 year figures in 2024 and it will be a very different story.

Property.

Over the last 30 years Australian listed property has come amazingly close to the return of the Autralian sharemarket (9.8%), at a compound annual return of 9.9%. For me it’s the great diversifier. It can experience the same highs and lows as shares but doesn’t necessarily move in tandem. It can, like during the GFC, where everything fell the better part of 50%. But take the last 12 months, however, and Property has been the standout. Looking at the main property fund I use when setting up investment/Supers/Pensions, which closely tracks the AREITS index, the 12 month return as at 31st March 2019 was over 25%, compared to 11.6% for the ASX200. In terms of current opportunity though, given the AREIT has now averaged nearly 15% p/a over the last 10 years, this ship may have sailed.

Australian shares.

First the macro picture: As at end of financial year (30 June 2018), over the last 30 years the Australian sharemarket has returned a compound average of 9.8% p/a. Unlike with Cash and Bonds, this is potentially a “conservative” macro view given the first three years of that (‘89, ‘90 and ‘91) were returns of just 3.5%, 4.1% and 5.9% respectively.

If you had invested at the bottom of the market post-GFC (March 09), you would have achieved a 10 year return of 11.6%. Let’s face it, this isn’t a far cry from our 30 year average, and as such I would say the Australian sharemarket represents great value right now. Furthermore, and in terms of a particular sector, many Small Companies funds have had a very average year and may also represent great value at the moment at deflated unit prices.

Global shares.

As stated, the US sharemarket has been the standout performer in the global economy. Using the MSCI index, which encompasses the largest 1,500 companies in the world, and then removing the US companies, here’s how the US compares to the rest of us:

There are some that believe that the GDP figures released for the US are misguiding, and inflated by the fact that their imports have dropped (so net export figure looks great) and more importantly there have been significant increases in Government spending. The widely followed David Rosenberg says that “cyclically adjusted GDP” is actually contracting at 2%, the steepest decline in a decade. Furthermore, a large part of rising US shares has been a result of companies buying back their own shares, usually using borrowed funds because money is so cheap at the moment. Actual sales growth from US companies has been no different to the rest of the world. So you’ve got the US Government throwing money at their economy, while US companies are doing the same. Is this sustainable?

Luckily, it’s not all about the US and there are plenty more fish in the global economic sea. You could consider branching out into the likes of the “Emerging markets” sector, as many of these funds have seen returns over the last decade below what we would expect of their long-term trend.

If you are concerned about the structure of your investments or think you may need to add further diversification to your portfolio, book in with your Hudson adviser.





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