New report warns Australian investors against relying solely on local asset classes
Russell Investments/ASX Long-term Investing Report confirms the 'triple treat' domestic investment honeymoon is over
SYDNEY, 3 June, 2015 – Australian investors can no longer rely on the 'triple treat' of a resilient domestic share market, strong domestic currency and solid residential property market. According to the 17th edition of the Russell Investments/ASX Long-term Investing Report, the first two of these asset classes struggled compared to other investments in 2014 - and the third looks increasingly risky.
The report, which allows investors to compare the performance of key domestic and global asset classes over 10- and 20-year periods, highlights the dangers of relying on historical returns. It warns that Australians may not achieve their long-term investing goals unless they make sure their investments are managed proactively and take a globally diversified approach.
Russell Investments' market strategists believe that Australian equities' performance and the dollar will remain under pressure in 2015. Analysing 2014, they point out:
- Australian equities lagged overseas markets for the second consecutive year underperforming unhedged global equities by 6.6 percentage points in 2014 (23.8% in 2013).
- The 10-year return on Australian equities fell from 9.2% to 7.1% at the end of 2014.
- The Australian dollar fell over 8% against the US dollar, from US$0.89 to US$0.82. In the first quarter of 2015, it fell an additional 7%. If it falls to $0.74 by the end of 2015 as projected by some experts, a super fund investor with $100,000 invested (in hedged global equities) at the beginning of the year could wind up with only $90,000, driven purely through currency movements (ignoring any market movements).
"Looking ahead, many indicators point to the possibility of slower growth in Australian equities," said Pete Gunning, Chief Executive, Asia-Pacific, Russell Investments.
"The local share market's fortunes are heavily tied to China's deteriorating demand for iron ore - and to the prospects of Australia's four major banks. With the chances of a prolonged downturn in China's steel consumption and volatility in bank stocks, investors are becoming skittish - with good reason."
The report found that for the 10-year period:
- International shares (hedged) overtook Australian shares and were the strongest performing asset over the 10-year period, producing 7.8% p.a. on a before tax, after fees basis.
- Australian residential investment property came in at fourth place, with a return of 7.0% p.a.
For the 20-year period:
- Australian residential property led the gains, returning 9.8% p.a. on a before-tax and after-fees basis.
- Australian shares followed closely behind, with a return of 9.5% p.a.
- Hedged global shares returned 8.6% p.a.
"The ASX continues to support Australian investors' interest in creating diversified portfolios by expanding the range of choices for investors, such as Australian Government Bonds (AGBs) and unlisted managed funds," said Marcus Christoe, Senior Manager, Funds and Investment Products.
"We remain absolutely focused on providing the products and services our clients demand in Australia and for the Australian financial market."
Although Australian residential property returns to both non-geared and geared investors continued to be strong over the long term, returns over the last 10 years rank fourth out of the nine key asset classes compared in the report.
The report warns that the headline-grabbing median property price rises do not reveal the whole picture, noting much lower rises outside of Sydney and Melbourne and significant deviation even within these cities.
"Regardless of location, property prices have been largely on the rise for the last 20 years, driven mainly by falling rates. With almost nowhere left for rates to fall, that same level of capital appreciation is unlikely to be repeated. If, as ASIC believes, signs of a dangerous property bubble in Sydney and Melbourne are accurate, residential housing prices could slump," Gunning said.
Considering this risk, the report points to the need for Australians to move away from the historical comfort of local asset classes and invest in globally diversified portfolios.
"Now we have trend evidence that previously sound investments are moving in the wrong direction, portfolios need to be proactively managed to manage risks. We recommend investors stop relying on purely local investments - and consider the full range of asset classes available to them."
"Domestic investments can continue to have a role in Australians' portfolios, but investors with a home-country bias would do well to revisit their portfolios, reduce their exposure to residential property and start investing a portion of their equity allocation offshore."
About the Russell Investments/ASX Long-Term Investing Report
The Russell Investments/ASX Long-Term Investing Report is the only widely available report that provides Australian investors with a comprehensive and factual comparison between the long-term returns of Australian residential investment property and key domestic and global asset classes - such as shares, fixed-interest investments and diversified managed funds. The report also takes into account the impact of tax and gearing as well as the benefits of investments held within the superannuation system.
About the ASX Group
ASX is one of the world's leading exchange groups. ASX operates a fully integrated exchange across multiple asset classes: equities, fixed income, derivatives and managed funds. ASX services a wide range of retail, institutional and corporate customers, directly and through intermediaries. ASX offers a broad range of services that allow our customers to invest, trade and manage risk. This includes listings, trading, post-trade services, and technical and information services. ASX operates infrastructure that supports the systemic stability of Australia's financial markets and is critical for the efficient functioning of the nation's economy, economic growth and position in the Asia-Pacific region. More information about ASX can be found at www.asx.com.au.
About Russell Investments
Russell Investments is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors–using the firm's core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures—to help each achieve their desired investment outcomes.
Russell Investments has more than AUD $337.9 billion in assets under management (as of 30/9/2015) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has $2.4 trillion in assets under advisement (as of 12/31/2014). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than $1.7 trillion in 2014 through its implementation services business.
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