Looking back to move forward

Many Australian for-purpose organisations maintain an investment portfolio to support their long-term sustainability.  It is valuable therefore to understand how asset classes perform over a long-term cycle. The 2017 Russell Investments Long-term Investing Report summarises how traditional asset classes have performed over 10 and 20-year time periods.

The report warns of five major threats to long-term wealth creation that could impact Australian organisations and individual investors.  These include:

  1. Using past performance to make investment decisions
  2. Having a lack of diversification in your portfolio
  3. A reliance on residential property
  4. Investing in over-priced traditional assets
  5. Setting and forgetting i.e. not capturing short to mid-term opportunities

When considering the report for For-Purpose organisations, we noted the below as most relevant and valuable findings:

Avoid concentration of assets

Having a narrowly focused portfolio by depending on only one or two asset classes exposes your organisation to a lot of unnecessary risk. For example, many Australian for-purpose organisations have a strong preference for Australian shares to capture the franked dividend stream that they offer. While investing solely in Australian shares in some periods may pay off, there are periods where investing in Australian shares only will result in large losses.

An investment strategy that includes a wide range of asset classes can be more favourable as the diversification of asset classes can help cushion investors against the, often dramatic, losses that can occur in a single asset class. These strategies can further reduce risk with the use of asset classes that are more alternative in nature (particularly in periods where traditional asset classes – such as shares and bonds – are not seen as good value).

Think globally

An important finding from the report is the outperformance of global assets over domestic asset classes over the periods.  As noted above, it is common amongst Australian For-purpose organisations, to have a significant bias to Australian shares. However, notwithstanding the tax advantages, having an oversized exposure to Australian shares may not be in every organisation’s best interests’. Over a 10-year period, Australian shares fell further away from the top four performing asset classes and Australian dollar hedged global shares outperformed Australian shares by 1.2%.

This report demonstrates that, from a total return perspective, over a 10-year period, across shares, bonds and listed property, the global market option outperformed domestic assets by one percent or more.

Manage through volatility

Our investment strategist group continues to forecast lower returns and higher volatility going forward as equity markets (especially in the U.S.) become increasingly expensive, while markets may experience sharp sudden falls as unprecedented levels of political changes in numerous countries create fear and uncertainty.1

A more volatile environment with lower expected returns presents a significant challenge for long-term investors as short-term market volatility steadily chips away at investors’ long-term gains.  For a for-purpose organisation it’s really difficult to budget appropriately if your investment portfolio returns can’t meet your savings and spending targets.  Investors faced with volatile markets will require a nimble approach, shifting between asset classes and sub-asset classes in real time in anticipation of and as market conditions change.

Diversified and dynamically-managed funds are well placed to take advantage of emerging shorter-term investment opportunities and protect against significant losses while still helping your portfolio to achieve your long-term goals.

Making investment decisions based on past performance is a high-risk strategy that we do not recommend. However, you can draw valuable insights from the past. The 2017 Russell Investments Long-term investing report provides investors with a timely reminder that asset classes are vulnerable to the vagaries of market changes. More than ever our investment strategists are monitoring a rapidly changing investment environment with unpredictable market movements. With this backdrop, For-Purpose organisations would be wise to explore greater diversification within their portfolio - expanding global exposure and investigating new investment options to manage their risk exposure and harness market opportunities.

1Russell Investments 2017 Global Market Outlook: The New Abnormal