John Abernethy says the “lost decade” for Australian equities comes at a bad time for the Baby Boomer generation heading into retirement.
This year is set to become one to forget on the Australian sharemarket, and few are expecting 2016 to swing from the chandeliers. Chalk it up to one in a lost decade, leading fund managers say.
The idea that the past 10 years have essentially been a write-off in terms of creating shareholder wealth has been a big point of discussion in the funds management world in 2015.
In a recent discussion on Livewire Markets, Centennial Funds chief investment officer Matthew Kidman noted capital appreciation on the All Ordinaries index over 10 years had been a “miserly” 5.4 per cent.
The index is about where it was 10 years ago.
“It’s the worst performance in over 100 years on the Australian sharemarket,” he said.
Clime Asset Management chief investment officer John Abernethy said it couldn’t have come at a worse time, when the bulk of the massive Baby Boomer cohort were approaching retirement.
“That’s the effect of this lost decade. It really puts pressure on retirees’ capital basis,” Mr Abernethy said.
The index, a measure of market capitalisation, is sitting at the same level now as in early 2006, but has grown from about $1.1 trillion to $1.45 trillion. The money has gone into new issues, reinvestments or retained earnings, but return on equity has stalled.
“All this money’s gone in, it’s not generating a higher return on capital and the market’s just stalled,” Mr Abernethy said.
The S&P/ASX 200 is down 6 per cent for 2015 so far, on track for its worst performance since the global financial crisis.
Not every year was a write-off in the past 10 years. The worst of the global financial crisis was offset by double-digit returns at the height of the mining boom. Dividends have been steady, and growing, with the bulk of the 40 to 45 per cent return of the market in that time going on yields.
However, the effect of the decade had been that it had forced growth-driven investors offshore, a thematic that had developed in 2015, Mr Abernethy said.
“If you go back 10 years, the bulk of a balanced fund would be Australian equities. Now it’s down to around 20 per cent.”
Not lost, in transition
UBS Wealth Management’s head of investment strategy David Sokulsky disagreed with the idea of the “lost decade”, saying rather it had been a decade of “transition”.
“The ASX accumulation index [which includes dividends reinvested] is up 68 per cent over the past decade. It’s a misnomer that it’s been a lost decade,” he said.
“The composition of the market has changed. We’ve gone from a growth-oriented market to a market where now people want to get income,” he said.
Company management had responded by lifting payout ratios to about 80 per cent, but that came at a cost.
“If you pay out 80 per cent of your earnings, you do have to trade off in terms of slower growth. Growth has been relatively weak in Australia compared to what we’ve had,” Dr Sokulsky said.
But as the sharemarket falls, and yields remain high, investors are drawn again to the sharemarket, given the return on cash and bonds is at historical lows.
Dr Sokulsky agreed investors needed to look offshore for growth, while keeping Australian equities in the mix for the income.
Mr Abernethy said Australian shares would always be a favourite for yield.
“Maybe the Australian equity market, in a low-growth, low-yield environment, presents better opportunities than most, and it could be a mistake to get out now,” he said, noting the ASX had corrected by almost 1000 points since its April 27 high.
Index investing ‘a joke’
Dr Sokulsky said those who achieved growth in the past decade had done so through clever sector selection, notably getting ahead of the decline in the resources stocks and riding the banks until their savaging in 2015.
“If you were an active investor in the last decade, you would have done quite well. If you’re passive and invested in the index, it would have been a lost decade.”
Forager Funds chief investment officer Steve Johnson said 2015 proved that index investing was “a joke”.
The value fund manager said indexed funds and electronically traded funds had risen in popularity because of their low cost of entry and low management fees.
“My beef with index investing in Australia is that the index is a joke,” Mr Johnson wrote in a blog post.
“The big four banks, BHP Billiton and Telstra make up an absurd 42 per cent of the S&P/ASX 200 index.”
This year had been particularly bad for blue chips, and worse for the banks and miners, which had come under pressure from regulatory requirements and free-falling commodity prices, particularly oil and iron ore.
“Think about how correlated the risks are among the big four and it’s easy to see that, rather than reducing your risk by buying the index, you are exposing yourself to a highly concentrated portfolio of stocks,” he said.
“Hence the dramatic underperformance of the index in 2015.”
The following article featuring John Abernethy appeared in The Sydney Morning Herald, Business Day, December 21, 2015. Written by Vanessa Desloires, SMH Reporter.