Diversification was the key message for 2011, according to Warren Chant of rating company, Chant West. He says that the strong performance of unlisted assets has had a stabilising effect on fund returns in 2011.
“The benefits of diversification were clearly evident in 2011. Although both Australian shares and international shares fell, by 11% and 5.3% respectively, by being well diversified across a wide range of growth and defensive asset sectors, the loss for the median growth fund was limited to 2%,” explains Chant.
“The same comment applies when we look back over the past five years. This period, which includes both the GFC and the more recent sovereign debt-driven crisis, has been highly unusual in that both Australian and international shares have gone backwards. Yet, by finding alternative sources of return, including unlisted growth assets such as infrastructure, property and private equity, even some growth funds have produced a small positive return.”
Background: Your super fund invests in a mix of asset classes to generate an investment return on your super account, which means that some of your super money is likely to be invested overseas, a fair chunk invested in Australian assets, and a portion squirreled away in cash. The super money of most Australians is invested via a balanced or growth investment option, typically 61-80% of assets are in growth-style assets such as shares, property and alternative investments, and 20-40% are in income-style assets such as cash and fixed interest (bonds). If you choose your own investment option, or you run your own super fund, then you decide on the mix of asset classes for your super savings, including whether you have exposure to international assets, and whether you have exposure to foreign currency movements (that is, unhedged).
Briefly, when a super fund hedges your international investments against movements in the Australian dollar or foreign currency, your investment return is solely based on the merits of the investment rather than the strength or otherwise of the Australian dollar. If your super fund chooses not to hedge your international investments, then the return you may receive on this part of your portfolio may have very little to do with the merits of your investment. I explain the significance of hedging in more detail in my article Ban unhedged international shares in default investment options.
According to figures from rating company, Chant West, the top-performing asset class for the 12 months to 31 December 2011 was Private Equity with a 12-month return of 12.1% closely followed by Australian Bonds (11.4%) and International Bonds (hedged) (10.5%). Coming in fourth was Unlisted Infrastructure (9.6%) and a close fifth was Australian Unlisted Property (9.3%)
The table below sets out the performance figures for 13 asset classes (or sub-categories) for investment periods of 3 months, 6 months, 1 year, 3 years, 5 years, and, if applicable, 7 and 10 years.
Top performing asset classes for 10-year and 5-year periods to 31 December 2011
The top performers among the 13 asset classes (or sub-categories) are different when you look over a longer timeframe. For example, over a 10-year period, International Bonds (hedged) has outperformed all asset classes with an average annual return of 8.2%, followed by Australian Bonds with an annual return of 6.5%, and then Australian shares with an annual return of 6.1%.
Note: Figures over the 10-year and 7-year period to 31 December 2011 don’t include performance statistics for private equity, global listed property (hedged), global listed infrastructure (hedged), Unlisted Australian property, and unlisted infrastructure, due to the relatively recent development of these asset sub-categories.
The devastating effects of the Global Financial Crisis (GFC) can be seen in the 5-year performance figures for the higher risk asset classes, such as shares, listed property and private equity. The top performers over the 5-year period are international bonds (hedged) with an average annual return of 8.7%, followed by Australian bonds (7.4%), Unlisted infrastructure (6.5%), Cash (5.5%) and then Australian unlisted property (5.3%).
Australian shares have delivered a depressing loss of 2.4% a year over the same 5-year period, and international shares (hedged) a pathetic loss of 3.5% a year. Even worse, international shares (unhedged) delivered negative 7.5% every year for the past 5 years, on average, while Australian listed property, that is A-REITs delivered a shocking negative 15.2% every year for the past 5 years. What this means for investors in A-REITs, is that their A-REIT investment is a quarter of what it was worth five years earlier.
|Asset Sector Performance: Gross performance to December 2011|
|Asset Sector||3 Mths (%)||6 mths (%)||1 Yr (%)||3 Yrs (% pa)||5 Yrs (% pa)||7 Yrs (% pa)||10 Yrs (% pa)|
|International Shares (Hedged)||8.0||-8.1||-5.3||9.4||-3.5||1.6||1.6|
|International Shares (Unhedged)||2.0||-6.2||-5.3||-2.6||-7.5||-1.8||-3.5|
|Australian Listed Property (REITs)||3.8||-4.6||-1.6||2.3||-15.2||-5.7||0.6|
|Global Listed Property (REITs)||8.3||-7.4||1.4||16.6||-6.4||2.2||-|
|Australian Unlisted Property||2.5||4.6||9.3||2.8||5.3||-||-|
|Global Listed Infrastructure (Hedged)||5.5||0.1||4.7||6.7||0.6||-||-|
|International Bonds (Hedged)||2.0||6.4||10.5||9.3||8.7||7.8||8.2|
Source: Chant West, 23 January 2012 media release (www.chantwest.com.au)
Table notes: The table contains gross investment returns, that is, investment returns before fees and taxes have been deducted. The asset classes and categories listed are the main asset sectors that super funds invest in. Chant West has used market indices for performance figures for all sectors other than private equity and unlisted infrastructure. For those two categories, Chant West has used the returns of a major super fund in the Chant West survey that is representative of those sectors.