Top performing asset classes for 2016/17
It’s always fascinating to look back on a financial year and see the winners and losers, and confirm how tough it is to pick the best asset class in advance. The Morningstar Asset Class Gameboard for 2016/2017 shows the order from best to worst was:
- International Equity (unhedged): 14.7%
- Australian Equity (ASX/S&P200 Total Return): 14.1%
- Australian Small Caps: 7.0%
- Cash: 1.8%
- International Fixed Interest (hedged): 0.5%
- Australian Fixed Interest: 0.2%
- Australian Listed Property: -5.6%
Asset allocation is more important for long-term returns than stock selection, although within each asset class, there are significant successes and failures. For example, last year there was a dramatic difference in performance among Australian A-REITs and it was the big stocks than pushed the overall index down.
These equity returns are far higher than most analysts expected a year ago, and the ‘lower for longer’ has yet to play out. International Equities has hit the jackpot in four of the last five years. Will it do it again?
Clear winner and loser in 2017/2018 performance survey
Cuffelinks asked its readers to complete a short survey on expectations for market returns in this new financial year. We had over 400 responses, and the results suggest optimism for overall share market performance.
Winner of the expected best-performer category
Unhedged international equities (46% of votes)
Equities received strong support, with unhedged global shares (46%), Australian small caps (22%) and Australian equities (15%) adding up to 83% of votes. There was little support for fixed interest, and with cash at only 4% of votes, few investors see a market rout.
Particularly notable is that international equities have come first in four of the previous five financial years, so there’s either little support for ‘reverting to the mean’, or people are extrapolating from recent performance. How much does the concentration in Australia’s market among banks, miners and retailers play a role?
Only 2% expect residential property to be the best, but as in all years, that’s where most of the investment dollars will go.
Winner (or loser) of the expected worst-performer category
Cash (33% of votes)
Expectations for the worst performer were somewhat more balanced, with cash and fixed interest adding up to 57% of nominations. Taking a look at the Morningstar numbers for each financial year since 1998, cash has only come bottom twice. There are usually one or two other asset classes that put in a bad year and underperform the defensive characteristics of cash. Last year, cash outperformed listed property and fixed interest.
A healthy 22% expect residential property to perform worst, which is a decent vote for the market finally losing its head of steam (in Sydney and Melbourne, at least).
Most nominated range for S&P/ASX200 Total Return Index
+5% to +10% (47% of votes)
A strong 87% of votes placed the Australian index in the range of 0% to 10%, with most above +5%. Given the US market is at all-time highs and Australian and global valuations look stretched, and with US rates rising, this is an optimistic note for steady performance. There was stronger support for +10% and better (7.5%) than a bad result of -10% or worse (only 3%).
We will report on the results at the end of 2017/2018.
Content first published in the financial newsletter cuffelinks.com.au. Data and commentary on asset class returns was published on 13 July 2017, and results of the performance survey on 20 July 2017.