Sunday, October 06, 2024

Three quarter time score check: 2023 a low-scoring year, but most asset classes are positive

20 Oct 2023 11 month(s) ago

Despite constant doom and gloom in the media headlines this year, most asset classes are actually ahead in 2023. More importantly, most are ahead of inflation.

Returns from all types of assets, including cash, vary widely from year to year. All types of assets, even so-called ‘defensive’ assets go through periods of negative returns, and sometimes several negative years in a row.

Today’s chart shows total returns (i.e., including income) from two dozen of the main types of investment assets per calendar year since the start of the century. Returns above the red line are positive, below are negative.

This is designed primarily for Australian investors, so returns from international assets come in two flavors – hedged AUD, and un-hedged AUD, as marked.

(A table of benchmarks for each asset class/segment is included at the end of this article)

 

Portfolios and Inflation

Below the main table are returns from a typical simple ‘70/30’ portfolio (35% Australian shares, 35% developed market shares (50% of which is FX hedged), 10% Australian bonds (50/50 government/corporate), 10% global bonds (also split 50/50 government/corporate), and 10% cash, with all holdings rebalanced yearly).

All returns are before fees, so you can deduct a fraction of a percent from returns, as all of these are available in the form of very low-cost ETFs. (Fees on passive ETFs range from around 0.05% for share ETFs, and from around 0.10% for bond ETFs).

At the bottom, we show Australian CPI inflation per year.

table of asset class returns per year since 2000

 

2023 score card – to end of September

Most asset classes are positive so far this year, and most are ahead of inflation (marked in red).

Although Australian CPI inflation is running at 6% on an annualized basis, it is around 3.3% for the year to date because the running rate is slowing, after peaking at 7.9% in 2022.

Inflation for the full 2023 year is likely to be in the order of 5%.

The half dozen asset classes with negative returns so far in 2023 are mainly fixed-rate bonds, REITs, and infrastructure – all of which have been hurt by rising interest rates, particularly at the long end (bond yields).

Aussie small companies have also lagged badly this year, with many being hurt by rising short-term interest rates squeezing margins, without the pricing power of many large companies.

 

Asset class returns since 2000

The overall table looks like a random patchwork quilt of returns, with no apparent rhyme or reason. There are different winners and losers each year, with returns from every type of asset jumping around from year to year.

Some quick observations:

  • In most years, most types of investments post positive returns, and ahead of inflation.
  • There are occasional years when everything is positive – like 2005, 2016, and 2019.
  • But the rest of the time there are some types of assets that go backward.
  • In the big bust years (like 2008 and 2022), most types of assets post negative returns.
  • But even in the worst years, several asset types still manage to post positive returns, although the winners are different each time.

 

Most frequent HIGHEST returning assets

The asset types with the most years with the highest returns are:

  • Australian miners = 5 years as the highest returning asset type, courtesy of the post-2000 China boom 
  • US shares (Unhedged) = 4 years – mainly in the recent tech/online boom 
  • Australian REITS = 3 years - mainly in the post-GFC QE years of declining bond yields 
  • Global REITS (hedged) = 2 
  • Developed world small companies (hedged) = 2 
  • Developed world shares (hedged) = 1
  • Australian banks = 1 
  • Australian small companies = 1 
  • Emerging Markets shares (unhedged) = 1 
  • Emerging Markets bonds (hedged) = 1 
  • Australian government bonds = 1 
  • Gold (unhedged AUD) = 1 (2008, the year of the GFC sell-off)
  • USD cash (unhedged) = 1 

 

Most frequent LOWEST returning assets

Asset types with the most years with the lowest returns are:

  • USD cash (unhedged AUD) = 8 years as the lowest returning asset type – so much for the ultimate ‘safe haven!’ 
  • Global REITS (hedged) = 3 years – mostly in Covid lockdowns and the post-Covid inflation spike
  • Australian miners = 2
  • Gold (unhedged) = 2
  • Emerging Markets shares (unhedged) = 1
  • DM shares (hedged) = 1
  • US shares (unhedged) = 1
  • Global High Yield bonds (hedged) = 1
  • Australian REITS = 1
  • Developed world small companies (hedged) = 1
  • Australian government bonds = 1
  • Global infrastructure (hedged) = 1
  • Australian cash = 1

 

Average returns since 2000

 

The far-right column shows average annualized returns over the period since the start of 2000.


So far this century:

  • every type of asset has generated positive total returns
    everything except USD cash has beaten inflation
  • 1st place with the highest average total returns = Developed world small companies (hedged)
  • 2nd = Australian miners 
  • 3rd = Australian shares (ASX200 including franking credits)
  • 4th = Global infrastructure (hedged)
  • 5th = Australian banks

 

It is notable that global corporate investment grade bonds (hedged) beat development market shares (unhedged). So too did Aussie Hybrids (grossed up). This is mainly because of the poor performance of US, European, and Japanese shares in the 2001-2 ‘tech-wreck’.

 

Portfolio construction

Good portfolio construction is not about trying to pick the best asset classes each year or trying to avoid the worst. 

Nor is it about chasing last year's winners (hoping for a momentum effect), or last year's losers (hoping for a contrarian or reversion effect). These strategies almost always destroy wealth.

Good portfolio construction is about selecting the right mix of assets so that the portfolio as a whole has the greatest probability of achieving each investor’s long-term goals, within their tolerance for risk and volatility (ups and downs along the way), and liquidity requirements.

 

Inflation

To the far right of the table, we see that over the whole period, every type of asset has beaten CPI inflation, except for USD cash (in Australian dollars).


Sample portfolio returns

On the pro-forma returns from the simple 70/30 portfolio, these returns are before fees, and they assume no ‘alpha’ and no asset allocation changes, just setting the initial ‘strategic’ asset allocation and then re-balancing back to this each year.

Key outcomes for portfolios:

Overall average returns of 8.0% pa this century (before ETF fees)

  • With inflation averaging 3.0% pa, this simple 70/30 portfolio would have returned CPI+5% pa, which is a typical long target return for long term ‘growth’ portfolios.
  • There have been five years of negative portfolio returns this century (2002, 2008, 2011, 2018, and 2022), but four out of five of these were followed by very strong rebound years.

Asset classes and sectors, and benchmark index for each:

table of asset class benchmark indexes

We will report on full-year returns for 2023 in January.

Thank you for your time – please send me feedback and/or ideas for future editions!

Ashley Owen

 

Please subscribe to my Newsletter, connect on LinkedIn, or follow me on Twitter X 

 

Experiences


Director/Principal, Owen Analytics Pty Ltd (current)

Investment Markets Research & Analytics, Portfolio Construction & Management, Corporate Finance, Venture Capital, M&A, and IPOs. Investment Committee membership, consulting to advice firms and financial institutions.

Co-founder & Regular Contributor, Firstlinks (current)

Co-founder of Australia's leading investment and superannuation newsletter and website for industry professionals and investors.

Non-exec Director, Third Link Investment Managers (current)

Leading Australian equities fund-of-funds that donates all management fees to Australian charities. The fund has donated in excess of $21m to a range of Australian chartities since inception in 2008. 

Chief Investment Officer, Stanford Brown (past)

Responsible for managing over $2 billion AUM in multi-asset class portfolios and discretionary accounts at a privately-owned advice practice.

Director & Joint CEO at Philo Capital Advisers Pty Ltd (past)

Specialises in investment portfolio construction & management, multi-asset class asset allocation, and global macro strategies.

Check out my full bio here

 

Leave a Reply

“What sets Ashley Owen’s analysis apart from investment banks and the financial press is his deep fact-based understanding of long-term financial data, rather than getting caught up on the daily noise over issues that may generate trades or sell newspapers today, but will be irrelevant and misleading two years from now.” 

Hugh Dive, CFA. Chief Investment Officer, Atlas Funds Management, and frequent expert commentator quoted in the AFR.

“Over the past 20 years, Ashley has been an invaluable assistance to me, as a reliable source of unbelievably strong and interesting data, and many good investment ideas.”

"The depth and quality of Ashley’s research and analysis of investment markets is the best in the business.”

Dr Don Stammer - Australia’s most respected economic writer, commentator, and speaker for the past 40 years, with a distinguished career including the Reserve Bank of Australia, Chief Economist at Deutsche Bank Australia for 21 years, chair of nine ASX companies, plus numerous non-listed and not-for-profit boards. Read more

 

“Ashley’s unique fact-based analyses and insights into Australian and global markets are always worth reading. He has an incredibly deep and comprehensive store of financial markets data.”

Chris Cuffe, AO – One of Australia’s best known and most experienced investment managers – former CEO of industry giants Colonial First State, then Challenger Financial; founder and Chair of Australian Philanthropic Services, and Third Link Growth Fund; current/former chair, director and/or investment committee member of numerous funds including UniSuper, Argo Investments, Hearts and Minds Investments, Paul Ramsay Foundation, and many others. Read more.

 

‘For many years, Ashley has been my go-to source of information and analysis on what’s going on in financial markets and why.’

“Ashley has an encyclopaedic knowledge of the markets – I call him Mr Google!”

Noel Whittaker, AM – Australia’s best-known personal finance writer, columnist, and media commentator for the past three decades. He has written more than 20 books on personal finance, his columns appear in almost every major Australian newspaper, and he appears regularly on radio and TV as an expert on finance and investing. Noel Whittaker AM

Copyright © 2024 Owen Analytics

About Ashley Owen | Terms and Conditions | Privacy Policy | Archive | Disclaimer

The information contained in this document relates to historical, factual events and returns, and contains general commentary and observations about financial markets, asset classes, and asset allocation. This document, or any part thereof, does not, and is not intended to, constitute investment advice, or financial advice, or financial product advice, in any jurisdiction in which it is published, re-published or read. It does not recommend, encourage, or influence readers to buy, hold, sell, or deal in any financial product or security. Where securities of financial products are mentioned, it is purely for the purposes of illustration, context, and/or education, and not intended to influence anyone to buy, hold, sell, or deal in it. The information is current when written. All reasonable measures are taken to ensure its accuracy at the time of publication, but the author accepts no responsibility or liability for any errors or omissions. This document is only provided to, and intended for, holders of Australian Financial Services Licences. It should not be used or relied upon by any person or entity other than a duly licenced AFSL holder, or authorised representative thereof. The author receives no benefit, financial or otherwise, from any product provider, or product issuer, or any other firm involved directly or indirectly in the provision or services in or to financial markets or industries, whether mentioned in the report or not. Any opinions expressed by the author are his alone, and are intended for the purposes of education.