Cash loses shine against growth assets

Christine St Anne  |  11/02/2013Text size  Decrease  Increase  |  

Christine St Anne: Cash has been one of the favorite asset classes over the last few years. But latest analysis from Russell Investments has found that growth assets have recovered. Today I'm joined by Scott Fletcher to give us a further insight into the recovery of growth assets. Scott, welcome.

Scott Fletcher: Pleasure, and thank you.

St Anne: Scott, your analysis has found that growth assets have recovered over 2012. How does that compare with cash?

Fletcher: The recovery in growth assets, despite the volatility that we had in various parts during the year, growth assets were returning in general between 18 per cent and 20 per cent. If you look at individual stock markets, you had some stock markets that were mid-20s and so on. That compares to a cash return last year of around 4 per cent. So, what we found is that 2012 was definitely a year where it was almost like cash was returning to the old normal. People talk about the new normal and the new paradigms in the investment markets, but it was very much a return to the more traditional long-term rankings of growth assets versus cash.

St Anne: Scott, within the growth assets, what sectors performed the best?

Fletcher: Real Estate Investment Trust, Australian REITs. It was by far the standout. And REITs very much benefitted from a search for quality, yield, earning certainty, those sort of factors that were coming very much to the fore, particularly in risk off type periods like the second quarter of last year and so on. As you moved to the end of the year, you saw a broader stock market rally. So, it was initially the rally in the second half in REITs and in stocks as well was very much on earning certainty, yield, and so on, as large cap quality type focus. As we moved into December and even further into January, it sort of broadened more, and some of those value opportunities that managers and investors were seeking or getting into started to come at the fore very strongly at the end of the year. So, REITs have done very well, off a very low base, about 30 per cent return. Then there was Australian shares and international shares as well. With only international side, hedged outperforming un-hedged.

St. Anne: Scott, with growth assets recovering and as you mentioned cash going back to the old normal, are there any lessons for investors?

Fletcher: Yeah, I think the main lesson is that despite all the fear and uncertainty – and look it's understandable that people have been pretty apprehensive, retail investors apprehensive of coming back into the market, when the past fees have been so volatile and with the GFC and so on and such negative returns. But I think what it shows again is that you can't look for things to get better, you can't wait for economic dollar to turn around because typically, all the research and experience that we have at Russell, says that markets will turn 6 to 12 months ahead of any of the economic data, because markets are forward-looking.

So the best thing to do is, is to have a diversified portfolio. Its diversified across equities, bonds, cash, in a multi-asset type of approach, which can adapt to the changes in the market conditions, picking the best wining asset class is a very, very tough game and it's almost like again a Russian roulette. If you get it wrong, the consequences for your retirement funding and so on can be quite very serious.

So we think the best thing to do is to have a diversified multi-asset portfolio that can adapt and you see that in the performance differentials and in the tables that we put out where that multi-asset diversified portfolio sits probably in the upper echelon, but not as strong as the best performing asset class, but no way near as bad as the worse. So it sits in the sort of the second sort of grouping there. Which is what you want, long-term consistent performance to fund your retirement.

St. Anne: Finally, Scott, I know it's a bit difficult with volatility, but could you give us an insight into your views for 2013? Should investors remain cautious?

Fletcher: We definitely see an improving outlook, so particularly into the second half of 2013. The economic fundamentals are starting to turn the corner. You've got the prospects of the housing market pickup, improving its pace and that's more of a second half story at this point we think. The US economy will still grow about 2 per cent, 2.5 per cent thereabout; but by the end of the year, it should be growing about 3 per cent. China is stabilising in terms of the growth, softening that it had through 2012 and then it should get back up to about 8 per cent. Eurozone will still be a problem and Eurozone risk in terms of political risks and so on are definitely there. Also in the States, of course we've got the sequester of automatic climate cuts and so on, on March 1. We've got debt ceiling negotiations in congress.

So, second half is generally a broader outlook. Given the markets have rallied so hard and so fast they're more neutrally valued at this point. So that gives us a bit more caution on the next three months or so, particularly you have an Italian election, which could cause another bout of Eurozone volatility. So, I expect volatility spikes to continue through the year. We still think it will be a risk on, risk off type of year with its episodic bouts of nervousness and so on, but we think it's gradually improving. So by the time you get through to the second half, the outlook should be a lot brighter.

St. Anne: Scott, thanks so much for your insights today.

Fletcher: Great. Thank you.

Video Archive...

Helping SMSF trustees negotiate super complexities
19/08/2016  Peter Hogan, head of technical at the SMSF Assocation, shares his insights on the changing super environment and how it will affect SMSF trustees.
Chasing income in a low return world
10/08/2016  Paul Reisz, Pimco's executive vice president and income product manager head, gives his insights on where bond investors may find yield in the difficult global market environment.
US stocks offer most attractive income, says Investec
03/08/2016  Investec's UK-based global equity income investor Blake Hutchins says despite the stock-market rally raising valuations, the US offers the most attractive options for income investors.
US stocks which will continue to rally
28/07/2016  The US stock market looks fairly valued as a whole, admits JP Morgan's Dennis Ruhl--but there are some sectors which will deliver further growth.
Xero underlines returning popularity of technology stocks
19/07/2016  The success of accounting software company Xero is part of a broader resurgence of technology companies, contrasting with the shifting fortunes of Australia's resources sector.
Zurich Investments Global Thematic
18/07/2016  Morningstar's Kathryn Young explains what sets Zurich Investments Global Thematic apart from rival global equities strategies.
Gold Managers: Platinum International Fund
15/07/2016  Morningstar's Kathryn Young explains what makes Platinum International a standout strategy and the rationale behind the fund's Gold rating.
Gold Managers: Magellan Global Fund
15/07/2016  Morningstar's Tim Wong explains why the Magellan Global Equities was upgraded to Gold and why there is more to the strategy than Hamish Douglass.
Is this graph to blame for Brexit?
13/07/2016  Britain's vote to leave the European Union seems to tie in with a feeling across the Western world--a rebellion against globalisation and those in power.
Global equities versus Aussie equities
11/07/2016  While global equities may be attractive on a relative valuation basis, it's important not to blindly follow a benchmark, Morningstar Investment Management's Brad Bugg says.
Forecast 2016-17: Exercise caution
08/07/2016  Morningstar's Peter Warnes shares his thoughts on the past year, his expectations for the year ahead, as well as a few important recommendations.
Breaking from the pack in asset allocation
04/07/2016  Morningstar Investment Management's Andrew Lill explains the benefits of long-term, valuation-driven asset allocation, while also elaborating on his team's definition of "risk".
A permanent state of distorted reality
30/06/2016  Hamish Douglass, chief executive officer, Magellan Financial Group, explains why he believes we are at an odd point in history with the Brexit vote, ineffectual central bank policies and volatile currencies.
How should investors react to Brexit result?
28/06/2016  Dan Kemp of Morningstar UK says investors need to keep cool, calm heads amid political and financial uncertainty as to what happens next, following the Brexit vote.
Behavioural finance and how it hits your bottom line
28/06/2016  Understanding how your thought patterns drive investment decisions could amount to hundreds of thousands of dollars over your lifetime, explains behavioural finance expert Simon Russell.
Bogle on Brexit and other threats to global markets
21/06/2016  We have more borrowing, more leverage, more government debt relative to GDP than we have ever had with no attempt to get it down, says Vanguard founder Jack Bogle.
Are we heading for another recession?
21/06/2016  After an incredible rally across developed market equities and global bonds, the good times may be over. Should investors be selling up for cash and gold?
Buy the world in a couple of trades
20/06/2016  As the popularity of ETFs continues to skyrocket in Australia, Morningstar asks Jon Howie, head of iShares Australia how ongoing market volatility affects investors in this space.
2 asset classes presenting value
16/06/2016  While most asset classes may be a bit on the expensive side, Schroders' Simon Stevenson believes pockets of reasonable value can still be found.
Combining active and passive investment management
08/06/2016  Active investing versus index investing isn’t necessarily a prescriptive “one or the other” approach, explains Stephen van Eyk.