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...

What returns should you expect from markets?
01/12/2016  As market risks rise, investors must adjust their profit expectations--gone are the days of 8 per cent returns. But there are still growth opportunities out there if you know where to look.
Why healthcare stocks got a bump from Trump
28/11/2016  Australian healthcare and pharmaceutical companies continue to enjoy a purple patch, and for various reasons including the recent US election result, explains Morningstar's healthcare equities analyst Chris Kallos.
Equity and hybrid investors react as bond prices tumble
24/11/2016  The negative correlation between bonds and equities is reasserting itself following the US election of Donald Trump, according to John Likos, Morningstar's senior credit analyst.
2 global themes that are finding favour among ETF investors
15/11/2016  Australian retail investors are increasingly turning to ETFs for specific tactical exposures to global themes, particularly in the context of large-scale market events such as US election 2016.
Maintain discipline and stick to fundamentals when selecting stocks
14/11/2016  Steer clear of fads, maintain a disciplined approach and focus on company fundamentals in building and maintaining your investment portfolio, says Anton Tagliaferro, investment director, Investors Mutual
How Trump could impact economic growth
10/11/2016  Slowdowns in trade and immigration could hold back the US, and infrastructure spending could boost GDP, but it's too early to make any major changes to our economic forecast, says Morningstar's Bob Johnson.
President Trump: What should you do?
10/11/2016  Donald Trump has beaten Hillary Clinton to become the 45th US president. What should investors do?
Software companies worth watching amid tech deployment phase
08/11/2016  Kate Howitt, portfolio manager at Fidelity International discusses some of the core phases in technological disruption and identifies software companies among those currently presenting opportunities.
Kerr Neilson hot, cold and tepid on Europe, US and China
07/11/2016  Platinum co-founder and CEO Kerr Neilson explains his views on the major global markets and outlines where he sees opportunities--and where he doesn't.
Is Inghams a moat-worthy investment?
02/11/2016  Morningstar's Ravi Reddy discusses the upcoming float of poultry product producer Inghams, and whether it's in investors' interests to subscribe for shares in the IPO.
3 best ideas in healthcare
26/10/2016  Morningstar's Chris Kallos looks at some of the most compelling ideas in Australian healthcare, while also reaffirming the importance of the uncertainty rating and how it pertains to the sector.
Exercise caution and let some cash build
24/10/2016  Morningstar's Peter Warnes provides a near-term outlook for equities markets, while also sharing his thoughts on the upcoming Ingham's IPO.
Bogle forecasts low stock and bond market returns
21/10/2016  Warning of "much lower market returns" ahead, Vanguard founder Jack Bogle urges investors to seek low-cost investment products. From Morningstar US.
Finding the right flavour ETF amid expanding ETP menu
13/10/2016  From a relatively vanilla selection of exchange-traded funds (ETFs) on offer in the early 2000s, Australian investors can now choose from a wide range of exchange-traded products to suit various tastes.
Bright outlook for Aussie banks despite parliamentary committee and looming Basel IV regulations
12/10/2016  Australia’s ‘big four’ banks’ share prices have held up after their CEOs recently fronted a parliamentary committee, and have already absorbed the potential impact of more stringent capital requirements
Dividend, cashflow challenges hit investors but yield opportunities remain
06/10/2016  Technology, healthcare and telecoms hold opportunities for global equity investors even as utilities and energy stocks disappoint, says Jane Shoemake, director for global equity, Henderson
No place for set-and-forget asset allocation
04/10/2016  A 2016 company reporting season overview and explanation of why dynamic asset allocation is so important, from Dr Shane Oliver, chief economist and director of investment strategy, AMP Capital.
The search for bond yields
27/09/2016  Morningstar's Hybrid Handbook: Navigating the Australian Hybrid Market pulls back the curtain on corporate and bank hybrids, as John Likos, Morningstar's senior credit analyst, explains.
Here's which stocks will be the real winners in FY17
15/09/2016  Morningstar's Peter Warnes reflects upon the most recent corporate earnings season and shares his thoughts on which stocks could deliver strong performances in the near term.
Resolution Capital Global Property Securities
13/09/2016  Morningstar's Ross Macmillan examines a number of outstanding qualities that sets Resolution Capital apart from other managers.