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...

to Morningstar Premium Membership

Market outlook for 2015
18/12/2014  Morningstar's Peter Warnes gives investors an idea of what to expect from the Australian share market over the coming year, while also providing some tips for a stronger portfolio.
Morningstar's new ETF ratings
10/12/2014  Morningstar’s Tim Murphy discusses the new ETF analyst ratings and reports that are now available to investors.
Top opportunities in hybrids
09/12/2014  After a recent broad widening in pricing, investors may find opportunities in some of the older-style bank notes and high-quality corporate issuers.
Iron ore's changing landscape
03/12/2014  With small, high-cost miners set to struggle, Chinese growth to flatten and the low-cost majors pushing hard on expansion, the face of iron-ore mining is set to look very different.
Will QE boost European stocks?
28/11/2014  As ECB members hint quantitative easing could come sooner than expected in the Eurozone, we examine the prospects for European stock markets. From Morningstar UK.
Quality stocks, sustainable yields
26/11/2014  Anton Tagliaferro of Investors Mutual shares his outlook for the market at last month's Morningstar Individual Investor Conference.
Key risks in bond investing
21/11/2014  There are a number of risks investors need to consider in bond investing.
Confronting volatility and low growth
18/11/2014  Given issues such as recent volatility, rising global debt levels and the threat of European deflation, there are steps investors can take to safeguard their portfolios.
Medibank: A quality business at the right price?
13/11/2014  The health insurer is a quality business but it will all come down two the price, according to two fund managers.
Telstra and sustainable returns
12/11/2014  The Australian telecoms giant has some exciting growth opportunities ahead of it and will continue to provide sustainable returns over the longer term.
Bank earnings wrap-up
07/11/2014  Morningstar sector head of financials David Ellis gives investors the lowdown on the most recent batch of earnings from Australia's major banks.
Medibank IPO Report
29/10/2014  While there were a few "surprises" in the prospectus, health insurer Medibank Private is still on track to deliver growth, according to Morningstar's Peter Warnes and David Ellis.
Opportunities in fixed income
28/10/2014   Bentham Asset Management principal and portfolio manager Richard Quin provides investors with some insights into fixed-income investment and the role that short-duration credit can play in a portfolio.
Key investor risks
21/10/2014  Voted among the 50 most influential people in finance today, author and former banker Satyajit
Finding value in small companies
14/10/2014  A portfolio of "terrific value" can still be achieved despite the stretched valuations in the smaller end of the Australian equities market.
Choosing quality businesses
07/10/2014  Credit investors adopt a different approach to equity investors when assessing a quality business, according to PIMCO's Tracy Chin.
Don't panic about PIMCO
30/09/2014  Morningstar's Tim Murphy talks about the recent portfolio manager changes at the global bond manager and why investors should not panic.
Medibank IPO Preview
25/09/2014  Morningstar's Peter Warnes and David Ellis preview the upcoming initial public offering of health insurance giant Medibank Private.
A better deal for investors
24/09/2014  Morningstar’s Anthony Serhan outlines what the government’s Financial System Inquiry will mean for investors.
Europe growth: Gone for good?
18/09/2014  Facing entrenched structural issues, the eurozone’s days of robust growth are likely over, but there are some reasons for hope, says Morningstar's Bob Johnson.