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...

The importance of valuation
25/11/2015  Valuation is critical as it drives both risk and return, and buying the wrong asset at the wrong time can have devastating consequences.
2016 another difficult year for emerging markets
24/11/2015  Emerging markets veteran Hugh Young of Aberdeen admits that 2015 has been hard for investors but says stocks are cheap and there are gains to made over the long term.
Emerging markets: down but not out
18/11/2015  Emerging economies have struggled in recent years, but their increased productivity, stronger population growth, and rising middle classes represent an important growth opportunity for the future.
Characteristics of quality investments
17/11/2015  While markets may be constantly changing the traits of good-quality companies remain the same, Celeste Funds Management's Frank Villante says.
Moats, stewardship and managing volatility
12/11/2015  Morningstar's Mathew Hodge looks at how moat ratings complement an income strategy and can steer investors away from a range of problems.
Hong Kong stocks better value than Chinese
10/11/2015  It is important to be selective when investing in China, says Aberdeen's Nicholas Yeo, as volatility is here to stay.
Biotechs under the microscope
05/11/2015  Morningstar's Chris Kallos explains why all biotech companies are not the same and how this can affect the number of risks a certain company can carry.
China slowdown won't hurt Asian equities
03/11/2015  Chinese GDP growth may have slowed but the fundamentals are still supportive of equity markets, says Barings head of multi-asset Khiem Do.
Health stocks in the green zone
29/10/2015  Morningstar's Peter Warnes looks at an area of the market where the recent volatility has created opportunities, while also reiterating the importance of moats and stewardship.
Investing in a time of disruption
26/10/2015  While economies grapple with demographics, price distortions and deleveraging, a fourth D confronts investors, says Fidelity’s Kate Howitt.
US won't catch recession off China
22/10/2015  When you have slow underlying growth, it's sometimes tough to tell the difference between a slowdown and a recession, says BlackRock's Tony DeSpirito
What is an economic moat?
19/10/2015  Businesses with a Morningstar economic moat rating are positioned to generate excess returns over an extended period.
Keeping a long-term focus
12/10/2015  Superannuation balances still grew despite extreme events such as the global financial crisis, says Morningstar’s Anthony Serhan.
The problem with China
07/10/2015  China’s stock market crash will spur an internal debate in the country about the need for more market-based reforms, says author and former banker Satyajit Das.
Best ideas in credit
06/10/2015  Morningstar’s John Likos discusses what types of securities are included in the Moat-Focused Credit Best Ideas list.
Pitfalls of investing for retirement
30/09/2015  Bad behaviour before and in retirement can take a major hit to your savings. We outline the pitfalls to avoid if you want to maximise your pension pot.
Outlook for rates and the dollar
28/09/2015  Nikko Asset Management currency strategist Roger Bridges gives his view on China's recent move with the yuan, as well as the outlook for interest rates and the Australian dollar.
The new mediocre and growth
25/09/2015  Housing affordability challenges and shorter government terms will be the norm under the "new mediocre" of growth, says author Satyajit Das.
A look at global valuations
22/09/2015  Magellan’s Hamish Douglass talks about where he is finding value across the globe and why his fund has reduced its exposure to emerging markets
Global economic worries stall Fed
18/09/2015  Although overseas concerns halted Fed action this month, a hike is still in the cards this year--but it shouldn't derail the economy, say Morningstar's Bob Johnson.