SMSFundamentals | Jun 06 2012
By Andrew Nelson
The results are in. It turns out Australian shares have outperformed all other asset classes over the past 20 years. And yes, that includes real estate, fixed interest investments and cash according to this year's Russell Investments/ASX Long-Term Investing Report.
The 14th issue of this annual study shows Australian shares and residential property both delivered better returns than more conservative asset classes like cash and fixed income over the past 10 and 20 years. The results do factor in taxes and borrowing costs, thus showing real mid to long-term performance.
According to the report, Australian shares returned 9% per year at the lowest tax rate and 7% per year at the highest marginal tax rate. Residential investment property booked average returns of 8.1% and 6.6% at the lowest and highest tax rate, while Cash showed the lowest returns of all asset classes over the 20 year period.
Greg Liddell, Russell's director of consulting and advisory services predicted that over the next 10 years we can start to expect lower returns from fixed interest investments.
"With 10 year government bond yields sitting at record lows, over the next 10 years returns from bonds will be lower," he said.
Liddell also discussed recent superannuation reforms, noting the new legislation that requires super fund trustees to consider after-tax outcomes was due to the significant impact an after-tax focus can have on returns.
"The report has consistently demonstrated the value of calculating investment returns on both a pre- and after-tax basis across the asset classes examined. Calculating the effective tax rates on different asset classes helps investors to determine their best allocation of capital between these asset classes to maximise their after-tax returns and ultimately boost their wealth," he said.
It’s an important point he makes, as the report showed that on a pre-tax basis residential investment property returned of 9.0% per year over 20 years. But it was still Australian shares that provided better after-tax returns.
The story is a little different on a 10 year time frame, as residential investment property outperformed all other asset classes at the lowest and highest tax rate at 7.2% and 5.8%. However, Russell warns that residential property is far from being a risk free lock on future investment growth.
"The investment fundamentals of residential property are becoming less attractive compared to listed shares. The main risks for residential property relate to relatively high valuations and the prospect of further deleveraging by Australian households. Low rental yields will make it difficult for residential property to outperform listed shares as an investment over the next decade," said Mr Liddell.
However, the same can be said of shares, especially given the current environment and outlook. The ongoing European debt crisis, worries about a drawn out US recovery and the potential for China’s GDP growth to slow all underline this point. And that’s not to mention the two-speed Australian economy, which has been a major contributor to domestic market volatility of late.
"The reason we look to 10 to 20 years in this report is because in these asset classes investors should be invested for a minimum of seven years. Volatile short-term return patterns are a normal part of investing in growth type asset classes such as equities.
Investors with long term time horizons should not respond to these short term market movements with knee-jerk reactions. For instance, while Australian and overseas equity markets produced negative returns over the 2011 calendar year, Australian equities have performed strongly over longer timeframes, which is where a long-term investor should focus," said Mr Liddell.
(A full copy of the Report is available via the Special Reports section on the FNArena website)
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
