The annual Russell Investments/ASX long-term performance study of the nine major asset classes has led the advisory firm and multi-manager to question traditional investor allocations to domestic shares and residential property.
With the possibility of a housing bubble in Sydney and Melbourne – as well as Auckland in New Zealand – being openly discussed, prospects for a further decline in the Aussie dollar, especially versus the US dollar, and domestic equities “remaining under pressure”, Russell is advocating a switch to a more balanced global portfolio.
Pete Gunning, Russell’s Asia Pacific chief executive and former global CIO, said: “Looking ahead, many indicators point to the possibility of slower growth in Australian equities…The local share market’s fortunes are heavily tied to China’s deteriorating demand for iron ore – and to the prospects of Australia’s four major banks. With the chances of a prolonged downturn in China’s steel consumption and volatility in bank stocks, investors are becoming skittish – with good reason.”
The report found that for the 10-year period, international shares (hedged) overtook Australian shares and were the strongest performing asset over that period, producing 7.8 per cent a year on a before-tax, after-fees basis. And Australian residential investment property came in at fourth place, with a return of 7.0 per cent a year.
For the 20-year period, Australian residential property still led the pack, however, returning 9.8 per cent a year. And Australian shares followed closely behind, with a return of 9.5 per cent annualized over the 20 years. Global shares, hedged, returned 8.6 per cent a year.
But the report warns that the headline-grabbing median property price rises do not reveal the whole picture in Australia, noting much lower rises outside of Sydney and Melbourne and significant deviation even within these cities.
“Regardless of location, property prices have been largely on the rise for the last 20 years, driven mainly by falling rates. With almost nowhere left for rates to fall, that same level of capital appreciation is unlikely to be repeated. If, as ASIC believes, signs of a dangerous property bubble in Sydney and Melbourne are accurate, residential housing prices could slump,” Gunning said.
“Domestic investments can continue to have a role in Australians’ portfolios, but investors with a home-country bias would do well to revisit their portfolios, reduce their exposure to residential property and start investing a portion of their equity allocation offshore.”
The report demonstrates the significant differences between pre-tax and after-tax returns in the various asset classes. For instance, tax has a greater impact on cash and bonds than domestic shares and property. But it also makes a significant difference with international shares, pushing their net returns below those of domestic shares and into second place out of the nine asset classes for the 10 years to December last.
But Russell bearish on Australian shares and housing