Which stock pick beat all the rest over the past 20 years? Was it Rio Tinto, BHP, or even one of the banks?

The best stock on the ASX is Australia’s third-largest iron ore miner Fortescue Metals, with a total return of 248,625% over the past 20 years. If you’d invested $1,000 in Fortescue Metals back in 1991, it’d be worth a pretty sum of $2,487,250 today. But betting on the fortunes of Fortescue back in 1991 would have been a long shot; the company only started shipping iron ore to China from its 87,000 km² site in the Pilbara region of Western Australia in 2008.

Since iron ore is China’s single biggest imported commodity in terms of volume, in hindsight it’s no wonder that Fortescue Metals would directly benefit from China’s extraordinary growth rate over the past 20 years. The big question for investors is which companies will enjoy super-charged growth over the next 20 years.

The two tables below show the best performing stocks over 10 and 20 years – restricted to the ASX50 companies. A total of 28 companies have listed continuously for the past 20 years.

The second best performing stock over 20 years is Sonic Healthcare, followed by construction and mining giant Leighton Holdings, retail goliath Wesfarmers (owner of three coal mines) and Commonwealth Bank, the 46th biggest bank in the world. These companies have continued to performed due to sheer size and clout; both Leighton and CBA profited from a decade long property boom and Wesfarmers from its dominance across mining to consumer staples.

The far majority of these companies make money from mining or banking, with the odd Sonic Healthcare, the ASX, and some property construction companies breaking the norm.

Out of the list of the top performers over 10 years, the dominance of mining is obvious – with the banking sector continuing to perform well. At the bottom of the list are a bundle of companies that have performed poorly across insurance, property development and media such as AMP, Alumina, Mirvac, News Corporation and GPT. 

CommSec notes that since October 1991, total returns on Aussie shares have risen by 433%, or 22% per annum. However, remember that these figures are coming off a low base. In 1991 Australia was deep in recession and unemployment was rising; it was the time of the Gulf War and the 1990 oil price spike. It was the time when Paul Keating coined the well-worn phrase, “the recession we had to have.” From 1991 until today, Australia has enjoyed the longest economic boom in history – and share price returns over this period reflect this simple fact.

The table below shows the unbeatable returns from shares compared to bonds and cash. “While investors are currently favouring cash [at the moment],” notes CommSec, “it’s worth noting that if $100,000 had been invested in stocks at the end of 1990, it would have been worth $804,000 at the start of this year. The same $100,000 would have appreciated to just under $305,000.”

What will the next 20 years bring? Many experts say that commodities will continue to outshine other investments over the coming decade. China is touted as the leading superpower as US hegemony comes to a fizzling end; India, too is regarded as a hotbed of growth as its staggering population moves up the consumption chain.

But remember Japan? Wasn’t it threatening to become the world’s next superpower prior to 1991 – before an asset price bubble, the Plaza Accord and loose lending practices resulted in the ‘lost decade,’ a sustained period of stagnation in which the Japanese stockmarket capitulated – hitting a 27-year low in 2009. (The Plaza Accord was a currency pact instigated by the US to depreciate the US dollar relative to the Yen. Between 1984 and 1987, the US dollar depreciated some 51% against the yen due to central bank intervention. The Plaza Accord contributed to Japan’s asset bubble, which ultimately collapsed – leading to the lost decade)

Below charts the Nikkei 225 over the past 30 years.

The purpose of analysing Japan is that the future is not so easy to predict. The US is not going to willingly hand over its number one spot, and China’s rise to the top of the power pile is not in the bag. Already, certain US groups are sparking anti-China sentiment via its outlets such as the Washington Post: “Just how many American jobs have been lost to subsidized Chinese exports is unclear,” the article begins. “A study by three academic economists concludes that imports from China account for about a quarter of lost US manufacturing jobs from 1990 to 2007, at almost 1 million jobs.”

The article continues: “China’s predatory trade practices erode America’s industrial base and stymie the economic recovery. The Chinese do not believe in free trade or fair trade. They practice fixed trade – fixed to benefit them at others’ expense. What, if anything, can we do about that?”

Last month, a bill was passed by the US Senate (yet to become law) to stymie China’s currency practices; the ruling would allow US companies facing Chinese imports to petition the Commerce department for relief, effectively blaming the undervalued renminbi (RMB) as an illegal subsidy. If agreed, the department could impose countervailing duties that offset the subsidy. It’s an ironic move for the US, the self-proclaimed bastion of free market economics – but the issue for investors is what impact could a trade war between the US and China bring to China’s growth rates and ultimately for Australia over the coming decade.

Potentially, the next 20 years will see a further strengthening of Australia’s largest companies as they expand into Asia. Perhaps we’ll see a continuation of the “too big to fail” phenomenon where low regulatory hurdles and open markets allows the biggest to basically do whatever they please. In that sense, betting on the biggest and strongest companies would be one strategy to take for investors keen to keep in their portfolio returns buoyant in coming decades.

It goes against the usual mantra, which is to buy contrarian plays – out of favour, smaller companies with a great future. But is a great future increasingly the domain of the largest and strongest companies, as the smallest battle to survive?

In fact a report by David Blitz and Pim Van Vliet, called ‘The Volatility Effect: Lower Risk Without Lower Return,” found that better performing stocks, on average, are those that exhibit lower volatility, contrary to mainstay investment analysis suggesting that investors who buy high risk stocks are rewarded with high returns. The authors state: “Relatively simple investment strategies are found to generate statistically significant higher returns than the market portfolio.” They conclude that equity investors traditionally overpay for risky stocks.

To find out if a stock is risky, check for its beta; a higher beta (>1) means that the stock moves more than the market, whereas a lower beta (<1) means that the stock moves less than the market. A stock that moves in line with the market will have a beta reading of 1.

For example, Fortescue Metals has a Beta of 1.95 compared to 1.28 for the market. Wesfarmers by comparison has a beta of 0.92, which means that it’s less volatile than the market. 

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