New directions for Aussie investors?Sharemarket Insights & Strategy
Aussie blue-chip shares under-perform: Mid-sized companies and international shares have outperformed ‘Mums and Dads’ stocks over the past five years. It is useful for investors to understand how different asset classes are performing as it may highlight opportunities. Smaller returns from major Australian companies
Many Australians got their start in the sharemarket through privatisations and demutualisations. That is, companies like Telstra, AMP, Colonial, Commonwealth Bank, Suncorp, Qantas and state betting agencies like TAB (NSW). Some retail investors have held on to these stocks over time and perhaps added modestly to their holdings with positions in other domestic companies. For others, the initial investment may have sparked broader interest with investors adding to their portfolios with domestic and international investments and perhaps positions in options and futures.
In 1999, CommSec devised an index called the Mums and Dads index to highlight the performance of retail investors who got their start in the sharemarket through demutualisations, privatisations or ‘household names’ like Woolworths. The current composition of the CommSec Mums and Dads index is Telstra, Commonwealth Bank, Woolworths, Qantas, AMP, Tabcorp, Suncorp, IAG and Wesfarmers.
Until around five years ago, total returns on the CommSec Mums & Dads index (share prices and dividends included) closely tracked total returns on the broader index – the All Ordinaries accumulation index. But over the past five years, the All Ords accumulation index has lifted around 82 per cent while the CommSec Mums and Dads index has lifted by just 35 per cent. Mid-sized companies gain favour
One of the out-performing areas over the past five years has been the mid-tier companies. Since mid-2013 the MidCap50 accumulation index has doubled in value. As noted above, over the same period the All Ords accumulation index lifted by around 82 per cent while returns on the CommSec Mums and Dads index rose by just 35 per cent
The MidCap50 includes a number of ‘new wave’ stocks as well as ‘disrupters’ – companies challenging those with far bigger market size or capitalisation – that is, the ‘big cap’ companies. Notable mid-tier companies include A2 Milk, Dominos, Flight Centre, JB Hi-Fi and Resmed.
On a shorter-term comparison, since the start of 2018 the All Ordinaries accumulation index has lifted by 6 per cent (ASX 200 accumulation +5.9 per cent) while the MidCap50 accumulation index has lifted by 6.6 per cent. By comparison the CommSec Mums and Dads index has risen by just 1.6 per cent.
However just as investors constantly need to track the performance of their domestic portfolios – especially the influence of new themes or paradigms – there is also the need to take a broader perspective. Considerations include the differing performance of domestic industries or sectors to those abroad.
Global shares have certainly performed strongly over recent years. The US Dow Jones and S&P 500 indexes have hit record highs in the past month. And the Japanese Nikkei 225 index hit 27-year highs yesterday.
Global shares
Five or ten years ago it was more difficult for retail investors to invest in individual companies that were listed on overseas sharemarkets. To gain overseas exposure, investors tended to favour managed funds.
Today, retail investors have much more flexibility to invest in individual companies on overseas exchanges, or via exchange traded funds (ETFs) and managed funds. Australia accounts for just 2 per cent of world sharemarket capitalisation, so there is a raft of opportunities outside our borders. One complication is the need to take into account currency fluctuations. Since the currency was floated, the Australian dollar has fluctuated on average by US14 cents a year against the greenback, although there has been less volatility in recent years
One way of measuring the performance of the ‘world sharemarket’ is by reference to an index. And one of the best known indexes is that compiled by Morgan Stanley Capital International (MSCI).
The MSCI World Index, is described as “a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85 per cent of the free floatadjusted market capitalization in each country and MSCI World Index does not offer exposure to emerging markets.” The world MSCI can be tracked through finance websites on a daily basis as well as wire services and adjustments can be made for dividends and currency fluctuations.
Over the past five years the world MSCI in US dollar terms has risen by 41 per cent with total returns (measured by the accumulation index) up by 56 per cent. By comparison, in Australian dollar terms the MSCI Australian index rose by 17 per cent and 42 per cent respectively over the period.
But when you adjust the world MSCI for currency changes – convert the index to Australian dollar terms – the outperformance is enhanced even further. Over the past five years the world MSCI has lifted by 83 per cent in Australian dollar terms with total returns up 101 per cent.
Shorter-run returns
As always the time comparison chosen may affect the results obtained. And with international shares, changes in the value of the US dollar can significantly impact the results.
Looking back since the index was constituted in May 2000, and assessing returns in Australian dollar terms, returns on the ASX 200 have risen four-fold whereas returns on the world MSCI have doubled. So on a long-term basis the Australian sharemarket has out-perrformed global shares.
However, looking over the past decade, Australian dollar returns for both the ASX 200 and the world MSCI tracked closely, especially up to 2014. But in the past four years the world MSCI broke away, lifting by 68 per cent while the ASX 200 has risen by only 39 per cent.
Further, since the start of 2018, the world MSCI accumulation index in Australian dollar terms has lifted by around 14 per cent, well ahead of returns of around 6 per cent for the Australian market.
Global investing
The hard part for investors thinking more globally is in deciding where to put your money. There is a raft of ETFs covering the broader global economy, specific countries or regions, and specific sectors or industries for countries or regions. Investors also need to determine whether to invest in a hedged fund (protects for changes in currencies) or invest unhedged (maintains exposure to currency changes).
And rather than investing in ETFs or managed funds, other investors may prefer to invest in specific companies such as the technology giants – Apple, Facebook, Netflix, Amazon or Google (Alphabet).
The US out-performs
The Dow Jones index is probably the best known of the US equity indexes. Other indexes include the S&P 500, Nasdaq Composite and Russell 2000. And while the price index – the Dow Jones Industrial average (DJIA) – is commonly quoted, there is also a total return index for the Dow.
Up until the end of September the DJIA rose by 7 per cent and total returns (includes dividends) lifted by 10 per cent while returns on the index in Australian dollar terms have lifted by around 18 per cent.
By comparison, in local currency terms the ASX 200 rose by 2.3 per cent, the All Ords lifted 2.6 per cent and total returns on Australian shares have increased by around 6 per cent.
Certainly the US economy has performed strongly with annual economic growth sitting at 4.2 per cent, unemployment near 18-year lows and inflation sitting at just 2 per cent. However the old adage applies for the sharemarket – past performance is no guarantee of future returns.
The US Dow Jones has made solid returns – especially over the past two years, averaging annual growth near 22 per cent and well out-performing the Australian market.
While the US economy is performing strongly, the budget deficit remains high, the Federal Reserve is still in the  process or ‘normalising’ interest rates and the US is engaged in trade disputes with a raft of economies such as
China and the European Union.
In addition some would cite relatively expensive valuations for US shares with prices around 17.8 times forward earnings, well above the longer-term average of around 14.5 times earnings.
What are the implications for investors?
Global sharemarkets have made solid gains in recent years reflecting economic recoveries after the global financial crisis. In this respect, the US has had one of the stand-out economies and sharemarkets.
Australian investors can now embrace a broader range of opportunities than in the past, whether they are domestic companies and sectors or opportunities across global economies. While there may have been good reasons in the past for investors to stick with blue-chip ‘Mums and Dads’ investments, better performing investments locally and globally argue for a fresh look at portfolios.
Investments in international shares and small and mid-sized Australian companies provide scope for greater diversification in investor portfolios.
Published by Craig James, Chief Economist, CommSec