Disappointing outcome for investors with returns only slightly above average
For a year that started out so well, the actual outcome for the fiscal year ending Sunday is disappointing. The more than 10 per cent fall in share prices over the past two months has transformed what would have been a very good year for superannuation fund and personal investors into one with returns only slightly above average.
When final results are released, the balanced and growth super fund annual returns are likely to be between 7 and 10 per cent. The higher figure will be recorded by funds with an above-average weighting to Australian and overseas shares.
For the Australian market even after the latest falls, the broad market indices are still just under 15 per cent higher than one year ago. Because of the steep decline in the value of the dollar, the returns from overseas markets in Australian-dollar terms have been higher. Whether these higher returns from overseas investments are fully reflected in super fund returns depends upon whether the fund managers opted to hedge part or all of the currency risk. With a falling dollar, unhedged overseas investments provide higher returns but many fund managers opt to hedge currency risks to avoid major surprises.
For the investor, the year just ended has still been one of the better periods since the financial crisis. Part of the reason is that despite uncertainties in world economies, the reduction in interest rates has regenerated investor interest in more risky higher-yielding shares and property investments. This "hunt for yield" will help put a floor under our market.
While the falling dollar may encourage further selling by overseas investors keen to hold on to their profits, the now lower share prices result in higher yields for local investors making new purchases.
If there is one major lesson to be learnt from this year, it's that the investment climate for the foreseeable future will continue to be uncertain. Gone are the days when double-digit annual returns were quite common and investors were reasonably certain of continuing high returns. The current situation is totally different.
Annual returns have been volatile and even negative in some years. As a result, it is essential for investors to ensure that the investment risk profile of their portfolio is consistent with and capable of providing the needed level of income and not susceptible to large gyrations.
Given the extent of the recent falls, there is scope for at least a modest recovery in coming months if the recovery in the US continues and confidence about the prospects for China returns.