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Perpetual reminder on growth

NOW is not the time for investors to abandon ‘growth’ assets such as shares and property.

That is the message from Perpetual Private Clients, which has sought to put the current dismal returns from international and Australian shares into perspective.

“Growth assets are still the best place to invest to ensure the greatest probability of securing a suitable income in retirement,” Perpetual says in its latest Technical Bulletin.

Investors’ faith in shares has been tested yet again by negative returns in September.

“The downturn left most growth-oriented superannuation funds deep in negative territory,” according to asset consultants InTech.

The median return from these ‘growth’ funds, which invest mainly in shares and property, was -3.3 per cent.

“This has been the worst monthly return for growth funds since the days of the Russian debt crisis in August 1998,” InTech senior consultant Andrew Korbel said.

“For the financial year to date, the median growth fund return is now sitting at -5.3 per cent”.

The main contributor to this outcome was the continued heavy losses in the US share market, which is heading towards its third straight calendar year of negative returns.

Australian shares have barely moved over the past year, with the S&P/ASX 200 Index up just 1 per cent, whereas property and ‘defensive’ sectors such as cash and bonds continue to yield positive returns.

Against this backdrop, Perpetual has looked back at long-term trends to draw out some lessons for investors.

“If history has taught us anything, it is that chasing the return of the best performer and switching from one asset class to another can be quite costly,” it says.

Perpetual has found that some of the best gains in share markets have occurred after large falls.

For instance, the US market rose 8.1 per cent in the 12 months after the October 1987 crash.

Similarly, it jumped 26 per cent in the 12 months after Iraq invaded Kuwait in 1990.

Investors who sell their shares in the hope of buying again at better prices may end up missing these rebounds.

Another lesson from history is that the best performing asset class in one year will rarely be the best performer in the next year.

“It can also be argued that the volatility we have seen of late is the inevitable unwinding of a bull-run that was long due for a break,” Perpetual says.

Indeed, investors may have quickly forgotten the extent of the bull-run.

The MSCI World index, which values all major global share markets, rose almost 400 per cent in the 10 years to October 2000 before the current decline commenced.

Perpetual has also advised investors to expect negative returns from time to time.

“Negative returns in any one year are a certainty at some point in time for all share market investors,” the bulletin says.

“We estimate that for both Australian and international equities, the probability of a negative return is in fact two in every seven years.”

Looking ahead, Perpetual has advised investors to revise down their expectations.

As detailed in the table (left), long-term returns from Australian shares are projected to fall from around 12 per cent a year to about 8.5 per cent a year.

Projected returns from international shares are also 8.5 per cent, about half the level achieved during the 1990s.

Importantly, these returns are still higher than projected returns from all other asset classes.

p See story, Page 33.

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