Economic Overview
The March quarter was one that included speculation about US monetary policy, a modest recovery in developed economies, geopolitical strains and continued adjustment in emerging markets.
In the US, weather conspired to obscure hiring and consumer spending increases. However, new Federal Reserve chair Janet Yellen said with the economy still slack, stimulus would be maintained.
Across the Atlantic, the euro area began its recovery from recession. Economic sentiment in the 18-nation single currency zone hit its highest levels in nearly three years, although jobs growth was sluggish and inflation remained at extremely low levels.
Weak indicators continued to emerge from China, fuelling expectations of stimulus to keep the economy growing at around 7.5%. Beijing aims to reduce exports in favour of domestic consumption, but it’s been a challenge. As usual, concerns over China played out in commodity markets. Mounting iron ore stockpiles at Chinese ports drove the commodity downward in March.
New Zealand’s economic strength led their Reserve Bank to raise official cash rates in March.
Market Overview
Asset Class Returns
The following outlines the returns across the various asset classes to the 31st March 2014.
The first quarter of 2014 highlighted the benefit of country, sector and asset class diversification. Australian, developed and emerging equity markets all diverged, as did equities and fixed interest.
Soft economic data and geopolitical tensions made for a shaky first quarter for global equity investors, resulting in a negative global returns. For unhedged Australian investors, the strength of the $A amplified the negative result.
In the US market, economic and interest rate uncertainty appeared to trigger a rotation toward perceived defensive sectors. REITs, utilities and healthcare outperformed the S&P500 Index, while consumer discretionary stocks fell sharply.
In emerging markets, the focus was on the tensions between Russia and the West. Further weighing on sentiment were weaker-than-expected economic indicators and concerns about the systemic risk in China after the first corporate debt default there.
The contrast with global markets extended to the sub-asset classes with value lagging growth and small lagging large, weighed down again by resources. On a sector basis, top local performers were REITs and utilities, followed by financials.
New Zealand’s equity market, as measured by the NZX50 Gross Index experienced stellar performance, returning more than 8.51% in local currency terms.
The global bond market defied predictions to broadly outperform equity indices. Yield curves flattened in the US, the UK and Germany, with the narrowing term spread driving a positive term premium. Corporate bonds outperformed government debt and the contracting credit spread driving a positive credit premium.
As always there are no consistent patterns to be found amongst asset class returns.
Why Do Investors Think They Know Better?
DALBAR is a US based research firm who’ve been monitoring investment returns for three decades. At the end of last quarter they released their annual “Quantitative Analysis of Investor Behaviour”.
The report compares US investors’ equity fund returns against the returns of the S&P 500 Index. And no matter what timeframe DALBAR chooses to measure the average investor against the market, the investor loses.
Why?
Because many investors think they know better than the market. Assume that there’s an investment fund that has averaged a 10% average return over the last 10 years – that’s the investment return. Now assume you’re the investor and put your money in that fund and kept it there for the whole 10 years. Your then return as the investor would also be 10% and equal to the investment.
Unfortunately, this rarely happens because of our behaviour.
Every time we move in and out of an investment we will inevitably concede returns to the market. We think we know of a better fund. Markets go up and we feel good so we want to buy in. Some website on the internet is predicting the next depression. Another website is predicting gold will be going to $2000. Markets go down and we feel bad so we want to sell out. Or one of our friends or family members is investing another way, which makes us feel itchy to test it out.
We do have an excuse – we can’t help it!
We’re hardwired to try and do things that give us pleasure and flee from things that cause us pain. It’s kept us alive over thousands of years, but it makes us terrible investors. So when following our natural instincts we end up buying things when they’ve gone up and selling when they’ve gone down – which all markets inevitably do.
As investors we do this believing we’re protecting our future, but we’re doing the opposite and DALBAR’s figures show the cost.
In 2013 the average US equity fund investor achieved a 25.54% return, which seems quite impressive until you notice the S&P 500 Index returned 32.41%. Over five years the individual investor trails the S&P 500 by 2.73%, over ten years they trail by 1.52% and over twenty years they’re lagging the index by 4.2% per annum.
To put that in perspective, an extra 4.2% pa, over twenty years, would mean more than doubling an investment balance.
Another damning revelation from DALBAR comes from their ‘Guess Right Ratio’, which measures inflows and outflows of funds. In 2013 it showed investors sold up in the two months of negative returns, before then piling back in after the markets went up again.
DALBAR concluded in its report, “attempts to correct irrational investor behaviour through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited.”
Here we disagree; DALBAR assumes those investors who trail the market have been thoroughly educated and are aware of potential mistakes. From our experience, investors who embrace education make prudent decisions. They understand they don’t know better than the market and instead of today, tomorrow or next week, their eyes are focused on their long term goals.
Good Times In Istanbul (Not Constantinople)
Fairfax journalist, Michael West recently penned an interesting article on one of the big players in Australia’s financial planning industry, AMP. Now that the big four banks and AMP control over 80% of the financial planning market, it’s often left to them to set the agenda. This leaves many clients unaware they’re at the mercy of a salesforce that often pushes client money into a vertically integrated system, with the endpoint for client money being that company’s own financial products.
The rewards for the best at selling company products?
Well they seem pretty good according to West. A nice $20 million bash in Istanbul:
“(AMP & Hillross, owned by AMP) have breezily lavished a $20 million junket on their sales force and themselves to boot. Before this year’s Byzantium bash, the AMP held its ”conference” in Dublin, South Africa, Amsterdam, Colorado and Buenos Aires.
If the behemoths of superannuation shell out two bob supporting a charity you will see it heralded in press releases. There was no media for this shameful junket though. Nor was AMP forthcoming with explanatory detail. ”Professional development conference”, was the manicured response this week.
Surely financial planning should be about the adviser using best endeavours to maximise the wealth of the client – allocating retirement savings to the best financial product available. If this was really about education – rather than a reward for flogging AMP product and an enticement to flog more – we solemnly promise to eat our fez.
The keynote speaker, who commands a $100,000 price tag, was one Jeremy Gutsche, a spruiker in the mould of Anthony Robbins. ”Win like you are used to it. Lose like you enjoy it”, is his sort of glib motivational fare which has naught to do with education and everything to do with churning out product.”
What would AMP tell their clients about this $20 million dollar bash? We guess AMP would say it was nobody’s business but the Turks!
With thanks to DFA Australia.
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