Sharemarket perspectives
- The CommSec ‘Mums and Dads share index’ – a way of tracking the performance of commonly-held shares – fell by 7.4 per cent in 2010, exceeding the decline for the broader All Ordinaries index.
- It was the second year of under-performance for the CommSec Mums and Dads share index. Given its concentration on blue chip shares, the Mums and Dads index is a relatively defensive index. While some investors may be happy to maintain a defensive portfolio, this could be at the expense of performance. Both the All Resources index and Small Ordinaries have out-performed the broader sharemarket over the past seven years.
What does it all mean?
- “Buy and hold” investors may elect to spend more time thinking about the composition of their portfolios following another flat year for the sharemarket. In the late nineties and early noughties many people got their start in the sharemarket by investing in share floats like Telstra or receiving shares from demutualisations, such as AMP, Colonial or IAG. And these “Mum and Dad” investors may have added to the portfolios over time through the floats of government TABs. But a quick glance at the recent performance of those investments may yield more frowns rather than grins.
- Focussing solely on share price performance, the CommSec Mums and Dads index has risen by just over 4 per cent a year over the past seven years as opposed to 6.5 per cent per annum growth for the broader All Ordinaries. Now it’s worth noting that companies like AMP, CBA, Tabcorp and Telstra have tended to pay high dividends over time, bumping up total returns on the blue-chip investments. But it would still be beneficial for investors to take time out at the start of a new year to ensure that their portfolios are still meeting performance hurdles.
- Certainly the Resources sector has been a stand-out over the past seven years with the ASX Resources 200 index rising 27.7 per cent a year since 2004. Over the same time, the CommSec Mums and Dads index has lifted 4.1 per cent a year with the All Ordinaries growing 6.5 per cent a year. But investors need to be mindful that dividend yields in the resources sector may be closer to 2 per cent rather than 4 per cent for the broader sharemarket. And share prices of resource companies tend be more volatile than blue-chips.
- Again, small companies have also out-performed the Mums and Dads index and the All Ordinaries over the past seven years, growing 7.3 per cent a year since 2004. But before adding companies to their portfolio investors need to decide whether they are prepared to take on more volatility and perhaps sacrifice dividend yield.
The CommSec Mums and Dads share index
- The CommSec Mums and Dads index was devised as a way of tracking the performance of commonly held shares. The index is made of “household names” as well as companies that evolved via demutualisations
and privatisations. Many investors got their start in shares by receiving shares in companies like AMP or investing in the Telstra floats. - The CommSec Mums and Dads index is an equally weighted portfolio, currently made up of 9 commonly held stocks. The index includes AMP, CBA, IAG, Qantas, Suncorp-Metway, Tabcorp, Telstra, Wesfarmers and Woolworths. The base period of the index is January 4 1999=100.
- Latest results: Over 2010 the CommSec Mums and Dads index under-performed the broader All Ordinaries index for the second straight year. The CommSec Mums and Dads index fell by 7.4 per cent in 2010 while the All Ordinaries index eased by 0.7 per cent and the S&P/ASX 200 index lost 2.6 per cent.
- In 2009 the CommSec Mums and Dads index was up just 18.1 per cent, well below the gain of 33.4 per cent for the All Ordinaries. Still, the CommSec Mums and Dads index held up better in 2009, losing 39.2 per cent against a 43 per cent slide in the All Ordinaries.
- Since its inception in 1999, the CommSec Mums and Dads index has lifted by around 4.3 per cent a year, short of the 6.5 per cent per annum gain for the All Ordinaries. The absence of resource stocks has hurt the performance of the Mums and Dads index over recent years.
- Only two stocks in the CommSec Mums and Dads index rose in 2010 – shares in both Wesfarmers and Tabcorp rose by 2.3 per cent. The biggest drop was recorded by AMP (down 21.9 per cent), followed by Telstra (down 18.7 per cent), Qantas (down 15.1 per cent), Commonwealth Bank (down 7.4 per cent), Woolworths and IAG (both down 3.7 per cent) with Suncorp-Metway down 0.9 per cent.
What are the implications for investors?
- It doesn’t matter whether you maintain a portfolio modelled on the CommSec Mums and Dads share index, the All Resources index or Small Ordinaries – you still need to determine whether your investments are paying their way and whether the current strategy is still appropriate. Unfortunately for many investors, 2010 was a “lost” year with share prices spending most of the year in negative territory. And 2011 hasn’t really started much better with the CommSec Mums and Dads index down 1 per cent in the first week and the All Ordinaries down 0.7 per cent.
- Interestingly when you assess performance in US dollar terms, the Australian sharemarket posted similar gains to the US Dow Jones, Japanese Nikkei, German Dax and the world (MSCI) index in 2011 while out-performing many European bourses. But that is cold comfort for domestic investors. Given the increasing influence played by the foreign investors and importance of currency movements in determining their investments, domestic investors have to be more active in assessing the performance of their portfolios. The Australian economy may be in reasonable shape, pointing to a firmer sharemarket, but that relationship doesn’t always hold.
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