Investors in commonly-held shares are still in front…despite a raft of tumultuous events over the past 13 years, Mum and Dad shareholders are still in front. Returns on the CommSec Mums and Dads share index have recorded 6.1 per cent compound annual returns since 1999.
But investors could have still done better. Many people got their start in the sharemarket by investing in demutualisations and government privatisations.
The CommSec Mums and Dads index was devised over a decade ago with this in mind. But investors would have done even better by embracing resource stocks over time, potentially achieving 8.6 per cent compound annual growth over the past 13 years.
Has the market bottomed? There are similarities between the market trough and recovery in March 2009 and the sharemarket moves over the past month. No one rings a bell when the market hits highs or lows. Investors must stay alert.
The CommSec Mums and Dads share index
- Australian investors have come a long way since the late 1990s. For many Aussie workers in the 1980s and 1990s, shares were considered volatile and inherently risky investments. Many preferred to put their savings into term deposits or property and leave share investments to their superannuation funds.
- But government decisions to sell assets like Telstra and gaming firms opened up share investing to more ordinary Australians – if you like, Aussie mums and dads. Demutualisations of financial groups like Colonial, IAG and AMP further boosted share ownership of Australians.
- The CommSec Mums and Dads index was devised to reflect this development. That is to cover stocks that essentially gave investors their start in the sharemarket.
- Over time, some of the companies have come and gone. But the companies that have been represented in the CommSec Mums and Dads index over time include: AMP, Colonial (now CBA), CBA, Coles Myer (now Wesfarmers), IAG, Qantas, Suncorp, NSW TAB (now Tabcorp), Tabcorp (structure has changed), Telstra (various floats) and Woolworths.
- As noted, some of these companies have been the subject of demutualisations or privatisations. Others are readily identifiable household names such as Coles Myer or Woolworths.
Returns on the CommSec Mums and Dads share index
- There is no easy way to calculate returns on the CommSec Mums and Dads share index over time. As mentioned, some companies are still with us, some exist as part of larger groups. But when calculating returns, it is clear that total returns need to be considered – capital appreciation as well as dividends. Even then the process isn’t easy as some investors reinvest dividends, some take the cash and then there are buybacks and rights offers that may be taken up by investors.
- Using data supplied by CBA Quant we have assessed total returns on stocks since 1999. There are six stocks in the CommSec Mums and Dads index that have been there since the inception in 1999: AMP, CBA, Qantas, Suncorp, Telstra and Woolworths. If $100 was invested in each ($600) the portfolio would have been worth $1473.50 at the end of 2011, a compound return of 7.2 per cent a year.
- For the wider group of 11 CommSec Mums and Dads stocks, the calculation of returns is more difficult reflecting different entry and exit points on the sharemarket. And assumptions need to be made, such as whether investors rolled over investments into takeover partners.
- But we estimate returns on the broader CommSec Mums and Dads index ($1,100) amounted to $2,387 at the end of 2011, a compound return of 6.1 per cent a year since 1999.
- If $100 had been invested in the broader sharemarket (All Ordinaries) we estimate that it would have been worth $249 at the end of 2011, a compound return of 7.3 per cent per annum.
Mums and Dads index underperforms?
- On the results noted above, the CommSec Mums and Dads index has underperformed the broader sharemarket over the past 13 years. But as always the actual results will vary with each investor. That is, did the investor hold all the stocks in the CommSec Mums and Dads index for the entire period and were investments evenly spread across all stocks? Clearly there are simplifying assumptions and each investor’s experience would have varied.
- But there are valuable lessons that can be learnt from a theoretical exercise such as the CommSec Mums and Dads index.
Investors have achieved returns over time
- One important conclusion from the exercise is that investors have managed to achieve attractive returns despite a raft of negative influences over the past 13 years. Investors have had to contend with the bursting of the technology bubble, gyrations in the Australian dollar from record low to 30-year high, the Global Financial Crisis and the European Debt Crisis – to name just a few.
- The CommSec Mums and Dads index has produced compound returns of 6.1 per cent over the past 13 years and the All Ordinaries has returned a 7.3 per cent compound annual return. By contrast the compound return on cash (assuming investments at the cash rate) over the same period was 5.2 per cent per annum.
Different portfolios, different results
- Why the difference between the CommSec Mums and Dads index and the All Ordinaries? One important difference – especially in recent years – has been the performance of resource stocks. If just two stocks, BHP Billiton and Rio Tinto, were added to the CommSec Mums and Dads index then we estimate compound annual returns would have been 8.6 per cent rather than 6.1 per cent since 1999.
- The key point is that investors must always review portfolio performance if the aim is to maximise returns. Even with the CommSec Mums and Dads index, there have been enormous differences in stock performance over time. For instance $100 invested in Telstra in 1999 would now represent $88.90. Still if you went back to September 2010 the investment would have been worth only $63.60. And then there has been Woolworths where $100 in 1999 would now be worth $703.90.
The value of diversification
- If an investor just chose one or two stocks of the CommSec Mums and Dads index and didn’t assess performance over time, the results may have proved very different. For instance if Telstra and AMP were held over time and perhaps Qantas was thrown in for good measure then the portfolio would be worth less now than 13 years ago. Still, if the investor chose Woolworths and the Commonwealth Bank then a $200 investment ($100 in each) would have grown to over $1,100.
- The old adage of not putting all your eggs in one basket is clearly demonstrated through a simple example such as the CommSec Mums and Dads index. Tracking actual returns on commonly-held stocks highlights the truths of simple concepts as diversification.
Time in the market
- Another old adage is that it is time in the market, not market timing that matters. That’s not specifically correct as most investors would attest. Certainly if you are constantly assessing the landscape, and read the signals correctly, then you will profit from the diligence. For instance March 6 2009 was the low point for the sharemarket after the Global Financial Crisis. You may not have identified this turning point at the time and invested everything into shares, but if you did sense the improvement in the investment landscape and gradually put more money to work in then sharemarket, then you would have benefitted from the experience. Over the five months from March 6, the sharemarket rose almost 40 per cent.
- Over the first three weeks of 2011 global sharemarkets have consistently lifted. The All Ordinaries has risen by 4.3 per cent, the US Dow Jones has lifted by 4 per cent and the German Dax has risen by 9.1 per cent. European sharemarkets have risen for five straight weeks. Whether the healing process is indeed here for good remains to be seen, but it is a trend worth watching.
- Since 1999, returns on Telstra have shrunk while returns on BHP Billiton and Rio Tinto have well and truly out-performed. But much can change when you assess returns over different time periods. From March to December 2011, returns on Telstra rose by almost 24 per cent, while returns on BHP Billiton fell 25 per cent and Rio Tinto fell by 28 per cent.
- Investors will have different risk preferences, different investment time periods, different preferences on types of returns such as capital appreciation and dividends and will assess situations differently. But there is no substitute for staying on top of your investments and the investment landscape, whether you prefer cash-based investments or a mix of assets in your portfolio.
What are the implications?
The investment landscape is constantly changing. Currently investors are maintaining a super-cautious approach to investments, preferring cash-based investment over most other asset classes. But a simple approach such as the CommSec Mums and Dads index is useful in highlighting investment concepts such as diversification and market timing and the risks of failing to rationally assess the investment landscape.
The CommSec Mums and Dads index has a healthy mix of under-performers and out-performers when viewed over the last 13 years. And the past 13 years has clearly been a challenging period for investors. But despite all the challenges, both the CommSec Mums and Dads index and All Ordinaries have out-performed a simple cash-only strategy. Still it is important to closely review portfolio strategy and changes in the investment landscape so that you take advantage of opportunities as well as protect your wealth.