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Investors who haven't held shares of smaller companies such as A2 Milk over the past 12 months have had a rough time on the sharemarket. Eddie Jim
by Sam Henderson
With Brexit now behind us and further gyrations in the share market upon us, it's worth considering the future performance of your self-managed superannuation fund under a new global paradigm as the financial year winds up. I'm not referring to the new paradigm being a European Union without Britain. America will dismiss that little hiccup curtly as the world's biggest economy moves on to internal politics and domestic growth.
The paradigm to which I refer, and to which SMSFs are acutely in denial about, is the potential for interest rates and bond yields to remain at record low levels for many years. I'm also highlighting the fact that multiple global and geopolitical events keep arising that provide a potential catalyst for further rate cuts here in Australia to combat slowing economic growth and weak earnings.
Consider the Consumer Price Index and its paltry increase of just 1.3 per cent for the year to the end of March. Despite record low interest rates and rising house prices (on the east coast), prices are not increasing and in many categories, prices are actually falling. The cost of essentials like housing and food have remained fairly stable with health care being the biggest contributor to rising prices.
Wages rose just 1.7 per cent overall for the year to November 2015. Interestingly, male wages rose just 1.1 per cent and the ladies eclipsed that rate with a whopping 2.7 per cent growth rate.
With this all in mind and with elections both here and in the US, the big question is: where do you invest in the remainder of 2016? Where indeed to invest in the new financial year?
With the All Ordinaries sitting at around 5200, against expectations of 5955 about 15 months ago, it's fair to say that investing in Australian shares has been frustrating for SMSF investors. Frustrating because we know SMSF investors love cash, the banks and the rest of the ASX top 20 stocks. Tough time
According to the Tax Office figures from June 2015, SMSFs held $157 billion in cash and $187 billion in Australian shares, far outweighing other asset classes. With term deposits yielding about 2.5 per cent and the sharemarket 10 per cent lower than it was 15 months ago, SMSFs have had a tough time of it.
Major companies have lost their shine. Aldi is eating away at rival supermarket chains Woolies and Coles, while the Australian Prudential and Regulation Authority is imposing tighter capital requirements on the banks.
If you haven't ventured into property listings company REA Group, pharmaceutical group CSL or Ramsay Health Care, not to mention Blackmores, the vitamins manufacturer, Domino's, the pizza group, Bellamys, the organic baby food producer or A2 Milk, then you would have had a fairly torrid time on the Australian sharemarket.
Let's revisit the CPI figures. With price growth in most areas fairly flat, the big movers were healthcare and insurance. While I'm not a fan of insurance owing to the risks, healthcare is of great interest. CSL has been a great performer for me. On the back of reinvesting earnings into research and development and the development of new products, the share price has risen to an all-time high of $117. Improve earnings
The CPI figures also showed that hospital service costs grew 6.2 per cent in the year to March 2016 and pharmaceuticals rose 4.8 per cent. Consider the rise of the Ramsay Health share price at $73. The share price has risen by about 33 per cent a year for the past five years. So too, Sigma Pharmaceuticals shares have risen 52 per cent for the year, having added 24 per cent a year for the past five years. Whilst these shares may be expensive as a result of the price moves, the companies are examples of those able to improve their earnings in a flat market.
The important point here is that SMSFs are conservative and historically have been interested in the ASX top 20 stocks and cash. Both of these investments have performed poorly in the past 12 to 18 months and that trend is likely to continue. In this new paradigm of low and falling interest rates, unless you're willing to change your methods and expand your research beyond the ASX 20 and cash, then its maybe a steep and very expensive learning curve.
Active portfolio management is alive and well in 2016. The new financial year is likely to be a repeat of the past 12 months. Advice has never been more important and changing the way you think about markets has never been more necessary if you want to maintain your lifestyle in retirement.
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