As we enter not only a new year, but a new decade, for many it is the time for retrospection. Below are some of our thoughts moving into the 2020s.
The Bull Market Continues
The US share market continues to push upwards despite trade tensions, impeachment, tensions with Iran and economic growth concerns.
Share market returns have been strong across the globe, with New Zealand near the top of the pack. With such strong performance at home, even poor managers could deliver decent returns, if you focus only on the percentages.
Should we shift more of our investments to our local market following NZ's past returns?
NZ represents only 0.2% of the global stock market but makes up 5% of our share portfolios. This is an 25x overweight, implemented due to tax advantages for NZ investors.
We tend to focus on NZ more than other markets as we read about NZ companies in the news each day. In 2019, the share markets in the Netherlands, Switzerland and Ireland performed better than our own. We seldom discuss overweighting these markets due to past performance as they are never at the forefront of our minds.
These three countries are represented in our well-diversified global portfolios, along with more than 20 other developed countries. Through diversification, we can benefit from strong performers without guessing where they will arise.
Bond Markets - Slow and Steady
It is easy to overlook the performance of bonds, especially in a market where share prices soar. But bonds have continued to offer exactly what investors need in their portfolios; more steady performance than shares (for a lower return), diversification and better returns than the cash alternative.
Yet some commentators spent the decade gloomily predicting the collapse of bond markets, usually due to the policies of careless governments.
American adviser Ben Carlson says it best in his article for A Wealth of Common Sense. Below is a quote where he is discussing the performance of bonds for american investors.
“But those returns came with roughly 75% lower volatility than the stock market over this time. The largest drawdowns were just 5% and 11% respectively, for the Aggregate and TIPS while the S&P fell close to 20% on two different occasions.
And bond investors weren’t crushed by inflation, the death of the fiat currencies, government debt levels, or “money printing” by the Fed. These are all things the doomsayers were warning about in 2008, 2009, 2010, 2011, 2012, 2013, 2014, and you get the picture.”
Bonds continue to play an important role, offering a way to customise a client's portfolio to better suit their goals. We expect them to continue offering long-term returns better than cash and the short-term stability needed by investors. These key characteristics apply in all markets, even during the current low interest rate environment.
Morningstar's Manager of the Decade
The 2000s marked a disappointing time for share investors. Two bear markets, due to the tech bubble and global financial crisis, led to the "lost decade" of subdued returns.
Some investment managers were able to buck the trend, delivering high returns in a stagnant market. With the end of 2009 during near, Morningstar, the monolithic investment research company, decided to honour some of the best performers with "manager of the decade" awards.
The manager taking the prize in the US share market category was Bruce Berkowitz. Berkowitz's Fairholme Fund had delivered more than 13% p.a. during the decade, while the average US share investor was in the negatives.
How did Berkowitz, the star of the 2000s, perform in the 2010s? The Fairholme Fund ended the decade with a return of 4.5% p.a. vs the index return of 11.8%. Over ten years, this means an initial investment increased by a bit over 50% with Berkowitz while the index tripled in value.
Could it be that Berkowitz reached top place due to chance, like the oracle animals I discussed previously? The outcome of the Fairholme Fund clearly shows how past performance does not always indicate higher expected returns.
We believe long-term returns are driven by key factors, identified by decades of academic research. This is why we implement this research in client portfolios, instead of chasing past performance.