One of the reasons Kerr Neilson has been a long-run hit with investors is that he is a great communicator. Not so much as an entertainer – there tend not to be too many jokes – but in his ability to awaken his audience to little-known facts to prove a point.
In much the same way as the celebrity documentary maker Stephen Fry did with his part-comic television program ‘QI’ (which stands for ‘quite interesting’) the founder of Platinum Asset Management addressed more than 600 attendees at the annual Morningstar Investment Conference in Sydney on May 24, with a sprinkling of facts about investing which gave one pause to think.
A well-known critic of residential property as an investment, for instance, he used this example to question, even, the value in the real rise in Sydney house prices over the past 16 years.
“If you bought a home in 2000 for $500,000 and sold it in 2016 for $2 million, a four-fold increase, you would think that was very good,” he said. “But that’s a compound rate of 8 per cent.” Less, of course, after maintenance and charges such as rates and, perhaps, body corporate fees.
He split the investment universe into sectors which had either ‘low conviction’ among investors or ‘high conviction’. He then split those into the areas for which there was ‘weak evidence’ of their actual performance over long periods or ‘strong evidence’.
The ‘low conviction’ sectors historically for Australian investors are global bonds and global shares. The ‘high conviction’ sectors are, you guessed it, residential property and Australian shares.
But there is only weak evidence to support those levels of convictions for both residential property and global bonds, but strong evidence support those convictions in global shares and Australian equities.
Over the past 10 years global shares have returned 7.5 per cent a year and Australian shares 5.1 per cent. For shares in general, for the 21 markets for which there is data, there has been a 5.1 per cent real return (after inflation) a year, on average, between 1872 and 2016.
“There’s a bias towards the upside with shares,” he said. “For example, taking the two worst five-year periods in known history, from October 1929 and September 2000, the losses were about 16 per cent, but immediately afterwards there was a three-fold increase over the subsequent 15 years.”
And times of war deliver interesting results. It helps a lot if you win the war, but not always. For instance, the US market was up 22 per cent during WWII, but down 18 per cent during WWI (admittedly, the US involvement in WWI was more limited than other countries). Japan, also involved in WWI on the side of the Allies, was up 66 per cent but it was down 96 per cent during WWII. Germany, who lost out in both wars, was down 66 per cent during WWI and down 88 per cent in WWII.
Looking forward, Kerr predicted that the surge in corporate profitably which occurred in the second half of the last century, due to “extraordinary” technological advances, was unlikely to continue.
He is bullish on resources over the long term, even though there is a tendency to be a levelling off in demand as countries mature in their economic development and enter a service-industry phase. For instance, helped by the increasing use of electric cars – which have already been legislated as compulsory by 2030 by Beijing and Brussels, the demand for copper is set to double. And “we will still be using oil and coal for years as emerging markets start to enjoy better living standards”, he said.
But lower returns in developed markets compared with emerging markets in the future will not be even. “There will be some wonderful returns from what look like boring companies,” Kerr said.
Adding his own historical observation at the same session at the Morningstar conference, Michael Hasenstab, the CIO of Franklin Templeton Investments, said that equity portfolios and bond portfolios that were idiosyncratic (away from the index) gave better diversification for investors than typical equity and bond mixes.
He said it was in October 2016 when Modern Portfolio Theory blew up. It was when the US would stay in the doldrums and “no-one” though Trump would win the presidency of the US. Both, perhaps interlinked, were wrong.
Jamie Wickham, the managing director of Morningstar in Australasia, who opened the conference, said the company’s aim was to create great products and services and to produce innovative thought leadership and events, research and tools to help advisors build robust financial strategies for clients.
Greg Bright is publisher of Investor Strategy News (Australia)