Shares have underperformed on a risk-adjusted basis for NZ investors over the last two decades, according to a new analysis by actuarial consulting firm Melville Jessup Weaver (MJW).
The study, which back-tested three notional portfolios over the 20 years to end December 2015, found that despite an overall favourable period for stock markets, growth-heavy investors were not duly rewarded.
“… returns from shares have not outperformed bonds as much as an investor would have ideally liked, given the risks inherent with share investments,” the MJW report says. “This is in the main due to bond markets benefitting from a steady fall in interest rates over the period.”
Both the model growth and balanced portfolios – with 80 per cent and 50 per cent allocated to shares respectively – gave NZ investors a 7.8 per cent annual return over the 20-year period. Meanwhile, the MJW-constructed income portfolio, comprising just 20 per cent of equities, returned 7.2 per cent over the same stretch of time.
“The returns from the portfolios haven’t quite worked out as the asset consultant’s assumptions expect,” the MJW study says. “If they had the return on the balanced fund would have been less and similarly the return on the conservative fund would have been a lot weaker. What has driven this outcome is the 20-year bull run in bond markets.”
Across all the portfolios, global bonds outweighed local fixed income allocations on a 2:1 ratio while the shares component was split 3:1 between global and Australasian assets (divided evenly between NZ and Australian equities).
MJW says the three portfolios approximate the average asset allocations of current KiwiSaver fund settings.
The models assumed 100 per cent hedging on global bonds and 50 per cent hedging on offshore equities (excepting Australian shares which were unhedged).
Currency strategies had an outsized impact on global equity performance with the unhedged MSCI returning an annual 5.7 per cent over the 20-year period compared to 8.4 per cent for the half-hedged
“… most of the variance from the hedge result… was due to the value of the forward points – a big bonus,” the report says.
Over the two decades, NZ investors saw virtually identical results from both local and Australian equities, which returned 8.6 per cent and 8.7 per cent respectively.
“But over this period the NZ market was weak for the first five years and arguably the outcome for the last five years has been exceptional and possibly partly due to the impact of the inflow of KiwiSaver funds into the market,” the MJW study says. “This result has supported the often-pursued strategy for some charities of a high allocation to NZ shares. But questions abound as to whether this is the right strategy going forward.”
Overall, MJW says the experience of the last 20 years reinforces the need for investors to be “crystal clear” of their fund’s purpose and liquidity requirements.
“And [investors should be] realistic that when markets go down the great majority of investors lose money and the exceptions are far and between albeit that the stories of those who did not will abound in the media,” the report says.