When making investment decisions, it is useful to have knowledge of the long term performance of different asset classes. While historical returns do not guarantee future returns, long term performance data can still give us some idea of which asset classes tend to produce the highest returns in the long run.
Below we break down the Australian share market into three sub-groups to look at the performance of different sectors. The resources group includes only mining, oil and gas companies; property includes listed real estate companies; while industrial covers every other industry. For reference, we have also included the performance of New Zealand shares and United States shares as well as the decline in the purchasing power of Australian money (Australian inflation).
Notes: Gross returns before tax and transaction costs from 1 August 1986/1996 to 31 July 2016. Source data from Morningstar, Bloomberg, ABS, Macquarie, Milford estimates. Australian shares: S&P ASX 300 indices. New Zealand shares: S&P/NZX All NZD. US shares: S&P 500 USD
We can see that industrial shares have produced the highest return over the past 20 and 30 years while resources have performed poorly relative to industrials and property. The poor performance of resources reflects the difficulty in the mining, oil and gas businesses. Large sums of money are invested in the exploration and development of resources but earnings are then susceptible to the vicious swings of commodity prices. This is one of the reasons why Milford favours Australian industrial companies over resource companies (the other reasons being the volatile nature of resource returns and Milford’s investment capability in industrial companies compared to resource companies).
Australian property shares have produced very good returns, especially when considering that these businesses are generally lower risk than industrial and resource companies. Milford has a significant amount of listed property investments in Australia which are currently benefiting from the low interest rates around the world and demand for high dividend paying companies.
It is worth explaining the relatively weak 7.0% per annum performance of New Zealand shares over the last 30 years. The starting date of August 1986 excludes a couple of very strong years in the lead up to the 1987 New Zealand share market crash but includes the weak years of the bear market that followed. The mid-to-late 80’s returns in Australia and the United States had far smaller swings, both up and down, than in New Zealand. The 9.3% per annum return of New Zealand shares over the last 20 years excludes this effect and shows that New Zealand shares have performed very well, 1% ahead of United States shares and marginally ahead of Australian shares as a whole.
Notes: Gross returns before tax and transaction costs from 1 August 1986/1996 to 31 July 2016. Source data from Morningstar, Bloomberg, ABS, Macquarie, Milford estimates. Australian shares: S&P ASX 300 indices. New Zealand shares: S&P/NZX All NZD. US shares: S&P 500 USD. Logarithmic scale used with base of 2.
William Curtayne
Deputy Head of Australian Investments
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.