The launch of the comprehensive Australian Equities Database (AED), spanning 1926 to the 1970s, has provided new lessons for SMSF trustees and members on return expectations, investment decisions and time horizons.
The Australian Centre for Financial Studies (ACFS) and Vanguard Australia jointly released the AED, which was compiled from disparate share exchange gazettes and company reports.
Key findings were that low returns were comparable with past experience, market volatility was higher than before the 1970s and that the Australian market was highly concentrated.
“[What SMSF trustees] can take away from this is around framing expectations of returns,” Vanguard Australia head of market strategy and communication Robin Bowerman told selfmanagedsuper.
“Typically, people with SMSFs have had a great run with increasing dividend yields and franking credits et cetera, but we’re now in an environment where interest rates are at record lows.
“Yet looking over the last 90 years it’s not that abnormal, and it has happened for significant amounts of time in the past.
“SMSFs need to think about what were their expectations on their portfolios and that the 5 per cent to 7 per cent range may be the reality going forward. So it’s about adjusting their expectations.”
Bowerman said another significant finding was that market volatility seemed higher than it historically has been.
“So we need to get used to the idea that perhaps we have to live with more volatility, and that’s an argument for being prepared to ride through it and that short-term approach is a really difficult thing to do in terms of timing,” he noted.
“From Vanguard’s point of view it comes back to the argument for diversification – making sure you’re diversified within the share market, investing internationally particularly using exchange-traded funds (ETF) et cetera.
“Back in the ‘30s and ‘40s it was almost impossible to buy US shares, but now you can get them for 5 basis points from an ETF, so the tools that are there now for people to diversify are fantastic.”
“It doesn’t mean you have to [invest] in everything but it’s about assessing what’s the right asset allocation depending where you are in risk, your age, when you’re going to reach retirement. But what’s the asset allocation that actually works?”
Further, Bowerman cautioned SMSFs about judging the longevity of companies, particularly with the plethora of new fintech names.
“Another good question for investors to ask themselves is whether this is a long-term play or a short-term speculative [decision]. Is it a gamble?” he said.
“At a conference presentation earlier this year, it was revealed that the average life of Fortune 500 companies in the US has reduced from around 40 years down to 25 years. That just shows the nature of the pace of change occurring.”
ACFS research director Kevin Davis, who completed preliminary research using the AED, added that the question of dividends was now very important as many SMSFs were concerned with dividend yields.
The data series in the AED was compiled and verified by ACFS research fellow John Fowler.
It provides an unprecedented 90-year view of Australian equities.