It has been a great year – really!

Co-founder of the Switzer Report
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You wouldn’t know it from all the negativity out there but financial year 2014 has been a great year for most investors – really! And the economy hasn’t done that badly, either. I am indebted to the CommSec team and Craig James who pointed this out in a report last Wednesday entitled ‘Economic Insights: A good year, or a very good year?’ Before returning to examine how our investments have performed, let’s take a closer look at the big picture with the economy.

The big picture

If you ask two economists the same question, you often get two totally different answers, so it is not surprising that there is no single way of declaring that the economy today is better than it was a year ago. However, by looking at a range of measures, it is pretty clear that it is no worse off, and arguably, a bit stronger.

For the 12 months to the end of March, the economy grew at 3.5%. Over the financial year, growth should come in at around 3.0% (compared to 2.6% last year), and is set to grow (according to CommSec) at 3.3% next year. Inflation has ticked up a touch, but should ease, and unemployment is sitting just below 6%. That disguises a firmer start to the employment market in 2014, with 98,000 new jobs added in the first five months, compared to just 60,700 for all of calendar 2013.

The external scorecard (the financial markets) conveys a rosier picture. Dollar up, interest rates and bond yields down, sharemarket up.

The Data – Then and Now

Sources: RBA, ABS, S&P

A great year for investors

Apart from those investors who rely on income from cash or term deposits, financial year 2013/14 has been a top year. The sharemarket is up by 12.84% to last Friday (17.66% when dividends are included), residential property is up by 9.27%, and a narrowing in credit spreads and a small fall in bond yields, means fixed income investors will also have enjoyed a small capital gain.

Let’s start with the property market. While the gain in home prices has been most marked in Sydney, all capital cities have outperformed inflation, and on an aggregate basis, RP Data-Rismark says the market is up 9.27% so far this financial year.

Increase in home prices this financial year

Source: RP Data-Rismark Daily Home Value Index, 30 June 2013 to 22 June 2014

With dividends, share market investors are looking at close to 18% returns this financial year. Interestingly, all sectors are showing positive returns – and while investors in the financial sector are being rewarded with a total return of just over 23%, the worst performing sector (consumer staples) has still returned 5%. By historical standards, the gap between the ‘best’ and ‘worst’ sector is pretty tight.

The financial year picture also disguises a tale of two halves – while the first half of the year was pretty strong, the market since the start of 2014 has only returned 3.24%. Also, sectors like materials bottomed around June last year – so while it is showing a gain this financial year, since January 2013, the sector’s total return is negative at -4.37%.

Sharemarket total returns by sector this financial year

Source: S&P Accumulation Indices, 28 June to 20 June 2014

Implications for investors

Perhaps the most obvious implication is for us to snap out of our lethargy and recognize that things are pretty good. Low inflation, economic growth over 3%, an Australian dollar near parity, record low interest rates, unemployment under 6% and high investment returns are indicators of a strong economy. Let’s feel the wealth!

More specifically, time to crunch some numbers and see how our investment portfolio or SMSF has performed this financial year and compare it to the market. Any such comparison of course needs to compare “apples with apples” – so we need to adjust the expected return according to our asset allocation and risk profile. With this in hand, the obvious question to ask is: “how good a job have I done as an investment manager?”

For example, let’s assume your SMSF has a ‘balanced’ profile (approximately 60% in growth assets and 40% in income assets), with the asset allocation as per the following table. Multiplying the market return by the allocation percentage, we can calculate the expected contribution from each asset class. In this example, the expected return from the total portfolio is 11.7%.

* Price return on US S&P 500 in AUD, from 28/6/13 to 20/6/13

By comparing the performance of our SMSF to the expected return, we are in a position to answer in part the question above and if necessary, take some action. Of course, the return in the example is calculated on a ‘pre-tax’ basis – if our fund has a major weighting in shares paying fully franked dividends, its ‘after tax return’ may actually be higher. And, it is the ‘after-tax’ return that counts.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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