The 2017-18 financial year was a year of huge differences between the returns of bonds and equities.
This was an environment where there was a potential trade war between the US and China, a potential war between the US and North Korea – and then peace talks, and where central banks started raising interest rates after a long period of very low rates. As with most worrying headlines, none of these led to disaster. The potential trade war and rising interest rates are two issues that we continue to monitor for their impact on your investments.
Growth assets – shares, property and infrastructure – all achieved double digit returns for the financial year. The best returning asset class was private equity at 25.4% (after investment fees and costs but before tax). Private equity means shares in companies that aren’t listed on stock exchanges. They’re often shares of younger companies with high growth potential, hence the higher returns.
The defensive assets which include government bonds and corporate debt delivered a positive return, but were all below 5%. Global government bonds were the lowest with a return of less than 1%. This level of return is to be expected in a rising interest rate environment. Interest rates are low so cash yield from the bonds is small, while rising interest rates means that the market value of the bonds will fall.
This pattern of returns, where debt and equities complement each other in the short-term, is what we typically expect to see. The fact that defensive assets usually perform well when equities fall smooths long-term returns and is the reason that we diversify between different types of investments.
The thing that made this year stand out is that the performance difference between defensive assets and growth assets was more than 10% which is much higher than most years. This difference caused a bigger than usual spread between the performance of our diversified options. It also means performance surveys published by the media need to be read with extra care this year, as funds that fall into the same group may have quite different asset allocations and this can explain performance differences.
It was also a year where the two halves showed different performance patterns. In the first half of the financial year all asset classes had positive returns, many at levels well above our long-term expectations. In the second half of the year returns were more mixed, with most growth assets still performing well but defensive assets struggling. The market volatility that caused issues in the second half is likely to continue for some time yet.
We expect the gap between defensive and growth assets to reduce this financial year to more normal levels. Overall we expect returns to be moderate, as defensive asset classes can’t produce high returns from here, and growth assets look expensive and are exposed to market and geopolitical risks. We have positioned the portfolio to reflect this. A question that’s sometimes asked is why we bother with government bonds when we expect low single digit returns. The answer is that in the event of an equity market fall, they’ll be the best performing assets as central banks lower rates and bond prices rise.
The trustee of Tasplan Super (ABN 14 602 032 302) is Tasplan Pty Ltd (ABN 13 009 563 062). AFSL 235391.