FYI | Dec 01 2020
By Peter Switzer, Switzer Report
FACT: Smart stock-picking or reliance on great fund managers gives good alpha returns
In a week's time we'll be able to test the stock market rule of thumb' that shares will return around 10% a year over a 10-year period. The IOZ exchange traded fund from iShares, which tracks the ASX/S&P 200, has been operating since 10 December 2010 so I thought I'd test this out because I often make reference to the expected return for having faith in stocks.
It wasn't a great year to kick off, as the chart shows. The kick-off price was around $20. By 30 September 2011, it was down to $16.90. You can probably blame the end of the mining boom as one reason but political instability with Labor was no help, nor was our dollar, which hit $US1.08 in May!
Also not helping was the fact that the US lost its AAA-credit rating. And over this time, the S&P 500 dropped close to 16%. As we can't resist playing follow the leader', this was bad news for IOZ investors as well.
Then it was a nice climb to around $26 by March 2015. However, the optimism didn't last. Between March 2015 and February 2016, IOZ fell to $20. That was a 30% fall!
Excuse my French but this was a crap year or so, partly created by dumb politicians. Here were the negatives that took money off stock market players:
- Chinese growth slowed and the SSE Composite fell 43% in just over two months between June 2015 and August 2015. This worried Wall Street.
- The yuan was devalued. This also spooked Wall Street.
- Commodity prices slumped as the world's most important economy for global growth slowed.
- The threat of a Grexit' was still a possibility.
- The Brexit referendum!
- In September 2015, the Coalition swapped Tony Abbott as PM for Malcolm Turnbull.
- The double dissolution 2016 election wasn't a plus, with the Government reduced to a one-seat majority.
Did I say it was a crap', year? (Excusez-moi, encore!)
This changed and it was helped by Donald Trump winning the December 2016 election.
By August 2018, IOZ was back to $26. Then Donald met Xi Jinping and trade and tariffs trumped the stock market party. However, by late 2018, trade talks had raised positivity and Trump had hogtied the Fed Chair, Jerome Powell, to cut interest rates. And the stock market took off.
There was a 25% gain from 28 December 2018 to 21 February 2020, with the unit price at $29.18. But the Coronavirus brought us back to earth and IOZ fell to $20.14 a 30% fall!
Since then it has rebounded to $27.09, which is a 34% comeback. But remember this: when you fall 30%, you need a 44% comeback to get you back to where you started before the crash.
OK, that's the story. As you can see, it was complicated with everything from Brexit to Donald Trump to question marks over China's ability to keep growing and then the damn virus!
Anyone who slammed a million into IOZ over that time has seen their capital go up and down, but it has grown by 34% or 3.4% on average over the decade.
Let's be conservative with the income paid by IOZ, but it has generally (until this year) paid over 4.2%. So the count is now 7.6% (3.4% + 4.2%). If we allow 1.4% for franking credits, we end up with a payoff per year of 9.0% (grossed up).
This isn't a bad result for an investment product that's had to deal with so many curve balls and undoubtedly makes a decent case for all ETFs out there that give you the entire S&P/ASX 200 Index.
While this is OK for a core return, remember there can be some bad years for stocks generally, as the IOZ chart above shows. That's why smart stock-picking or reliance on great fund managers can give you some good alpha returns.
I know I'm conflicted pointing to the performance of WCM because a company I have a share in brought this US fund manager to the ASX. However its return over the past 11 years shows what an above average fund manager can do.
This was data from October 30 but you can see what a very good fund manager can do. Looking for best of breed (especially when wanting to invest overseas) is a pretty good strategy.
If you want to go down the fund manager path, you should think about creating a fund of funds (maybe two or three or even more) so you have diversification and lower exposure to a manager that has a bad trot after being crash hot.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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