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Smart investing
A tale of two scorecards
April 26, 2007
Robin Bowerman
There are many parallels that can be drawn between investing and playing sport – a key one being the importance of keeping score.
Unfortunately with investing there are a number of scoreboards to choose from. There is the daily market scoreboard, the before fees and taxes scoreboard, the after fees but before taxes scoreboard and finally the scoreboard that really counts – the one that tells you what the investment is worth after fees and taxes.
And then there is the powerful influence of the time clock. Knowing how much time is left to play can be the difference between crisis mode and sticking to the game plan. With the stockmarket there is a lot of focus on the short-term – be it daily or even hourly when markets are volatile. But it is the long-term result that really matters for most individual investors and the Australian Stock Exchange is to be commended for annually releasing its performance comparison of different asset classes over 10 and 20 years. For people investing for their retirement that is the timeframe most have to work with – and even when retirement has begun the average person can look forward a decade or two, albeit with a different risk perspective because of the diminished ability to rebuild capital if significant losses are suffered.
Everyone loves a winner so let’s deal with that upfront. Listed property took top honors before tax but after costs over both 10 and 20 year periods to the end of December 2006.
Listed property delivered 15.8% a year in the 10 year contest and a stunning 13.2% for the 20 year period.
Global listed property was runner up while Australian shares was third with a 12.8% p.a. return for 10 years. That narrowly shaded residential investment property over the 10 years with the ASX report calculating direct property delivered 11.7% p.a.
Overseas shares where the currency risk was unhedged underperformed Australian shares by 5.2% while cash brought up the rear of the field with a 5.2% p.a. return over the 10 years.
Some people may be sceptical of a report published by the ASX that shows shares outperforming residential property but the calculations of the returns is done by international asset consultants Russell Investment Group who manage some $260 billion in assets worldwide. They used a population weighted average return across major capital cities to calculate the residential property returns using data from the Real Institute of Australia and the Australian Bureau of Statistics.
But the debate should not be whether you are a property investor or a share investor but rather the value you get from having your money spread across the range of asset classes – including the poor performers for the past 10 years cash and unhedged international shares.
It is also worth remembering that the past 10 years has been a golden period for investors in growth assets be it residential property, listed property or shares and no-one should be planning their retirement on the assumption that those past returns point the way to the future.
The reality check for investors is in the report’s after tax return comparison. Not surprisingly the report found that tax makes a significant difference to the end outcome for investors.
The study claims that investors on the top marginal tax rate paid an effective tax rate for Australian shares of around 21%, residential investment property and listed property were around 26% while fixed interest and cash naturally enough were around 49%. The lower effective tax rate for Australian shares is largely explained by the dividend imputation system.
So on an after tax basis how did the asset classes stack up?
For people on the top marginal tax rate listed property was still the winner with a return of 11.6% p.a. (15.8% before tax) but the gap with Australian shares had narrowed dramatically with shares now returning 10.1% (12.8% before tax) and residential property dropping back to 8.8% p.a.(11.7% before tax) while fixed interest was 3.3% p.a. and cash 2.3% p.a. On an after tax basis cash fell behind the average rate of inflation for the 10 year period.
As you can see when you take tax into account the scorecard can look quite different. Which raises the simple question: are investors looking at the wrong scoreboard when almost all performance return surveys published in the media do not take tax into account?
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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