Growth stocks still the best bet as returns go backwards

Growth stocks still the best bet. Picture: NCA NewsWire / Jeremy Piper

Whoa! Just a second! Investors tied to their home-based PCs for the last six months are getting very excited about a rebound.

And there has been a rebound: the outlook for shares, residential property and gold has improved. But we are nowhere near back to a passably functioning economy — local or global.

That’s why if you look at your investment portfolio or super returns for the last 12 months you will be doing well to have advanced or rebounded at all.

Our best guide to overall investment returns is the progress of super fund balanced options, as that’s where most people have most of their money.

So how are they doing? Well, according to SuperRatings, the returns for the median balanced option over the past 12 months is minus 0.8 per cent. For the year to date (to the end of October) it is worse at -2.5 per cent.

Much as we enjoy reporting on investment news in an accelerating news cycle you, the investor, have to strip out the noise. You can’t make serious judgments on super returns over, say, a month.

Rather we invest for the long term and over the long term investment returns are declining, despite the endless attention we give to the winners, from Amazon to Afterpay.

Let’s just take a moment to look at the past. The accumulation returns on the median balanced super fund on a 10-year basis is 7.3 per cent — very nice. On a seven-year basis it’s 6.6 per cent: not bad either. On a five-year basis it’s 6 per cent. On a three-year basis it is 4.7 per cent. You get the picture.  Now a chorus of SMSF operators and star fund managers will tell us that they have done much better than this, and no doubt they have — some individual funds will always outperform.

But for the majority these are the sort of numbers they are working with because the reality is that — whatever the perceived outlook — our share and property markets have been at best flat for the last year while fixed interest offers very modest returns.

The average Australian is more likely to read about Amazon or Afterpay than hold them. In contrast, local investment portfolios are often more exposed to NAB or Telstra — stocks that have reduced dividends and operate on share prices that are lower than they were five years ago.

No wonder top investors such as the Future Fund have kept their powder dry. The fund lifted its cash holdings from 14 to 20 per cent in the last nine months — any more cash on hand and the fund will have as much as the average SMSF operator (if we are to take the ATO returns seriously).

The post-Covid market

Over the last month the mood across investment markets changed for the better.

Major variables for investors are, if not decided, at least coming into view. We are close to a US election outcome; we are close to a range of COVID vaccines.

Yet we still have low rates and a weak labour market — these are ideal conditions for share investors and adventurous residential property investors.

The biggest theme bubbling away in the markets is a potential return to value — that is, the old fashioned profit-making industrials and financials with strong track records: banks, property trusts, telecoms stocks.

We saw our version of this stepchange on the ASX this week when traders sold off the growth favourites — Afterpay, NextDC, Wisetech — and swung towards beaten-up cyclicals such as property trusts Unibail Rodamco (Westfield), Scentre et al. Money poured into Qantas and Sydney Airport too.

It’s clear value stocks could be re-rated in the months ahead — and the more extreme examples of companies that popped in the COVID panic will now face tougher times.

The bigger question is whether the market have new winners — will the big winners from the structural shifts of the COVID era recede to be replaced by something new? Most unlikely.

Nobody knows the future, but the stockpickers at the annual Sohn Hearts & Minds Investment Conference, held online on Friday, can call it better than most.

If you look across the stocks these investment gurus picked for the year ahead, the long-term structural nature of what we witnessed over the last six months is reinforced: the stocks picks are in online retail (Temple & Webster), digital payments, telehealth, online collaboration … and online grocery delivery (Hello Fresh).

There were few stock picks in the Sohn selection that could be classified under value or beaten-up blue chips. Rather the stocks chosen represented a view of the future which sees an extension of what we saw this year.

As Professor Scott Galloway of NYU Stern School of Business said in his keynote to the conference, the big winners of the crisis are going to keep being the big winners: “Whenever there is the culling of the herd, the elephants that have survived just have more foliage to feed off,” he explained.

Many investors may have missed the first phase of the great change across investment markets that occurred while our broader investment returns went nowhere — there is no reason to miss the next phase.