For those investors who still like to try to pick next year’s top-performing asset class, the Russell Investment Group’s annual long-term performance numbers for the major asset classes after fees and taxes, published last week in association with the ASX, should provide interesting reading.

But, if it is read in conjunction with the Mercer Investment Consulting annual survey of new mandates searched for, the implications are potentially disturbing. As all investors should know, and Russell’s chief investment officer, Peter Gunning, points out, the best-performing asset classes of the past 10 or even 20 years are not necessarily going to be tops over the subsequent periods. In fact, for a single year, an investor is usually better off choosing an asset class which has underperformed. The figures are not surprising given the way markets have behaved over the past decade or two. Australian listed property outperformed all other domestic asset classes in the 10 years to December last year on both a before and after-tax basis, while Australian shares achieved the highest returns for the 20-year period. On a pre-tax, but after costs basis, global listed property outperformed over the 10 years. And overseas shares underperformed Australian fixed interest over 10 years, pre-tax but after costs. But Russell’s Gunning says: “For example, the best long-term performing asset class during the 1990s was international shares [highest performer for the 10 years to 1991, 1992, 1993, 1994 as well as 1998, 1999, 2000, 2001] followed by Australian bonds [for the 10 years to 1995, 1996, 1997].” But even institutional investors are prone to get into investments after they have been through a long bull run. The Mercer survey of its searches on behalf of institutional clients around the world in 2005, shows an interesting trend in Australia. The proportion of Australian property manager searches for Mercer clients jumped from 10.9 per cent of all searches in 2004 to 23.7 per cent in 2005, making it the most popular asset class for search activity. To put that in perspective, Mercer did 97 searches for Australian clients last year, with a total value of $US3.9 billion – making for more than $A1.25 billion new property manager searches. Now this doesn’t prove a big late swing into property but it does indicate a heightened positive awareness – clients don’t engage in searches for new property managers when they are exiting or under-weighting the asset class. Gunning said that, in addition to the obvious tax impact, the report served to remind investors of the cyclical nature of markets, and the dangers of market timing. “While the report presents a useful view of long-term investment performance, it is unfortunately not indicative of how asset classes might perform in the next 10 or 20 years … “The big take-home message for investors, however, is the magic of superannuation. Under the Government’s proposed Budget measures, people will have more flexibility to keep adding to their super, effectively allowing high-income earners to invest at 15 per cent and reap the same improved returns of the lowest marginal tax payers.”

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