Australian Investment Performance 1960 to 2005

After publishing a series of SuperMail articles, comparing long-term performance of two Australian investment sectors, Colin Grenfell, Superannuation consultant, Actuary and Associate Director of SuperEasy, has now written a paper on the topic.

Hundreds of articles about investment performance are published regularly in Australia with ever-increasing frequency. Often they cover just ordinary shares or pooled funds and sometimes they cover a limited range of investment sectors. The performance usually relates to the last few months or last year, sometimes the last 3 or 5 years, very occasionally the last 10 or 20 years. Mr Grenfell's latest paper, "Australian Investment Performance 1960 to 2005" is an unique document, covering 45 years (or 179 quarters) of Australian Investment performance. The paper was presented to the Institute of Actuaries of Australia (IAAust), at the 2005 Biennial Convention, held from 8 May - 11 May 2005, in Cairns.

Herewith, we are bringing some excerpts from Mr Grenfell's paper:

"The objective of this paper was to help bridge the gap between the demand from actuaries (and consumers) for robust assumptions in respect of future investment returns across a broad range of investment sectors, and the limited supply of data readily available for a range of investment sectors."

"The advent of unit price data in Australia 40 years ago, through National Mutual's "EFG" system, provided both the inspiration for this paper and a substantial database of investment performance statistics, across a broad range of investment sectors."

"The paper developed and summarized assumptions sets for medium to long-term use in stochastic investment models, across the range of investment sectors and economic indicators that were examined. In determining those assumptions, the paper has illustrated techniques for 'backdating' incomplete data series for use, particularly, with cross-correlation and autocorrelation analyses."

The analysis covers eleven investment classes plus four financial indicators:

Growth Securities

Interest Income

Financial Indicators

Australian shares

Australian fixed interest

CPI

Int’l shares (unhedged)

Int’l fixed interest (hedged)

AWOTE

Property trusts

Government semis (0-3yrs)

90 day bill rates

Direct property

Inflation linked bonds

10 year bond rates

 

Loans (floating rate)

 

 

Mortgage Trust

 

 

Cash

 


For each of these 15 "sectors" the annualised average results are tabulated and summarised for:

  • risk margins (over 10 year bond rates),
  • coefficients of variation,
  • skewness,
  • kurtosis,
  • cross-correlations, and
  • auto-correlations.

For the purposes of the paper, risk margins are calculated relative to ten year bond rates. The risk margin (sometimes referred to in other publications as `risk premium' or `equity risk premium') is the excess of the sector annual investment return over the annualised effective point-in-time bond rate. The coefficient of variation is equal to the mean (or arithmetic average) divided by the standard deviation.


Investment Assumptions

Sector

Risk margin

(arithmetic

average)

Mean rate

(arithmetic

average)

Coefficient

of

variation

Standard

deviation

of rates

 

 

 

 

 

Australian shares

4.0%

10.0%

1.600

16.0%

Int’l shares (unhedged)

4.0%

10.0%

1.600

16.0%

Property trusts

3.5%

9.5%

1.221

11.6%

Direct property

1.2%

7.2%

1.000

7.2%

 

 

 

 

 

Australian fixed interest

1.0%

7.0%

0.700

4.9%

Int’l fixed int. (hedged)

0.8%

6.8%

0.691

4.7%

Inflation linked bonds

1.0%

7.0%

0.800

5.6%

Cash

-0.5%

5.5%

0.490

2.7%

 

 

 

 

 

90 day bill rates

-0.5%

5.5%

0.527

2.9%

10 year bond rates

0%

6.0%

0.384

2.3%

AWOTE           

-2.25%

3.75%

0.600

2.25%

CPI

-3.50%

2.50%

0.700

1.75%



Click on the link below to download the paper (PDF):

Australian Investment Performance 1960 to 2005