The search for Value

Tuesday, April 19, 2016

Markets have fallen, however, the rules of investing have not changed. This investment note takes a deeper dive on where expected investment return lies for the patient investor. By Angus Dockrill, IMFG Wealth Specialist

Short term problem; Long term perspective

It has been said we live in a ‘low return’ investment environment. Bank term deposit rates are at near historical lows, rental yields on property have been compressed and share markets have fallen over the last 12 months.  

Indeed, many experts believe we will continue to experience a low return environment across most major asset classes and investment markets for the foreseeable future. Their reasons to justify these views include the difficulty China faces in transitioning its economy, gradual unwinding of debt across global markets, the impact of an ageing population in the developed world and geopolitical issues.

If one assumes capitalism and the generally accepted rules of capital markets continue, we see more opportunity for the long term investor. Put another way, having paid the price of risk you may as well stick around for the return.

If you need a reminder on the rewards that capital markets offer, the below graph compares the growth of wealth in the Australian share market when compared with the Australian Bond Index as well as inflation for the 25 years to the end of February 2016 (refer below graph).

As outlined above, $1 invested in the All Ordinaries Share Market Index (with dividends reinvested) has grown to $9.93 (ie, the red line) – reflecting an annualised investment return of 9.58% pa over the 25 years to end of February 2016. During the same period the Australian Bond Bank Bill Index has grown to $3.80 – reflecting an annualised investment return of 5.46% pa (the blue line) and CPI inflation has increased by 2.47% pa (the green line). Clearly, the share market has delivered a significantly higher growth of wealth - albeit with a commensurately higher level of risk, or volatility, as evidenced by the red line rising and falling through various periods.

Some achieve returns higher than others

Our analysis shows share-based investments that have out performed the broader share market over the last 25 year period have significantly under performed the broader share market over the last 12 months.

We contend this presents long term opportunity for the patient and diversified investor. 

We have already established that if you had invested $1 into the All Ordinaries Share Index 25 years ago it would have grown to $9.93 (with dividends reinvested) – reflecting an annualised investment return of 9.58% pa (ie, refer to the now green line in the 2nd graph below). With reference to the below graph, evidence also shows that $1 invested in the Value Share Market Index has grown to $13.59, reflecting an annualised return of 10.96% (ie, red line in below graph) and the Growth Share Market Index has grown to $8.93, reflecting an annualised return of 9.12% (ie, yellow line in below graph).  

There is a long running debate amongst the investment management community on whether a growth or value investment philosophy is ‘better’ - a debate often coloured with self interest.  Further some may debate the composition of the various indices (back tested indices may not be perfect) and that portfolio implementation does alter the actual return an investor may receive. In any event, based on the data the above does reveal that over the last 25 years the Value Index has outperformed both the broader share market as well as the Growth Index (source: Standard & Poors Index Services Group). It should not surprise to acknowledge this relatively higher return was generated with a higher level of risk, or volatility, in the value of the investments that make up the Value Share Market Index.

The recent investment experience has been quite the opposite.  That is, in recent years the Growth Index has outperformed the Value Index. Performance for 12 months to end of February 2016:

INDEX PERFORMANCE 12 mths to end of Feb 2016
All Ordinaries Index (Total Return) -12.23%
S&P Australia BMI Growth Index (gross dividend) -10.99%
S&P Australia BMI Value Index (gross dividend) -16.52%
Relative under performance of Value vs Growth 5.53%

Is this time different? Or is there now more opportunity for the long term investor? That is, do the rules that govern investment returns remain sound. We firmly accept that to capture a higher investment return over the long term means an acceptance of a higher amount of risk.   

Long term rewards for the patient investor

"Long-term investing is about character, about depth of vision and the cultivation of patience, about who you are and who you’ve made yourself to be.” — Lowell Miller, in his book The Single Best Investment

The rules and forces that shape investment markets have not changed. An appropriately diversified portfolio across asset classes was and remains the most likely portfolio to allow you to capture the returns offered by capital markets and achieve your long term goals. 


Angus Dockrill is a professional Financial Adviser for successful people and their families in the Sydney area.  

IMFG is a financial services business with a difference. Our clients are supported by a team of specialists, not generalists. We believe that the most successful people have their financial house organised within an elegantly simply framework aligned with their dreams, vision, values and goals.

[i] Source of Data: Standard and Poors Index Services.

Identity McIntyre Pty Ltd and its specialist financial advisers Scott Douglas, Angus Dockrill, Dan Blatch and Lisette Walsh are authorised representatives of Apogee Financial Planning Limited, Australian Financial Services Licensee Registered Office at: 105 - 153 Miller Street North Sydney NSW 2060. These representatives are trading as IMFG.

This article is intended to provide general information only and has been prepared without taking into account any particular person's objectives, financial situation or needs. Persons should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend persons obtain financial advice specific to their situation before making any decision regarding a financial product or decision.



Identity McIntyre Pty Ltd and its specialist financial advisers Angus Dockrill, Scott Douglas, Dan Blatch, Lisette Walsh, Vince Dore, Sangram Rana, John Foley and Matthew Bull are authorised representatives of IMFG Pty Limited, Australian Financial Services Licensee number 527657 Registered Office at: Level 8, 171 Clarence Street, Sydney NSW 2000. These representatives are trading as IMFG.

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