20 Years
M4 Investing for life (Stream 1: The Working Client)
John King King Indices Creator and Owner ajk.com.au
2
Extending the client story • • • •
Will & Monica are both non-smokers They plan to retire when Monica turns 60 [17 years from now (2033)] They want a low ‘risk of not achieving their financial goals’ Want living standards to at least grow with rest of society (Preferably more)
3
Major Risks Risk is the “possibility of not achieving your goal” Risk is a concept, not a number Major risks are: 1.
Outliving your investments
2.
Inflation
3.
Investment performance
Most ‘safe’ or ‘low risk’ investments are ‘high risk’ in relation to first two risks
4
Will & Monica’s Life Expectancy (from 2016) 100.00%
Couple
At least One Alive
40
51
2056
2067
Years retired
23
34
20% Probability
47
56
2063
2072
30
39
# of Years
90.00% 80.00% 70.00%
Expect (50%)
60.00%
Year
50.00%
Retirement
40.00% 30.00% 20.00%
10.00% 0.00%
0
5 10 Couple
15
20 Will
25
30 35 Monica
40
45 50 55 At Least One Alive
60
Year Years retired
5
Planning Period $1,000,000 Initial Portfolio – Annuities assuming 10% p.a. return and various periods Annuity for years in retirement:
10% p.a. (Nominal)
25 Years
(88% probability of outliving)
$110,168
30 Years
(72% probability of outliving)
$106,079
40 Years
(20% probability of outliving)
$102,259
Perpetuity
( 0% probability of outliving)
$100,000
Perpetuity is just 2.2% p.a. less than a 40 year annuity 20% risk of being needed (Premium of 2.2% p.a. protects against this risk)
6
Risk of Outliving Investments - Conclusions Don’t use life expectancy 50% chance of living longer Take into account life as couple & life of surviving partner What probability of failure is acceptable risk? e.g. Look at 20% probability of life span (or 10%, or …) Life expectancy difficult to control Except for smoking (take 10 years off the non-smoker numbers) Plan for 20+ years of retirement (Maybe use perpetual)
7
Inflation – Silent Destroyer of Wealth and Income Total inflation over previous 20 years (1948 to 2014) 600%
9.3% p.a. (1970-90) 500% 400%
2.9% p.a. (1952-72)
300% 200% 100% 0% 1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
8 Inflation loss over the previous 20 years (1948 to 2014) 0% (10%)
(20%) (30%) (40%) (50%) (60%) (70%) (80%) (90%) 1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
9
Risk of Inflation - Conclusions Inflation hurts – a lot (Even low inflation) 3% p.a. produces 45% destruction in 20 years; 59% in 30 years; 70% in 40 years 9% p.a. destroys 82% in 20 years
Future inflation is uncertain Best 20 year period ended in 1972 (2.9% p.a. average) Next 20 years was worst 20 year period (9.3% p.a. average)
Need investments which keep up with inflation (at least) That only maintains living standards at current level
Need investments which growth with the economy (at least) Living standards will growth at the average of the economy Living standards will be maintained, relative to rest of society
10
Portfolio Creation First – Residence (debt-free before retirement) Lifestyle asset, not a financial asset
Second – Liquidity outside super Regular cash flow needs & Emergency cash flow contingency 6 to 12 months spending (depending on cash inflows and risk tolerance)
Long-Term Investments, including Super & Outside Super Super is a taxation vehicle, not an investment ‘Inside super’ & ‘outside super’ follow same investment philosophy Our focus for rest of session
11
Investment Assets – Only Two Types Debt
Upper limit on benefit (interest or similar) Lower risk on NOMINAL capital than equivalent equity (Inflation risk) No long-term capital gains Bonds, loans & deposits
Equity
Owner gets all profits, and losses Value of asset can rise or fall Owner get benefit/loss of asset price change Businesses & real estate (investment, not residence) Shares are not an asset; a legal document showing ownership of business
12
Diversification – So don’t lose all assets at once Risk Reduction from Diversification (40% Correlation which is Australian average) Companies % Reduction in Diversifiable Risk
10
15
20
200
∞
87.6%
91.6%
93.7%
99.4%
100%
Get good diversification with as few as 10 assets (87% risk reduction) 15 to 20 assets provides more diversification for risk averse investors Only 4% to 6% extra risk reduction
Will & Monica will invest 2/3rds of their Super Fund in one investment Is this good diversification? [‘Yes’ or ‘No’]
13
Australian Investment Returns 1980-2014 $1,000 Original Investment
Shares
Property
Bonds
Bank Bills
Inflation
31/12/2014 Value (Nominal)
$47,572
$34,681
$23,781
$18,158
$4,286
31/12/2014 Value (Real)
$11,099
$ 8,091
$ 5,548
$ 4,236
$1,000
Annual Nominal Return
11.67%
10.66%
9.48%
8.64%
4.25%
Annual Real Return
7.12%
6.16%
5.02%
4.21%
0.00%
14
Australian Portfolio Growth 1980-2014 (Total Return) $50,000 $45,000 $40,000
$35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$0
Shares
Property
Bonds
Bank Bills
Inflation
15
Australian Investment Returns 1980-2014 Long Term – 20 Years 20 Year Returns
Shares
Property
Bonds
Bank Bills
Inflation
Average
788.1%
651.4%
555.4%
363.7%
99.9%
Std Devn
38.8%
78.5%
42.9%
47.3%
19.4%
Average/Std Devn
20.31
8.30
12.94
7.69
465.6%
235.9%
272.9%
183.1%
177.7%
Best 20 Years
1,363.0%
1,347.3%
1,029.2%
768.7%
64.4%
31/12/2014 Value ($1,000 invested on 31/12/1979)
$47,572
$34,681
$23,781
$18,158
$4,286
Worst 20 Years
16
Australian Investment Returns 1980-2014 Long Term Real – 20 Years 20 Year Real Returns
Shares
Property
Bonds
Bank Bills
Inflation
Average
344.3%
275.9%
227.9%
132.0%
99.9%
Std Devn
23.3%
54.9%
23.1%
24.3%
19.4%
Average/Std Devn
14.78
5.02
9.86
5.43
5.15
Probability < 220% (6.00% p.a.)
0.00%
15.4%
36.6%
99.99%
Worst 20 Years
218.5%
100.7%
117.7%
66.6%
177.7%
Best 20 Years
491.3%
533.3%
353.1%
212.8%
64.4%
31/12/2014 Real Value $1,000 invested on 31/12/1979
$11,099
$ 8,091
$ 5,548
$ 4,236
$1,000
17
Bonds – Reality Check
Bonds only perform well when interest rates are falling ‘Capital gain’ is only bringing forward future earnings; not really a capital gain
10 year $1,000 bond with interest rate of 2.5% p.a. Locked in for 10 years. Market rate falls to 2.0%. Value rises to $1,045. ‘Capital gain’ of $45 (4.5%) ‘Capital gain’ 4.5% + interest 2.5% = 7.0% total return. Report 7.0% return for current year. Future returns lower by same amount as the capital gain (4.5%) Future returns 2.0% p.a. for next 9 years. Locked in. Total return over 10 years = 2.5% p.a. (Unchanged, just timing changed) If sell (realise the capital gain) and buy a different bond, yield still reduced to 2.0% on new bond
Last 30 years of falling interest rates are best bond period ever in Aust. (Still lost to shares) Cannot be repeated, as current interest rates are extremely low and have little room for falling Next 10 Years to 2026 ‘locked in’ at current low interest rates
18
Real Estate (Property) – Reality Check
Property performance is listed ASX200 property (REITs & developers) 18 entities in ASX200 – most by segment (9% by number) About 5% of ASX200 by value Dominated by Westfield & Scentre (former Westfield Retail Trust) Lower return & higher risk than ASX200 (shares), while part of shares Residential property investment is worse Most own 1 property Property risk is based on many properties in many different cities Average risk is highly correlated with shares (no diversification benefit) Risk from 1 property is very high – no diversification Return is lower than listed property and shares Price increases represent more investment (larger homes), not ‘like-for-like’ Long-term prices rise 2% p.a. less than inflation (on ‘like-for-like’ basis) Rent yield is 2% to 3% p.a. lower than commercial yield
19
Conclusions: 20 Year Performance (Nominal & Real) 1.
Shares Highest return & Lowest risk (Value 37% better than 2nd best) Only one 20 year period less than 6.0% p.a. real (220% in 20 years + inflation) Best ‘worst 20 years’. ‘Worst 20 years’ much better than all alternatives.
2.
Cash & Bonds More variation than shares over 20 years Lower return & higher risk (Cash ‘Best’ < Shares ‘Worst’)
3.
Property Highest risk (More than double that of shares), 2nd best return (it is equity) ‘Worst 20 years’ only beats bank bills (cash)
Will this be the same in the future?
20
S&P 500 (1971 to 2011) [US]
S&P500 grew 17 times (7.3% p.a.) Dividend paying shares up 29.5 times (8.8% p.a.) Non-dividend paying shares up 2.0 times (1.7% p.a.) 22% of companies in S&P500 – no dividends:
Apple, Amazon, Dell, eBay, Google, Symantec, Yahoo Berkshire Hathaway Apple started a dividend in 2012
US has low dividend payouts (32%) & low yield (2.0%)
21
James Montier (2010) [US & Europe] 90% of long-term return from dividends Dividend growth: 0.94 correlation with long-term inflation (10 years) Total return (share price change + dividends): zero correlation with long-term inflation (10 years) Dividends are good long-term inflation hedge
22
Robert Arnott (2003) [US]
Dividends provided most of the return 1802 to 2002 $100 became $459 million (7.97% p.a.) Without dividends $100 became $5,556 (2.03% p.a.) Inflation has a big impact: $100 became $1,804 (1.46% p.a.) Without inflation (Real returns):
Total real return = 6.42% p.a. Total real dividend return = 5.82% p.a. Real dividend return = 90% of total real return
23
John King (2014) – Australian Evidence
Dividends provided most of the return 1987 to 2014 (98% of return: 61% cash, 37% franking credits) [Dividend Imputation started July 1, 1987]
Cash dividends are 96.6% of return if franking credits ignored Return ($)
Initial Investment (30/6/1987)
Balance
Return % (p.a.)
$ 1,000
Share price change
$ 285
$ 1,285
0.93%
Cash dividends
$ 8,067
$ 9,352
7.70%
Franking credits
$ 4,853
$ 14,205
1.70%
$ 13,205
$ 14,205
10.33%
Total (to 30/6/2014)
24
Aust: Dividends-Payers vs ‘No Dividend’ Companies (2000-2013)
Dividend portfolio worth 206% more than portfolio of ‘no dividend’ companies
25
Outliers: What to Do? In setting investment strategy:
Ignore big winning outliers with low chance of repeating
Do not ignore bad outliers, even with low chance of repeating
Risk of using averages
One bad outlier in a long-term strategy (10-30 years) can produce disastrous results, so must be considered Risk first – always consider bad results in setting strategy Need to survive these to succeed Reward second – never consider exceptionally good results in setting strategy Do not need these to succeed
26
Dividends are Lowest Risk Investment (1980 to 2014) Real Annual Returns
Cash Dividends
Bond Interest
Bank Bills
Inflation
Average
4.54%
4.02%
4.21%
4.25%
Std Devn
0.87%
2.47%
2.66%
3.03%
Worst Year
2.55%
0.48%
0.15%
11.30%
Best Year
6.66%
10.90%
9.84%
(0.20)%
Real growth (p.a.)
3.17%
(4.25)%
(4.25)%
0.00%
Dividend yields have low variation Dividends grow in real terms (i.e. Faster than inflation) Real Interest goes backwards at the rate of inflation
27
Dividends Summary
Total return = Dividends + share price changes Dividends = 90% to 101% of long-term return Dividends good long-term hedge against inflation Long-term share prices move with dividends Dividend paying companies better
Dividend paying companies
grow more
High dividend payout companies grow Dividends are lowest risk investment
more
It’s All About The Dividends
28
King Indices (a Dividend-Based Strategy) Dividend-Based Indices (31 March 2000 to 30 June 2016) Indices which: Benchmark the performance of Australian dividend-paying companies Have consistently produced excellent performance Outperformed all fund managers over 3 years & longer
Beat almost all fund managers in 2015/16
29
King Indices Top Performance
Only King Indices performed consistently well over the past 1, 3 and 5 years King Indices beat all fund managers for past 3 and 5 years Last 5 years: King10 up 261% (29.3% p.a.), King20 up 229% (26.9% p.a.) King10 index was up 26.1% in 2015/16 Only 2 fund managers did better (out of 265) King20 index was up 23.5% in 2015/16 Only 3 fund managers did better (out of 265) ASX200 was up 0.6% in 2015/16 (Last 5 years up 43% [7.4% p.a.]) Based on Mercer Investment Surveys of 265 Australian fund managers [139 invested in Australia, 126 invested overseas]
30
King Indices - Scoring System Scoring system to be included in a King Index:
Dividend growth for at least the three most recent years Low risk from: Dividend reduction Be in ‘ASX200 Index’ (Largest 200), or ‘All Ordinaries’ (Largest 500)
Two Indices:
King10 – 10 highest scoring companies King20 – 20 highest scoring companies Consistently beat ASX200 since inception in 2000 in all market conditions
31
King Indices Outperform the ASX200 (Total Return)
King Indices have outperformed the market for the past 16 years (to 30 June 2016) $100,000 invested on 31 March 2000 (dividends reinvested) would have grown to:
Accumulation Mode
Value on 30/6/2016
Total Return Annual Return
King10 Index
$3,020,297
2,920%
23.3%
King20 Index
$2,603,984
2,504%
22.2%
ASX200 Index
$ 332,691
233%
7.7%
Will & Monica have 17 years to retirement ($1.5M now)
32
Portfolio Values ($100,000 invested on 31/03/2000 Cash Dividends Reinvested) $3,200,000
Logarithmic scale $800,000
$200,000
$50,000
King10 Index
King20 Index
ASX200 Index
33
King Indices’ Risk is 30% Less than Market Average What is the risk that the King Indices will not continue to outperform the ASX200 Index? ‘Beta’ is a common measure of investment risk Average risk [or Market risk for ASX200 Index] beta = 1.00 King10’s beta is 0.70, which indicates 30% lower risk King20’s beta is 0.69, which indicates 31% lower risk 89% of companies had positive return 78% of companies beat market average (ASX200) King Indices are not dependent on a small number of ‘big winners’
34
Largest Stock Market Meltdown in Austn History (2007-2009) Largest Bear Markets
Mths
Total Fall (Incl Divs)
Price Fall
Annual Total Fall (p.a.)
2007 (Nov 1) to 2009 (Mar 6)
16
(50.4)%
(53.93)%
(40.7)%
1973 (Jan 31) to 1974 (Sep 30)
20
(49.8)%
(53.92)%
(33.9)%
1987 (Sep 21) to 1987 (Nov 11)
2
(49.7)%
(50.1)%
(99.3)%
1929 (Feb 28) to 1931 (Aug 31)
30
(37.8)%
(46.3)%
(17.3)%
King Indices: Fell less (33.2%), back to 25 Sept 2006 [13 mths before peak] (2 yrs 5 mths ago), and Recovered faster (15 Oct 2009: 23.5 mths since peak & 7 mths from bottom) ASX200 (11 Sept 2013: 5 yrs 10 mths since peak & 4 yrs 6 mths from bottom) ASX200 back to 3 Nov 2004 [3 yrs before peak] (4 yrs 4 mths ago)
35
GFC & Recovery ($100,000 invested on 31/10/2007 Total Return) $400,000
Logarithmic scale $200,000
ASX200 Recovered
King Index Recovered $100,000
$50,000 30/06/2008
30/06/2009
30/06/2010
30/06/2011
King10 Index
29/06/2012 King20 Index
28/06/2013 ASX200 Index
30/06/2014
30/06/2015
30/06/2016
36
King10 Consistently Beat the Market (ASX200) King10 has beaten the ASX200 for every period of 2 years & longer, and for 90% of the 12 month periods Usually by more than 5.0% p.a. Probability of King10 Beating the ASX200 Index (based on history) 1 Yr 2 Yrs 3 Yrs Number of Periods 184 172 160
4 Yrs 148
5 Yrs 136
Better than ASX200
90.2%
100.0%
100.0%
100.0%
100.0%
More than 2.00% p.a. better
85.3%
97.1%
100.0%
100.0%
100.0%
More than 5.00% p.a. better
77.7%
86.0%
98.1%
98.6%
100.0%
37
King20 Consistently Beat the Market (ASX200) King20 has beaten the ASX200 for every period of 2 years & longer, and for 94% of the 12 month periods Usually by more than 5.0% p.a. Probability of King20 Beating the ASX200 Index (Based on history) 1 Yr 2 Yrs 3 Yrs Number of Periods 184 172 160
4 Yrs 148
5 Yrs 136
Better than ASX200
94.0%
100.0%
100.0%
100.0%
100.0%
More than 2.00% p.a. better
88.0%
94.7%
100.0%
100.0%
100.0%
More than 5.00% p.a. better
77.1%
82.6%
96.2%
99.3%
100.0%
38
King Indices’ Dividends are Much Higher & Grew Faster $100,000 invested on 31 March 2000, with dividends reinvested: Dividends in 2000/01
Dividends in 2015/16
Growth
Growth (p.a.)
King10 Index
$ 5,640
$ 79,773
1,314%
19.3%
King20 Index
$ 4,931
$ 81,843
1,559%
20.6%
ASX200 Index
$ 3,749
$ 15,233
306%
9.8%
39
Annual Cash Dividends ($100,000 invested on 31/03/2000 Dividends Reinvested) $128,000
Logarithmic scale $64,000 $32,000 $16,000
$8,000 $4,000 $2,000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 King10 Index
King20 Index
ASX200 Index
40
King Indices’ Share Prices Grew More (Spend Dividends) King Indices have outperformed the market for the past 16 years (to 30 June 2016) $100,000 invested on 31 March 2000 (dividends spent) would have grown to: Share price growth
Value on 30/6/2016
Total Return
Annual Return
King10 Index
$1,533,259
1,433%
18.3%
King20 Index
$1,338,245
1,238%
17.3%
ASX200 Index
$ 167,025
67%
3.2%
41
Portfolio Values ($100,000 invested on 31/03/2000 Cash Dividends Spent) Logarithmic scale $800,000
$200,000
$50,000
King10 Index
King20 Index
ASX200 Index
42
King Indices’ Dividends are Much Higher & Grew Faster $100,000 invested on 31 March 2000, with dividends spent: Dividends in 2000/01
Dividends in 2015/16
Growth
Growth (p.a.)
King10 Index
$ 5,504
$ 41,146
647%
14.3%
King20 Index
$ 4,817
$ 42,822
789%
15.7%
ASX200 Index
$ 3,659
$ 7,830
114%
5.2%
43
Annual Cash Dividends ($100,000 invested on 31/03/2000 Dividends Spent) $64,000
Logarithmic scale $32,000 $16,000 $8,000 $4,000 $2,000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
King10 Index
King20 Index
ASX200 Index
44
Portfolio Construction - Conclusions Shares only Highest long-term real returns, lowest risk
Dividend share focus Provide 100% of long-term returns from shares at lowest risk
Only 10 to 20 different shares needed for diversification Bonds, cash and property are highly correlated with shares, higher risk and lower returns than shares Provide no benefits in a portfolio
45
King Indices – Dividend-Based Investing
Massively outperforms Stock Market average Growing dividends Growing capital values Lower risk Falls less in bear markets & recovers faster Beats the best fund managers
ajk.com.au
46
General Disclaimer © 2016 AJK Consulting Pty Ltd (ACN 065 296 040). All rights reserved. It is not possible to invest directly in an index. The King10 and King20 indices are benchmark indices which measure the performance of the constituents of each index. Past performance of an index is not a guarantee of future results. AJK Consulting Pty Ltd is not an investment advisor and makes no representation regarding the advisability of investing in any investment vehicle that seeks to track any of its indices. Inclusion of a security within an index is not a recommendation by AJK Consulting Pty Ltd to buy, sell, or hold such security, nor is it considered to be investment advice. These materials have been prepared solely for informational purposes based on information generally available to the public from sources believed to be reliable. Whilst every effort has been made to ensure the integrity of the data, AJK Consulting Pty Ltd do not guarantee the accuracy, completeness, timeliness or availability of the content. This disclaimer is subject to any requirement of the law.
47
Questions?
48
Thank You – Best Wishes John King FCA King Indices Website: ajk.com.au Email: [email protected] 0411 227 437 (08) 9332 2323
John King King Indices Creator and Owner ajk.com.au
2
Extending the client story • • • •
Will & Monica are both non-smokers They plan to retire when Monica turns 60 [17 years from now (2033)] They want a low ‘risk of not achieving their financial goals’ Want living standards to at least grow with rest of society (Preferably more)
3
Major Risks Risk is the “possibility of not achieving your goal” Risk is a concept, not a number Major risks are: 1.
Outliving your investments
2.
Inflation
3.
Investment performance
Most ‘safe’ or ‘low risk’ investments are ‘high risk’ in relation to first two risks
4
Will & Monica’s Life Expectancy (from 2016) 100.00%
Couple
At least One Alive
40
51
2056
2067
Years retired
23
34
20% Probability
47
56
2063
2072
30
39
# of Years
90.00% 80.00% 70.00%
Expect (50%)
60.00%
Year
50.00%
Retirement
40.00% 30.00% 20.00%
10.00% 0.00%
0
5 10 Couple
15
20 Will
25
30 35 Monica
40
45 50 55 At Least One Alive
60
Year Years retired
5
Planning Period $1,000,000 Initial Portfolio – Annuities assuming 10% p.a. return and various periods Annuity for years in retirement:
10% p.a. (Nominal)
25 Years
(88% probability of outliving)
$110,168
30 Years
(72% probability of outliving)
$106,079
40 Years
(20% probability of outliving)
$102,259
Perpetuity
( 0% probability of outliving)
$100,000
Perpetuity is just 2.2% p.a. less than a 40 year annuity 20% risk of being needed (Premium of 2.2% p.a. protects against this risk)
6
Risk of Outliving Investments - Conclusions Don’t use life expectancy 50% chance of living longer Take into account life as couple & life of surviving partner What probability of failure is acceptable risk? e.g. Look at 20% probability of life span (or 10%, or …) Life expectancy difficult to control Except for smoking (take 10 years off the non-smoker numbers) Plan for 20+ years of retirement (Maybe use perpetual)
7
Inflation – Silent Destroyer of Wealth and Income Total inflation over previous 20 years (1948 to 2014) 600%
9.3% p.a. (1970-90) 500% 400%
2.9% p.a. (1952-72)
300% 200% 100% 0% 1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
8 Inflation loss over the previous 20 years (1948 to 2014) 0% (10%)
(20%) (30%) (40%) (50%) (60%) (70%) (80%) (90%) 1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
9
Risk of Inflation - Conclusions Inflation hurts – a lot (Even low inflation) 3% p.a. produces 45% destruction in 20 years; 59% in 30 years; 70% in 40 years 9% p.a. destroys 82% in 20 years
Future inflation is uncertain Best 20 year period ended in 1972 (2.9% p.a. average) Next 20 years was worst 20 year period (9.3% p.a. average)
Need investments which keep up with inflation (at least) That only maintains living standards at current level
Need investments which growth with the economy (at least) Living standards will growth at the average of the economy Living standards will be maintained, relative to rest of society
10
Portfolio Creation First – Residence (debt-free before retirement) Lifestyle asset, not a financial asset
Second – Liquidity outside super Regular cash flow needs & Emergency cash flow contingency 6 to 12 months spending (depending on cash inflows and risk tolerance)
Long-Term Investments, including Super & Outside Super Super is a taxation vehicle, not an investment ‘Inside super’ & ‘outside super’ follow same investment philosophy Our focus for rest of session
11
Investment Assets – Only Two Types Debt
Upper limit on benefit (interest or similar) Lower risk on NOMINAL capital than equivalent equity (Inflation risk) No long-term capital gains Bonds, loans & deposits
Equity
Owner gets all profits, and losses Value of asset can rise or fall Owner get benefit/loss of asset price change Businesses & real estate (investment, not residence) Shares are not an asset; a legal document showing ownership of business
12
Diversification – So don’t lose all assets at once Risk Reduction from Diversification (40% Correlation which is Australian average) Companies % Reduction in Diversifiable Risk
10
15
20
200
∞
87.6%
91.6%
93.7%
99.4%
100%
Get good diversification with as few as 10 assets (87% risk reduction) 15 to 20 assets provides more diversification for risk averse investors Only 4% to 6% extra risk reduction
Will & Monica will invest 2/3rds of their Super Fund in one investment Is this good diversification? [‘Yes’ or ‘No’]
13
Australian Investment Returns 1980-2014 $1,000 Original Investment
Shares
Property
Bonds
Bank Bills
Inflation
31/12/2014 Value (Nominal)
$47,572
$34,681
$23,781
$18,158
$4,286
31/12/2014 Value (Real)
$11,099
$ 8,091
$ 5,548
$ 4,236
$1,000
Annual Nominal Return
11.67%
10.66%
9.48%
8.64%
4.25%
Annual Real Return
7.12%
6.16%
5.02%
4.21%
0.00%
14
Australian Portfolio Growth 1980-2014 (Total Return) $50,000 $45,000 $40,000
$35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$0
Shares
Property
Bonds
Bank Bills
Inflation
15
Australian Investment Returns 1980-2014 Long Term – 20 Years 20 Year Returns
Shares
Property
Bonds
Bank Bills
Inflation
Average
788.1%
651.4%
555.4%
363.7%
99.9%
Std Devn
38.8%
78.5%
42.9%
47.3%
19.4%
Average/Std Devn
20.31
8.30
12.94
7.69
465.6%
235.9%
272.9%
183.1%
177.7%
Best 20 Years
1,363.0%
1,347.3%
1,029.2%
768.7%
64.4%
31/12/2014 Value ($1,000 invested on 31/12/1979)
$47,572
$34,681
$23,781
$18,158
$4,286
Worst 20 Years
16
Australian Investment Returns 1980-2014 Long Term Real – 20 Years 20 Year Real Returns
Shares
Property
Bonds
Bank Bills
Inflation
Average
344.3%
275.9%
227.9%
132.0%
99.9%
Std Devn
23.3%
54.9%
23.1%
24.3%
19.4%
Average/Std Devn
14.78
5.02
9.86
5.43
5.15
Probability < 220% (6.00% p.a.)
0.00%
15.4%
36.6%
99.99%
Worst 20 Years
218.5%
100.7%
117.7%
66.6%
177.7%
Best 20 Years
491.3%
533.3%
353.1%
212.8%
64.4%
31/12/2014 Real Value $1,000 invested on 31/12/1979
$11,099
$ 8,091
$ 5,548
$ 4,236
$1,000
17
Bonds – Reality Check
Bonds only perform well when interest rates are falling ‘Capital gain’ is only bringing forward future earnings; not really a capital gain
10 year $1,000 bond with interest rate of 2.5% p.a. Locked in for 10 years. Market rate falls to 2.0%. Value rises to $1,045. ‘Capital gain’ of $45 (4.5%) ‘Capital gain’ 4.5% + interest 2.5% = 7.0% total return. Report 7.0% return for current year. Future returns lower by same amount as the capital gain (4.5%) Future returns 2.0% p.a. for next 9 years. Locked in. Total return over 10 years = 2.5% p.a. (Unchanged, just timing changed) If sell (realise the capital gain) and buy a different bond, yield still reduced to 2.0% on new bond
Last 30 years of falling interest rates are best bond period ever in Aust. (Still lost to shares) Cannot be repeated, as current interest rates are extremely low and have little room for falling Next 10 Years to 2026 ‘locked in’ at current low interest rates
18
Real Estate (Property) – Reality Check
Property performance is listed ASX200 property (REITs & developers) 18 entities in ASX200 – most by segment (9% by number) About 5% of ASX200 by value Dominated by Westfield & Scentre (former Westfield Retail Trust) Lower return & higher risk than ASX200 (shares), while part of shares Residential property investment is worse Most own 1 property Property risk is based on many properties in many different cities Average risk is highly correlated with shares (no diversification benefit) Risk from 1 property is very high – no diversification Return is lower than listed property and shares Price increases represent more investment (larger homes), not ‘like-for-like’ Long-term prices rise 2% p.a. less than inflation (on ‘like-for-like’ basis) Rent yield is 2% to 3% p.a. lower than commercial yield
19
Conclusions: 20 Year Performance (Nominal & Real) 1.
Shares Highest return & Lowest risk (Value 37% better than 2nd best) Only one 20 year period less than 6.0% p.a. real (220% in 20 years + inflation) Best ‘worst 20 years’. ‘Worst 20 years’ much better than all alternatives.
2.
Cash & Bonds More variation than shares over 20 years Lower return & higher risk (Cash ‘Best’ < Shares ‘Worst’)
3.
Property Highest risk (More than double that of shares), 2nd best return (it is equity) ‘Worst 20 years’ only beats bank bills (cash)
Will this be the same in the future?
20
S&P 500 (1971 to 2011) [US]
S&P500 grew 17 times (7.3% p.a.) Dividend paying shares up 29.5 times (8.8% p.a.) Non-dividend paying shares up 2.0 times (1.7% p.a.) 22% of companies in S&P500 – no dividends:
Apple, Amazon, Dell, eBay, Google, Symantec, Yahoo Berkshire Hathaway Apple started a dividend in 2012
US has low dividend payouts (32%) & low yield (2.0%)
21
James Montier (2010) [US & Europe] 90% of long-term return from dividends Dividend growth: 0.94 correlation with long-term inflation (10 years) Total return (share price change + dividends): zero correlation with long-term inflation (10 years) Dividends are good long-term inflation hedge
22
Robert Arnott (2003) [US]
Dividends provided most of the return 1802 to 2002 $100 became $459 million (7.97% p.a.) Without dividends $100 became $5,556 (2.03% p.a.) Inflation has a big impact: $100 became $1,804 (1.46% p.a.) Without inflation (Real returns):
Total real return = 6.42% p.a. Total real dividend return = 5.82% p.a. Real dividend return = 90% of total real return
23
John King (2014) – Australian Evidence
Dividends provided most of the return 1987 to 2014 (98% of return: 61% cash, 37% franking credits) [Dividend Imputation started July 1, 1987]
Cash dividends are 96.6% of return if franking credits ignored Return ($)
Initial Investment (30/6/1987)
Balance
Return % (p.a.)
$ 1,000
Share price change
$ 285
$ 1,285
0.93%
Cash dividends
$ 8,067
$ 9,352
7.70%
Franking credits
$ 4,853
$ 14,205
1.70%
$ 13,205
$ 14,205
10.33%
Total (to 30/6/2014)
24
Aust: Dividends-Payers vs ‘No Dividend’ Companies (2000-2013)
Dividend portfolio worth 206% more than portfolio of ‘no dividend’ companies
25
Outliers: What to Do? In setting investment strategy:
Ignore big winning outliers with low chance of repeating
Do not ignore bad outliers, even with low chance of repeating
Risk of using averages
One bad outlier in a long-term strategy (10-30 years) can produce disastrous results, so must be considered Risk first – always consider bad results in setting strategy Need to survive these to succeed Reward second – never consider exceptionally good results in setting strategy Do not need these to succeed
26
Dividends are Lowest Risk Investment (1980 to 2014) Real Annual Returns
Cash Dividends
Bond Interest
Bank Bills
Inflation
Average
4.54%
4.02%
4.21%
4.25%
Std Devn
0.87%
2.47%
2.66%
3.03%
Worst Year
2.55%
0.48%
0.15%
11.30%
Best Year
6.66%
10.90%
9.84%
(0.20)%
Real growth (p.a.)
3.17%
(4.25)%
(4.25)%
0.00%
Dividend yields have low variation Dividends grow in real terms (i.e. Faster than inflation) Real Interest goes backwards at the rate of inflation
27
Dividends Summary
Total return = Dividends + share price changes Dividends = 90% to 101% of long-term return Dividends good long-term hedge against inflation Long-term share prices move with dividends Dividend paying companies better
Dividend paying companies
grow more
High dividend payout companies grow Dividends are lowest risk investment
more
It’s All About The Dividends
28
King Indices (a Dividend-Based Strategy) Dividend-Based Indices (31 March 2000 to 30 June 2016) Indices which: Benchmark the performance of Australian dividend-paying companies Have consistently produced excellent performance Outperformed all fund managers over 3 years & longer
Beat almost all fund managers in 2015/16
29
King Indices Top Performance
Only King Indices performed consistently well over the past 1, 3 and 5 years King Indices beat all fund managers for past 3 and 5 years Last 5 years: King10 up 261% (29.3% p.a.), King20 up 229% (26.9% p.a.) King10 index was up 26.1% in 2015/16 Only 2 fund managers did better (out of 265) King20 index was up 23.5% in 2015/16 Only 3 fund managers did better (out of 265) ASX200 was up 0.6% in 2015/16 (Last 5 years up 43% [7.4% p.a.]) Based on Mercer Investment Surveys of 265 Australian fund managers [139 invested in Australia, 126 invested overseas]
30
King Indices - Scoring System Scoring system to be included in a King Index:
Dividend growth for at least the three most recent years Low risk from: Dividend reduction Be in ‘ASX200 Index’ (Largest 200), or ‘All Ordinaries’ (Largest 500)
Two Indices:
King10 – 10 highest scoring companies King20 – 20 highest scoring companies Consistently beat ASX200 since inception in 2000 in all market conditions
31
King Indices Outperform the ASX200 (Total Return)
King Indices have outperformed the market for the past 16 years (to 30 June 2016) $100,000 invested on 31 March 2000 (dividends reinvested) would have grown to:
Accumulation Mode
Value on 30/6/2016
Total Return Annual Return
King10 Index
$3,020,297
2,920%
23.3%
King20 Index
$2,603,984
2,504%
22.2%
ASX200 Index
$ 332,691
233%
7.7%
Will & Monica have 17 years to retirement ($1.5M now)
32
Portfolio Values ($100,000 invested on 31/03/2000 Cash Dividends Reinvested) $3,200,000
Logarithmic scale $800,000
$200,000
$50,000
King10 Index
King20 Index
ASX200 Index
33
King Indices’ Risk is 30% Less than Market Average What is the risk that the King Indices will not continue to outperform the ASX200 Index? ‘Beta’ is a common measure of investment risk Average risk [or Market risk for ASX200 Index] beta = 1.00 King10’s beta is 0.70, which indicates 30% lower risk King20’s beta is 0.69, which indicates 31% lower risk 89% of companies had positive return 78% of companies beat market average (ASX200) King Indices are not dependent on a small number of ‘big winners’
34
Largest Stock Market Meltdown in Austn History (2007-2009) Largest Bear Markets
Mths
Total Fall (Incl Divs)
Price Fall
Annual Total Fall (p.a.)
2007 (Nov 1) to 2009 (Mar 6)
16
(50.4)%
(53.93)%
(40.7)%
1973 (Jan 31) to 1974 (Sep 30)
20
(49.8)%
(53.92)%
(33.9)%
1987 (Sep 21) to 1987 (Nov 11)
2
(49.7)%
(50.1)%
(99.3)%
1929 (Feb 28) to 1931 (Aug 31)
30
(37.8)%
(46.3)%
(17.3)%
King Indices: Fell less (33.2%), back to 25 Sept 2006 [13 mths before peak] (2 yrs 5 mths ago), and Recovered faster (15 Oct 2009: 23.5 mths since peak & 7 mths from bottom) ASX200 (11 Sept 2013: 5 yrs 10 mths since peak & 4 yrs 6 mths from bottom) ASX200 back to 3 Nov 2004 [3 yrs before peak] (4 yrs 4 mths ago)
35
GFC & Recovery ($100,000 invested on 31/10/2007 Total Return) $400,000
Logarithmic scale $200,000
ASX200 Recovered
King Index Recovered $100,000
$50,000 30/06/2008
30/06/2009
30/06/2010
30/06/2011
King10 Index
29/06/2012 King20 Index
28/06/2013 ASX200 Index
30/06/2014
30/06/2015
30/06/2016
36
King10 Consistently Beat the Market (ASX200) King10 has beaten the ASX200 for every period of 2 years & longer, and for 90% of the 12 month periods Usually by more than 5.0% p.a. Probability of King10 Beating the ASX200 Index (based on history) 1 Yr 2 Yrs 3 Yrs Number of Periods 184 172 160
4 Yrs 148
5 Yrs 136
Better than ASX200
90.2%
100.0%
100.0%
100.0%
100.0%
More than 2.00% p.a. better
85.3%
97.1%
100.0%
100.0%
100.0%
More than 5.00% p.a. better
77.7%
86.0%
98.1%
98.6%
100.0%
37
King20 Consistently Beat the Market (ASX200) King20 has beaten the ASX200 for every period of 2 years & longer, and for 94% of the 12 month periods Usually by more than 5.0% p.a. Probability of King20 Beating the ASX200 Index (Based on history) 1 Yr 2 Yrs 3 Yrs Number of Periods 184 172 160
4 Yrs 148
5 Yrs 136
Better than ASX200
94.0%
100.0%
100.0%
100.0%
100.0%
More than 2.00% p.a. better
88.0%
94.7%
100.0%
100.0%
100.0%
More than 5.00% p.a. better
77.1%
82.6%
96.2%
99.3%
100.0%
38
King Indices’ Dividends are Much Higher & Grew Faster $100,000 invested on 31 March 2000, with dividends reinvested: Dividends in 2000/01
Dividends in 2015/16
Growth
Growth (p.a.)
King10 Index
$ 5,640
$ 79,773
1,314%
19.3%
King20 Index
$ 4,931
$ 81,843
1,559%
20.6%
ASX200 Index
$ 3,749
$ 15,233
306%
9.8%
39
Annual Cash Dividends ($100,000 invested on 31/03/2000 Dividends Reinvested) $128,000
Logarithmic scale $64,000 $32,000 $16,000
$8,000 $4,000 $2,000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 King10 Index
King20 Index
ASX200 Index
40
King Indices’ Share Prices Grew More (Spend Dividends) King Indices have outperformed the market for the past 16 years (to 30 June 2016) $100,000 invested on 31 March 2000 (dividends spent) would have grown to: Share price growth
Value on 30/6/2016
Total Return
Annual Return
King10 Index
$1,533,259
1,433%
18.3%
King20 Index
$1,338,245
1,238%
17.3%
ASX200 Index
$ 167,025
67%
3.2%
41
Portfolio Values ($100,000 invested on 31/03/2000 Cash Dividends Spent) Logarithmic scale $800,000
$200,000
$50,000
King10 Index
King20 Index
ASX200 Index
42
King Indices’ Dividends are Much Higher & Grew Faster $100,000 invested on 31 March 2000, with dividends spent: Dividends in 2000/01
Dividends in 2015/16
Growth
Growth (p.a.)
King10 Index
$ 5,504
$ 41,146
647%
14.3%
King20 Index
$ 4,817
$ 42,822
789%
15.7%
ASX200 Index
$ 3,659
$ 7,830
114%
5.2%
43
Annual Cash Dividends ($100,000 invested on 31/03/2000 Dividends Spent) $64,000
Logarithmic scale $32,000 $16,000 $8,000 $4,000 $2,000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
King10 Index
King20 Index
ASX200 Index
44
Portfolio Construction - Conclusions Shares only Highest long-term real returns, lowest risk
Dividend share focus Provide 100% of long-term returns from shares at lowest risk
Only 10 to 20 different shares needed for diversification Bonds, cash and property are highly correlated with shares, higher risk and lower returns than shares Provide no benefits in a portfolio
45
King Indices – Dividend-Based Investing
Massively outperforms Stock Market average Growing dividends Growing capital values Lower risk Falls less in bear markets & recovers faster Beats the best fund managers
ajk.com.au
46
General Disclaimer © 2016 AJK Consulting Pty Ltd (ACN 065 296 040). All rights reserved. It is not possible to invest directly in an index. The King10 and King20 indices are benchmark indices which measure the performance of the constituents of each index. Past performance of an index is not a guarantee of future results. AJK Consulting Pty Ltd is not an investment advisor and makes no representation regarding the advisability of investing in any investment vehicle that seeks to track any of its indices. Inclusion of a security within an index is not a recommendation by AJK Consulting Pty Ltd to buy, sell, or hold such security, nor is it considered to be investment advice. These materials have been prepared solely for informational purposes based on information generally available to the public from sources believed to be reliable. Whilst every effort has been made to ensure the integrity of the data, AJK Consulting Pty Ltd do not guarantee the accuracy, completeness, timeliness or availability of the content. This disclaimer is subject to any requirement of the law.
47
Questions?
48
Thank You – Best Wishes John King FCA King Indices Website: ajk.com.au Email: [email protected] 0411 227 437 (08) 9332 2323
