Eight investment themes for 2010

Many more investors are likely to enter 2010 with renewed confidence, while retaining a high degree of caution in the wake of the global financial crisis.

The S&P/ASX300 accumulation index returned 37.6% in the 2009 calendar year – its best return in 16 years. This compared with its worst return on record in the previous year.

And Australia’s large super funds with balanced portfolios returned 10.07% in the 12 months to November 30, reports fund researcher SuperRatings – after a horror 2008.

But while the biggest and easiest returns of this sharemarket recovery were made in 2009, there are widespread expectations that Australian shares will nevertheless produce solid returns in 2010. However, expect this to be a year of high volatility for share investors.

Other key investment themes for the year ahead are going to include putting into practice the lessons learned from the devastation caused by the GFC and accompanying bear market.

This means that investors will increasingly keep a much closer watch on what they are paying for investment management, investment transactions and in taxation. And investors should enter 2010 with a much more heightened awareness of the risks from investment markets and from excessive investment debt.

Further, many more investors are likely to place a much higher priority on ensuring that their portfolios are adequately diversified – another key investment lesson from the downturn.

The need for investment diversity and careful cost control will dictate which investment products will become highly popular.

1. Exchange-traded funds: ETFs – managed investment funds that track an index yet are traded on the market like a share – are unquestionably the latest investment product to take hold in Australia. These are the products to watch in 2010.

Although the amount invested through ETFs in Australia is still relatively small, their popularity is increasing at a breathtaking rate.

ETFs will become standard inclusions in many Australian investment portfolios during 2010.

For instance, self-managed super funds are increasingly using ETFs to provide the core of their equity portfolios and then using directly-held shares and actively-managed funds as “satellites”.

Why ETFs? These are easy-to-understand and easy-to-trade investments that provide wide diversification in local and international markets. And their costs are extremely low – lower than even conventional index funds.

Significantly, ETFs take the gamble out of trying to pick individual stocks that will outperform the market – an approach that fails to consistently succeed as numerous studies have shown.

As confidence spreads about the prospects for the sharemarket in 2010 (see theme three), ETFs will be among the principal beneficiaries.

2. Super comeback: Double-digit super fund returns? Seems unbelievable, but the median returns of the large funds with balanced portfolios are expected to achieve just this for the 2009 calendar year.

These much stronger returns should restore much of the confidence in the super system and in the management of the big super funds. And in turn, one of the investment themes of 2010 is likely to be a slowdown in the establishment rate of self-managed super funds by members of large funds.

3. Sharemarket optimism: As discussed earlier, the easiest and biggest returns from this sharemarket recovery are behind us, yet solid returns can be expected for the 2010 calendar year.

If you accept the positive forecasts, it is not too late to lift your sharemarket exposure.

Shane Oliver, head of investment strategy and chief economist of AMP Capital Investors, for instance, attributes his positive forecasts for the market in the 12 months ahead to a combination of improving economic and profit growth, low inflation and still low interest rates.

And, Oliver adds, there is still plenty of cash sitting on the sidelines that investors have ready to invest.

More investors would now be reviewing their exposure to the sharemarket, perhaps considering returning to their usual long-term weighting after increasing cash holdings during the bear market.

4. Re-evaluation of cash holdings: As interest rates rise, earnings from cash may seem tempting but more investors are likely to take a realistic approach to the real value of their earnings from cash in 2010.

Consider what your earnings on cash are really worth after allowing for tax and inflation.

While investing in the sharemarket is certainly a riskier proposition than holding cash, the makeup of the returns and their tax treatment is very different. Shares hold the potential for capital gains (and losses) and the imputation credits from franked dividends can do much to reduce or eliminate extra tax payable on dividends.

And low-income earners and super funds may receive excellent refunds on excess franking credits.

5. Fear of high investment debt: Investors who were badly stung by excessive debt and/or disturbed by the misfortunes of other heavily-geared investors are likely to remain shy about high investment debt in 2010. This is despite the many forecasts of a rising sharemarket.

The Reserve Bank’s margin-lending statistics for 2009 suggest that investors are taking a much more cautious approach about borrowing to invest in the sharemarket. And no doubt this will continue to be one of the strong themes in the year ahead.

6. Suspicion of stock-pickers: As share prices turned sharply downwards between August 2007 and March 2009, professional stock pickers exhibited once again how it is an almost unachievable ambition to consistently beat the market.

In 2010, one of the biggest investment themes will surely be the swing to conventional index funds and exchange-traded funds (ETFs) (see theme one) as more investors become unwilling to take a punt on active fund managers being able to accurately pick winning stocks.

As well, individual investors and self-managed fund trustees are less trustful of their own abilities and those of their advisers to pick the right stocks.

7. Scrooge-like control of costs and taxes: Being a mean, penny-pinching investor will be one of the big investment themes for 2010.

The savage bear market showed that investors who had minimised their investment and tax costs were the ones with among the least-negative returns at that time.

This was perhaps best exhibited with the returns of the big super funds. The no-frills funds with low total costs (administration and investment management) plus a low turnover of investments (minimising capital gains tax and transaction costs) were best able to handle difficult markets, as a general rule.

8. Flee from complexity: The Australian Securities and Investments Commission (ASIC) and quality financial planners have been warning for years not to invest in a financial product or strategy that you cannot understand. Well, this is a lesson many investors clearly forgot as the sharemarket powered forward for many years until August 2007.

In 2010, complex investments and strategies will be much out of favour as investors increasingly realise that the onus is on them to understand what is being offered before outlaying their money.

ASIC offers some straightforward advice about complex investments on its consumer website. See here.