It could have been a lot worse

Discussion in 'Sharemarket News & Market Analysis' started by Simon Hampel, 1st Jul, 2008.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    Think about it:

    The ASX200 Financials sector (XFJ) ended the year down 34.9%

    The ASX Small Ordinaries Index ended the year down 23.3%

    The ASX200 (XJO) ended the year down 16.9%

    The All Ordinaries (XAO) ended the year down 15.5%

    The ASX50 (XFL) ended the year down 15.4%

    ... but

    The ASX300 Metals and Mining sector (XMM) ended the year up 21.5%

    The ASX200 Energy Sector (XEJ) ended the year up 36.8%

    What's more, here are the returns for the top 10 constituents for the ASX200 (constituents and weights are according to http://www2.standardandpoors.com/spf/pdf/index/SP_ASX_200_Factsheet_A4.pdf):

    ASX Code ... Return ... Index weight

    BHP ... +24.8% ... 10.84%
    CBA ... -27.3% ... 6.26%
    NAB ... -35.4% ... 4.95%
    WBC ... -21.3% ... 4.19%
    ANZ ... -35.4% ... 4.13%
    WOW ... -9.4% ... 3.31%
    RIO ... +37.2% ... 3.05%
    WDC ... -18.4% ... 2.95%
    QBE ... -28.2% ... 2.38%
    TLS ... -7.6% ... 2.34%

    Notice how BHP and RIO make up 13.9% of the index weighting? The top 10 stocks combined make up 44.4% of the ASX200 weighting.

    I did some calculations working out roughly how much the stock weightings contributed to the overall performance of the index. I estimate that these 10 stocks contributed around -8.4% of the fall in the index, with the remaining 190 stocks contributing the other -8.5% or so.

    So what if we remove the strong performance of BHP and RIO from the calculations? Let's imagine they finished the year exactly where they started - so zero growth for the year (and imagine that the index weightings remain the same).

    My calculations show that the top 10 stocks then would contribute -16.9% return for the ASX200 index, and when we add the -8.5% from the other 190 stocks, that gives us a return of -25.5% for the ASX200 for the year.

    That's a lot worse than the -16.9% we ended up with ... all because of two mining companies!
     
    Simon Hampel, 1st Jul, 2008
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  2. crc_error

    crc_error The Rule of 72

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    Looks like ING has been the wining investment last financial year!

    or simply paying your PPOR home loan off would have been the smartest choice..
     
    crc_error, 1st Jul, 2008
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  3. crc_error

    crc_error The Rule of 72

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    You also forgot to mention the dismal performance of the property sector..

    we are at 20 year lows now! and have broken the critical 1400 mark.

    Makes one wonder if its worth investing at all if a whole sector is capable of wiping out 20 years of capital growth.
     

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    crc_error, 1st Jul, 2008
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  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Firstly, the property sector is a relatively small part of the index - compare the performance of the XFJ (Financials) against the XXJ (Financials excluding REITs) ... the XXJ isn't that much worse than the XFJ, meaning that the other financial stocks have a much greater weight on the performance of the markets and the "dismal performance" of REITs has had relatively little impact overall.

    Secondly, I think "20 year lows" is a bit of an extreme stretch. The market was last at this level less than 5 years ago. The fact that it was previously at this level the day of the 1987 stock market crash actually tells you quite a different story I think.

    The key with investing is to understand what it is you are investing in and to understand the drivers behind capital and income growth.

    Right now, property is victim to two convergent forces - a revaluation of property securities holdings which were often priced based on overly optimistic valuations of their holdings, plus the sudden increase in the cost of capital (and decrease in the liquidity of capital).

    When supposedly "conservative" listed property trusts are found to have 60%+ LVRs and have their entire business model based on shuffling their borrowings around - then questions needed to be asked ... and they were.

    I don't think the listed property sector is necessarily representative of the wider market though ... yes, some companies with high levels of debt (or exposure to bad debt) will struggle - but the rest of the market is driven by confidence and by real assets/earnings.

    This has been a bad year on the markets - and I think we will see some turbulence still for at least the rest of this year ... but the world isn't ending, there are still plenty of opportunities to make money - and we aren't seeing anything happen that hasn't already happened before in some form or another.
     
    Simon Hampel, 1st Jul, 2008
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  5. Andrew Allen

    Andrew Allen Well-Known Member Business Member

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    It is interesting.

    I was reading the report of an equal weight index for the S&P 500 yesterday, presumably that wouldn't be going as well as a usual indexing approach here at the moment due to BHP, though it would capture less of the tankage in financials... so would like to see some data.

    There is a known momentum/trending effect in markets that rewards rotating into sectors that are doing the best in relative strength terms with some alpha, some people I follow do that actively as retail traders with US listed ETF's.

    I guess the essence to good wealth conservation (once you have enough of the stuff to afford the luxury of diversification) is to do the opposite though, buy into the down sectors through rebalancing. Haven't reconciled how the two forces of mean reversion and momentum fit together, I suspect a lot depends on what time frames you are talking about.
     
    Andrew Allen, 1st Jul, 2008
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  6. crc_error

    crc_error The Rule of 72

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    crc_error, 1st Jul, 2008
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  7. Simon Hampel

    Simon Hampel Founder Staff Member

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    Some of the funds I previously invested in are quite alarming in how far they've dropped from their peaks:

    CFS W/S Small Companies - Core: -32.1%
    CFS W/S Property Securities: -49.6%
    CFS W/S Geared Share: -46.5%
    CFS W/S Global Property Securities: -27.3%
    Platinum European: -31.1%
    Platinum International Brands: -25.8%
    Platinum Japan: -54.9%

    ... but of course this is completely outdone by Challenger China (which I have never invested in) at -70.1% :eek:

    I think this shows the down side of growth funds.
     
    Simon Hampel, 1st Jul, 2008
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  8. DaveA__

    DaveA__ Well-Known Member

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    Quote Came from a really good article in todays Fin Review.

    Without BHP & Rio, it would of meant the index would of closed at 5012.6 yesterday and would of broken the 5000 mark sometime during the year....

    For crc -
    No your home deposit wasnt the best place to put your money this financial year. BHP would of been a much better investment
     
    DaveA__, 1st Jul, 2008
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  9. crc_error

    crc_error The Rule of 72

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    BHP isn't a sector..

    if your stock picking, FMG would have been allot better than BHP.
     
    crc_error, 2nd Jul, 2008
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  10. crc_error

    crc_error The Rule of 72

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    I never liked the Challenger fund, and have mentioned it before that high return = potential for large drop.. I think Macquarie also had some silly 1 hit wonder returning 70%.

    Interesting to see Colliers outperformed local LPT's so it would have been a better choice than CFS property fund investing locally.

    Imaging trying to invest in Japan with such movements in stock prices! that platinum fund returned something like 80% PA in the first 2 years or operation.. In that market you either become filthy rich or broke!

    Whats scary is the fact if you invested in any of those funds over the last year with 50% gearing, you would have been wiped out today..
     
    crc_error, 2nd Jul, 2008
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  11. AsxBroker

    AsxBroker Well-Known Member

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    Hi crc_error,

    I believe that may have been the Macquarie Geared Growth fund.
    I don't think it is going as well as last year Fund Profile

    Cheers,

    Dan

     
    AsxBroker, 2nd Jul, 2008
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  12. Glebe

    Glebe Well-Known Member

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    And most people are prepared to pay 2% MER's in retail unit trusts for the privilege of having shares in not much more than a handful of companies managed for them. :eek:
     
    Glebe, 2nd Jul, 2008
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