EYE-BALL’s Herman on – The All Ordinaries is a totally misleading index – and Australia’s lack of domestic Savings…
|Links to Previous ‘Herman’ Posts:
18th Sept – A Microcosm of Our Democracy – Auburn City Council elections.
28th Aug – – 2012 Overture – The Northern Fall (Autumn) –
17th Aug: – A Political Alternative – Australian Community Party –
Aug 6th: – Shang Yang’s good governance – or is it good faith?
July 21st: – Micro Economics – Thoughts and opinions on the Energy Debate!!!
July 18th: – A Chronology of Farce – and of a Government who Wonders Why Their Opinion Polls are so low.
July 4th: – 2012 Overture – The Northern Summer Arrives –
June 16th: 2012 Overture – The Greek Elections
June 2nd: Creative Destruction …
May 26th: White Collar Crime – Craig Thomson and Peter Slipper … or just Federal Parliament?
May 17th: The 2012 Overture Act III
Apr 21st: A Philosophical Appraisal of Social Economic Index… to Capture Wider Social Well Being.
Mar 26th: The 2012 Overture – A Crappy New Year – Part III.
Feb 14th: Democrazy Part XV – Clinging to Power.
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The All Ordinaries is a totally misleading index and Australia’s lack of domestic Savings!
| Author: EYE-BALL’s Herman | 2nd Oct 2012 |
|Please note well:-
THE FOLLOWING DOES NOT CONSTITUTE INVESTMENT ADVICE. IT IS AN HISTORICAL LOOK AT STOCK MARKET PERFORMANCE intended for economic debate. Readers should seek independent advice, the author does not work in the securities markets.
Doug McLeod wrote in his working platform for the Australian Community Party on Superannuation –
Hypothesise momentarily that the All Ordinary index has grown since 1992 (20 years) by somewhere approximating 4.85% compounding annually. The mathematic that underlies the index is extremely complex. It excludes dividends. It is difficult to assess total return on stocks. That 4.85% represents an average capital growth.
In 1992 Australia introduced the Superannuation Guaranty Levy. What is the income accumulation factor on those savings?
If you search the major fund managers like BT or MLC, the product offerings are so wide and diverse it is very difficult to comprehend. Moreover as the fund managers use such information as advertising it a minefield in itself. SunSuper makes available 5 years of daily unit prices. All my calculations are based on financial years ie 1st July to June 30th. Their five years do not match my analysis.
Below is a table of randomly selected Australia’s leading stocks 10 year all in performance. From July 2002 to June 2012. Note well that it stops on June 30 this year and does not include such factors as Twiggy Forrests (Fortescue’s) recent refinancing problems. There are several recent gyrations ignored.
Core prices were sourced from Yahoo Finance. At times certain stocks did not pass the smell test. Example News Corp had a major restructure in late 2004 where an excessive dividend was paid in Jan 2005. The dilution of the stock split and dividend lead to there being an apparent negative stock return and total return. Substantial further analysis is required to derive meaningful data.
Capital Growth is;
Growth adjusted for dividends is;
Interestingly my randomly selected portfolio had an average capital growth of 3.17% where the all ordinaries index grew at 3.24%. If I were to exclude Fortescue because in 2002 it was a penny dreadful, whereas by 2012 it was a producer and had paid dividends my portfolio would underperform the All Ordinaries (approx 0.5% portfolio growth).
Real Estate Investment Trusts (REIT’S) do have tax benefits attached, but they are different to imputation credits. In the case of GPT, Westfield I have ignored them.
By excluding GPT, Fortescue, Westfield, Consolidated Media and Newscorp I have an average 5% return for dividends on historical prices and that attracts a further 2% imputation credit. In the case of Cons Media they are a high div stock and that in part explains why the base is corrupted in this study. The statistical bias of this exercise worries me. The 10 year period takes in 5 massive bull run years prior to the GFC, and the 3 years of churning post GFC. Dividend yield will always be a major consideration in construction of a portfolio.
In the light of all this I needed to attempt to find an accumulation index to attempt to marry like with like. Failing that I revert to my basic assumption that Total return on Stock investments over the long run is Capital Growth plus approx 4% dividend yield plus imputation benefits.
While this experiment is really quite a dismal failure, the process is thought provoking.
Before coming to any conclusions dealing with the fund manager performance above are two funds that I was able to marry to my study period. Those numbers are sourced from their websites. I would suggest any reader take some time to look at their own Fund manager performance in the light of this analysis.
Once more it is difficult to make any meaningful supposition. State Super underperformed over the 10 year horizon compared to BT but have outperformed since GFC. Other than the period July 2007 to June 2009 BT earned their fees.
Doug’s proposition that self managed super invested in ASX top 50 stocks will save the fund managers fee and thereby increase the domestic savings ratio is very questionable. 25% of the stocks studied had a negative total return, whereas 33% had an inferior return to market performance.
The entire exercise has had me ponder several variables. Superannuation is essentially taxed at 15% on entry, 15% on income and in theory 15% on retirement (exit). Retirement benefits can be reduced by purchasing an annuity. Annuities are very inefficient and based on historical life tables. (hysterical). Normal tables (logics) simply do not apply to financial outcomes. Franking Credits were introduced by Treasurer John Howard to address double taxation of stock investment incomes and Australia’s poor record in long term saving.
The concept was broadened and standardised by Treasurer Keating. Then Keating introduced the Superannuation Guarantee Levy, largely paid for by salary sacrifice of indexation pay rises. Keating then introduced the entry tax on superannuation contributions. Similar economies like Canada and NZ have similar policies. But they are not employed in most other G20 economies.
No fund manager worth their salt should pay incremental tax on superannuation fund investment income. In theory franking credits attached to stock dividends should be used to offset taxation liability on other investment classes like bonds or rent streams. Imputation logics skews investment decisions away from other investment classes. It also adds many levels of complexities. For example the dividend policy of BHP’s shares listed in London or South Africa compared to those listed in Australia. Totally unrelated share investment in turn creates excessive speculation and that in itself skews returns. Imputation has exacerbated this. The entire complexities create the need for specialist investment advisers and fund managers.
The entry tax on superannuation is the most hideous attack on savings.
A head teacher from a high school was telling me emphatically that when he is forced to make a decision on his State Super at age 60, take the lump sum and buy a unit. Whether you gear it or not is immaterial. If you can gear it, buy two. Your children will inherit the property, under an annuity only your spouse derives any residual after your death. (His wife also works in the education system). Another couple who worked in the education system now receive an annuity and lament that is why we have no assets (the wife in that case is now on the Board of trustees at UTS – a handy little side income/hobby).
In a perfect world eliminate franking credits. Cut taxation on Superannuation entry to zero. Cut taxation on investment earnings of super funds to zero. Tax superannuation benefits on retirement that exceed 75% of median incomes. Make up the shortfall to government revenues on a broadly based consumption tax. What would be the balancing number, GST goes to 13%? Well don’t stop there, cut all payroll taxes and stamp duties on investment and increase GST again. And apply GST to all purchases including on line. It all sounds much like John Hewson before the election of 1993.
GST has been a dismal failure as it currently stands. The cash economy is simply flourishing. Why do mechanics insist on being paid cash? Builders still pay half their labourers in cash, and they don’t have superannuation or other normal entitlements. Your average plasterer or painter can not afford holidays most struggle just to pay the rent!
I haven’t even started on family trusts! Maybe I should leave that debate to Francois Hollande and Barak Obama. I am enjoying watching it unfold. The rioting in Madrid and Athens is not enjoyable. It is terrible.
What was Doug saying about the professional classes?
Believing in sanity is itself insanity.
EYE-BALL’s ‘Herman’ …