Summary: Equities take the cake when it comes to the asset mix, according to the ASX-Deloitte 2017 Australian Investor Study, as cash loses its appeal and property ownership doesn't live up to its media hype.
Key take-out: Less than half of the Australian investors surveyed had diversified portfolios, which could be pressing on returns. Surprisingly, millennials are more risk averse than their parents when it comes to investing.
Key beneficiaries: General investors. Category: Investment strategy.
Equities remain front and centre of the asset mix for Australians, preferred above even property and cash, but investors are struggling to diversify.
When it comes to diversification, most investors stick with different shares. Even though most say they understand what diversification is, less than half actually have diversified portfolios.
These are some of the outcomes of the 2017 Australian Investor Study conducted by Deloitte Access Economics and the ASX.
The study, which has been conducted since 1986, canvassed 4000 individuals for its most comprehensive iteration yet.
If you love holding shares, but have followed more of a ‘set and forget’ strategy this past year, you’re not alone. Of the 1500 survey respondents that do hold equities, a very low proportion had traded more than 50 times in the 12 months to March.
Around 60 per cent of investors didn’t place a single trade during that period.
Cash is losing appeal
Australian Tax Office data shows self-managed super funds alone still holding $157 billion in cash, but the tide may be turning across the board as more investors switch into other higher-performing assets.
The ASX-Deloitte study found that 62 per cent of investors hold ‘on-exchange’ investments, with 56 per cent also holding cash and 37 per cent holding investment property.
Across the entire spectrum of respondents, more are planning to move out of cash than any other investment over the next 12 months:
The more someone makes, the less likely they are to hold cash, the study revealed. A higher proportion of investors earning more than $150,000 held shares as opposed to cash.
“This could be partly attributable to the low interest rate environment – holding cash is not very rewarding in the current market,” said the study.
“If you look at the data, you have people intending to come out of cash, and more intending to buy shares. People have an aspiration to earn more about sophisticated investing and act on it, but this might not eventuate as much as the data suggests.”
What else is in the pie?
When it comes to the toppings on the asset allocation pie, there’s not as much variety as some would like.
The study included commentary from NAB about the bank often seeing “a disconnect between investors’ understanding and implementation of diversification”.
“Most investors feel comfortable with shares, cash, and property, but little else,” said the report, which also highlighted “a knowledge gap” for products “seen as complex”.
“It means that investors have less diversified portfolios than they otherwise could have. That is, investors may not be optimising their return for the level of risk they are taking on.”
Of the lesser known on-exchange products, listed investment companies (LICs) and exchange traded products, such as exchange traded funds (ETFs), are leading the way.
Scaled from the study results, 14 per cent of the Australian adult population held on-exchange investments other than shares.
LICs are now held by 3.9 per cent of the population, more than double the 2014 figure of 1.1 per cent. Over that period, the number of LICs operating on the ASX increased by 88 per cent to 96 in total.
By the same token, the number of ETFs on issue in Australia has increased by 61 per cent to 203 during this period, with total ETF assets under management now close to $30 billion. That growth is being heavily driven by financial advisors, who are increasingly recommending their clients into ETF portfolios.
No risky business
According to the ASX study, Australian investors are more risk averse than their global peers.
And, if fortune favours the brave, millennial investors are short-changing themselves the most of all.
More millennials are dipping their toes into investment markets. Over the last five years, the proportion of 18-24 year olds investing across all asset classes has doubled from 10 per cent to 20 per cent.
Millennial investors expected the highest returns among those surveyed, but were prepared to take on the least risk. Of those surveyed part of the next generation, 81 per cent were “seeking guaranteed or stable returns”. On average, millennials expected an 8.2 per cent return per annum on their investments, and more would “lose sleep” if their investment balance dropped 20 per cent:
These figures were disproportionate to 60 per cent of retirees “seeking guaranteed or stable returns” and this cohort expecting a slightly lower 8 per cent return per annum on average.
Deloitte Access Economics partner and study author, John O’Mahony, described this as a “breakthrough finding that challenges conventional wisdom about risk aversion and age”.
“This may be related to the economic environment that the younger cohorts have grown up in - witnessing the impact of the global financial crisis in their formative years,” the study added.
“At the same time, relatively lower financial knowledge and financial experience may also be driving this higher degree of cautiousness.”
These results largely support the conclusions of a global investment survey by Legg Mason in 2015 where only 29 per cent of Australian investors were prepared to increase their risk profile, as opposed to 66 per cent of investors globally.
O’Mahony said investors appear diversified, based on the returns they are chasing, but their portfolios tell a different story.
“These look like people who want diversified assets, but 40 per cent put their hands up in the air and said they weren't diversified,” he said.
“People should at least be across asset classes, across the world, or investing in products that automatically have diversification built in like ETFs. If they haven’t thought about diversification in this way before, they probably aren’t diversified.”
There’s been an increase in the number of investors holding international shares, although Australians are still heavily biased towards ASX-listed stocks. From 2014 to 2016, the number of Australian investors with international shares ticked up from 5 to 8 per cent of investors.
This could be skewed by migration data, however, and overseas companies buying Australian business.
International shares ownership is now at its highest point since at least 2002, or as the study noted, “back to its pre-GFC peak”.
“This could partly reflect improved appetite for overseas listed investments as well as better access,” said the study.
“However, investing directly in international shares can be expensive, and many individuals instead invest through managed funds or exchange traded funds.”