Australian share prices, including dividends, may be down 7 per cent over the past year to February 29 but the good news is that most small shareholders have done better than that.
Analysis by CommSec of the big listed companies held by the "mums and dads" shows that once dividends are included the total return of the typical small shareholders was down only 3 per cent.
The main reason that small investors are doing better is the outstanding performance of Telstra. In the past year, the telco rewarded its 1.4 million shareholders with a total return of almost 30 per cent.
"There has been demand for safe-haven-type stocks and demand for yield-bearing stocks and also the National Broadband Network provides some earnings certainty for Telstra," the chief economist at CommSec, Craig James, says.
Telstra's share price has risen from about $2.50 to about $3.30 over the past year and is currently on a cash dividend yield of more than 8 per cent - even more including tax benefits from the dividend franking.
"What Telstra highlights is that if you just look at its share price you are missing a major component of the returns," James says.
The main reasons for the poor performance of the broader market have been the performances of BHP Billiton and Rio Tinto, whose shares are held mostly by institutional investors rather rather than individuals. On a total return basis, both stocks are down more than 18 per cent over the year. Though, over the longer term, both stocks have been outstanding performers.
The mums and dads stocks are those that were mostly listed in the 1990s when government-owned businesses such as Commonwealth Bank were sold and mutuals, such as AMP, were privatised. The nine widely held stocks that make up CommSec's mums and dads index - Telstra, Commonwealth Bank, Woolworths, Qantas, AMP, Tabcorp, Suncorp, IAG and Wesfarmers - are mostly good dividend-payers and have generally been favoured by anxious investors looking for safe havens for their money.
The main detractors from the returns of the portfolios of mums and dads have been Qantas and AMP. Qantas is down, on a total return basis, by more than 26 per cent over the past year and 34 per cent over the past two years. "Airlines around the world are having to adjust to strong competition and oil prices are trending higher," James says.
"Also, global uncertainty and higher unemployment rates in Europe and the US are restricting the demand for travel.
"We have restricted tourism inflows to Australia because of the higher Australian dollar, though outflows remain healthy."
AMP is the second-poorest performer among the stocks favoured by the mums and dads with the stock down, on a total return basis, more than 19 per cent over the year and 23 per cent over the past two years.
James attributes the poor performance to weak investment markets and the desire of investors to put their money into cash.
Since the start of this year, Australian share prices are about 5 per cent higher. But it is still a long road back for shareholders to the market's record high of November 2007 with prices still 40 per cent below the peak. The analysis of the widely held companies by CommSec shows that once dividends are included to give the total return, the typical small shareholder is only 20 per cent less than in November 2007.
But the recently concluded profit reporting season shows recovering the 20 per cent shortfall is still likely to be some time off. In 2011, profits rose by just 2.1 per cent. And data released this week for the last quarter of last year shows annual growth of the Australian economy has slowed to 2.2 per cent, down from the long-term average of about 3 per cent.
James says the gross operating profit performance is the second-worst in 17 years, prior to the onset of the GFC. Profits rose in seven of the 15 industry sectors in the December quarter, led by administrative and support services (up 12.4 per cent) and electricity, gas and water services (up 4.7 per cent). Profits fell 57.3 per cent in the volatile financial and insurance services after a 36.1 per cent rise in the September quarter.
Profits also fell in mining (down 8.7 per cent), manufacturing (down 5.1 per cent) and construction (down 4.2 per cent). More cautious consumers, the high Australian dollar and relatively high interest rates are behind the overall slump in profits.
Even though two of the giants of the Australian market - BHP Billiton and Rio Tinto - have been struggling over the past year they probably should be held in the portfolios of small investors, James says.
They remain very profitable and the long-term outlook is good but they have been hit by sharply higher operating and capital costs. James says another reason BHP and Rio's share prices have been under pressure is that investors have been favouring the safe-haven parts of the market like Telstra and the utilities and some of the other higher-yielding stocks. Also, the high Australian dollar has made these stocks less attractive to foreign investors, he says.
THE NEED TO DIVERSIFY
The better-performing share portfolios in the long-term are those that have had exposure to
the resources sector, the chief economist at CommSec, Craig James, says.
Investors who held BHP-Billiton and Rio Tinto in their portfolios in the past 10 years would have significantly out performed the broader sharemarket. It is always a question of the time frame that you look at and if you are only looking at a one- or two-year time frame, thats a relatively short time period, James says. In the late 1990s and early 2000s resources were out of favour. There was nothing driving commodity prices higher before the industrialisation of China. BHP-Billiton and Rio Tinto are very much nowconsidered by the market as blue chip stocks, James says. There are always going to be bumps in the road but the more
stocks you have covering the industry sectors, the greater the diversification and the less you are exposed to the vagaries of just a few industry sectors, he says.