The aim is bonds, not shares

A great surge of money has flowed into global bond markets since the global financial crisis, but Australians have missed the boat. While investors in Europe and the US have switched from shares into cash and bonds, Australian investors have made a beeline for bank deposits.

The Boston Consulting Group's latest annual Global Wealth Report found households' shareholdings fell from 47 per cent of their portfolio in 2006 to 38 per cent last year, partly because of the falling value of shares, but also because of a switch to cash. Cash and deposits increased from 33 per cent to 42 per cent over the same period, while bonds held steady at 21 per cent (see table, below).

Investors in western Europe and the US had higher levels of bonds and lower levels of cash.

The head of financial services at BCG, Matthew Rogozinski, says the relatively high cash levels in Australia are the result of a combination of factors.

"Our sharemarket compressed more than others in the past 12 months and we had a high interest-rate environment, but there is probably also a predisposition among individual investors to look at cash and shares [to the exclusion of bonds]," he says.

LATE ACCESS TO BONDS

The head of family wealth advisory firm Professional Wealth, Doug Turek, says Australia is an anomaly in not having a properly functioning retail bond market. So when investors switched from risk assets to defensives after 2007, most of that money found its way into cash deposits, not bonds.

That situation is changing. Bond exchange-traded funds (ETFs), which have been widely available overseas for many years, were launched on the Australian Securities Exchange this year. The ASX also hopes to offer top-drawer Australian government bonds to retail investors by the end of the year.

"The irony is, it's a bit late," Turek says. "There are concerns that bonds are overvalued, and that is probably true. Many Australians missed the opportunity to invest when bonds were good value. Bond funds have averaged about 8 per cent (total return) since 2007, and some have been as high as 10 per cent, while cash has averaged about 5 per cent. That's a 2 per cent to 3 per cent premium for bonds, mostly due to capital appreciation."

Turek advises clients to stick to a pre-determined equity/bond mix and rebalance their portfolio after big market moves.

ALL-WEATHER COMBO

The exact portfolio split between growth and defensive assets depends on the individual. But for the defensive component of their portfolio, Turek recommends an all-weather combination of one-third cash and floating-rate investments, one-third fixed-rate investments, and one-third inflation-linked bonds. "In 2005-07, we were selling equities at high prices and buying bonds," he says. "As the [share]market fell, bonds went up so we started selling them to buy equities."

By contrast, Turek says, many investors had the wrong setting heading into the GFC and are still paying a heavy price for their lack of exposure to bonds.

He thinks shares are not undervalued yet, but if you invested in bonds that have gone up in value, the time is approaching to "buy shares bravely".

Rogozinski says another trend coming out of the GFC is a change in sentiment towards complex financial products among wealthy investors.

"There is a growing desire for simplicity and transparency," he says.

GROWTH-ASSET BIAS

While the rich have personally tailored portfolios, the vast majority of Australians have their retirement savings parked in their super fund's default option, which is designed to suit the many, not the few.

Super research house Chant West says the average super-fund default option had 73 per cent growth assets (shares, listed property and alternative assets) as of last December, and 27 per cent defensive assets (cash, bonds, direct property and alternatives).

In 2006, the split was the same but money has since been shifted out of shares and property into alternative growth assets, such as private equity, infrastructure and hedge funds. Cash levels grew from 3.7 per cent pre-GFC to 5.2 per cent last year.

The picture is very different for self-managed funds, which attract many of the millionaire investors surveyed in the wealth report.

According to self-managed super fund administration service Multiport, these funds had 43.1 per cent in shares as of last December, 26.7 per cent cash and 11.5 per cent in fixed interest, with the balance in property and alternatives.

DEFAULT SUPER FUNDS

Turek thinks default funds have too much exposure to shares. He uses a life-stage approach to asset allocation for his wealthy clients, slowly reducing risk assets as they age and approach retirement.

While some public-offer super funds have adopted a life-stage default option, there is less scope for people on lower incomes to access tailor-made solutions.

Most advisers recommend you don't consider self-managed super funds, which offer greater flexibility and tax benefits, until you have a minimum of $300,000 to invest.

The recent Roy Morgan State of the Nation Report found the average wealth of Australians over the age of 14 was $300,000 for city dwellers and $249,000 for their country cousins.

That's a far cry from the 132,000 Australian households with more than $1 million (excluding property and family businesses) unearthed by the Global Wealth Report. And as for the 228 Australian households with wealth of more than $100 million, they inhabit another planet.

Wealth of the nation

- Personal wealth in Australia stood still in 2011 at $US2.34 trillion, while global wealth grew 1.9 per cent to $US122.8 trillion.

- Australia has 132,000 millionaire households, placing us 17th in the global rankings. The US has the highest number of millionaires (5.13 million), ahead of Japan (1.59 million) and China (1.43 million), but millionaires are thickest on the ground in Singapore, where one home in 17 boasts a millionaire.

- The number of millionaires fell in the US and Japan, while wealthy households are popping up fastest in China and India.

- Wealth is spread more evenly across the community in Australia than almost anywhere. Around 19 per cent of Australia's private wealth is held by millionaire households, compared with 47 per cent in the US, and 60 per cent globally.

Source: Boston Consulting Group