The best way to make money over the past two years? Take your money out of cash and invest in infrastructure.
That’s one of the findings of AMP chief economist Shane Oliver, as part of a note to clients on successful investing.
And the research includes this handy summary of the best and worst performing asset classes in Australia each year since 2001:
Oliver used the chart to illustrate the benefits of a diversified portfolio.
The table shows that the best and worst performing assets classes vary from year to year, and no specific asset class has outperformed for an extended period.
By diversified, Oliver means developing a portfolio of assets that react differently to key macroeconomic events.
“For example, global and Australian shares tend to move together during extreme events. But bonds and shares tend to diverge when crises hit – as we saw in the global financial crisis (GFC) when shares fell sharply but bonds rallied,” Oliver said.
The table also reveals a cyclical pattern in various asset classes.
Global listed property was the best performing asset class in three of the four years leading up to the GFC, before the trend reversed in 2007 and property-related assets were the worst performers for three straight years.
Recently, unlisted infrastructure has been the best performer. By that, Oliver is referring to managed funds that provide exposure to different infrastructure assets such as airports and electricity/gas utilities.
Such assets typically provide a stable dividend yield to the owner, with low volatility.
It’s an asset class that’s well-suited to the prevailing macroeconomic backdrop of low interest rates and central bank liquidity.
In that environment, Oliver said that investors typically embark on a “search for yield”, seeking solid yield-based investments in response to very low interest rates and strong returns from the underlying assets”.
Conversely, cash has been the worst performer as low interest rates minimise the return from cash deposits.
However, that may change if central banks in the US and Europe embark on their current plans to begin tapering asset purchases.
The resulting withdrawal of liquidity may be the catalyst for a shift in the global investment cycle, so it will be interesting to watch which asset classes outperform next year.