20/20 Investing

The T20 Big Bash League is gaining popularity. There is no doubt of the appeal of 20/20 cricket. It is built for the broad market being short, fast and fun. Cricket is being packaged to appeal to our apparent shortening attention span. Journalism has been focused on our shortening attention spans for longer; this is particularly the case with financial journalism. But in finance, is short-termism fast and fun?

Corresponding with the year-end and summer cricket are the many financial stories in which industry pundits predict the returns of asset classes for the year ahead or discuss the previous 12 months. Making investment decisions based on these one year predictions is the akin to building a cricket team based on 20/20 form. There might be a few short term gains but cricket players really yearn for test match cricket and that is where they want to excel. They want to use their skill to succeed over a longer period of time. Not many other professional team sports in the world require five full days of concentration. Similarly investors should not allow short term investment 'fun' to determine long-term portfolio success.

Ricky Ponting, aka 'Punter', the former Australian Captain is a current commentator on Channel 10's coverage of the T20 Big Bash League, but let’s face it – he would prefer to be calling test cricket. Punter is an example of a test match cricketer and solid 20/20 player who had periods of poor performance and periods of strong performance – like asset classes. It seemed a summer didn't go by in which Ian Chappell wasn’t calling for Punter to be stood down or dropped. Yet here is a batsman who finished his test career with an average of 51.85, placing him behind only Don Bradman (99.94) and Greg Chappell (53.86) . Looking through the ‘noise’ of Punter’s form slumps, over the long term he outperformed every Australian batsman in history except two.

So while 12 months performance is entertaining to report, it is focused only on the short term. When investing it is useful to look through the ‘noise’ of short term performance and consider the long term. Like test match cricket - it may not always be fun to watch, you may defend it to people who call it boring, but it is about the long term.

Index returns for period ending 31 December 2014 

Sources: Market Vectors, Morningstar, UBS. Results are calculated to the last business day of the month and assume immediate reinvestment of all dividends and exclude costs associated with investing in the ETF. You cannot invest directly in an index. The above performance information is not a reliable indicator of current or future performance of the Index or ETF, which may be lower or higher.

As widely reported, global equities were among the top performing asset classes in 2014, returning 15.01% (as represented by the MSCI World ex Australia Index). In the 20/20 world this Index is the equivalent of Kevin Pietersen. It looks good, but there is something about it that doesn’t sit right. The MSCI World ex Australia Index has over 1,500 stocks so includes much good with much bad. The England and Wales Cricket Board (ECB) decided it could no longer take the good Pietersen with the bad Pietersen.

Investors can do that too and with less controversy than the ECB. MSCI, for its World ex Australia Quality Index, applies a filter to the MSCI World ex Australia Index based on three fundamental variables: high ROE, stable year-on-year earnings growth and low financial leverage. It filters out over 1200 stocks so only the highest 300 quality global stocks are included. In 2014 the MSCI World ex Australia Quality Index returned 19.19%. In the short term, quality outperforms. Over five years too, MSCI World ex Australia Quality Index (+15.20% pa) outperforms the MSCI World ex-Australia Index (+12.50% pa). The MSCI World ex Australia Quality Index is solid test-match-like investment, offering longer term outperformance with lower volatility than the standard MSCI World ex Australia Index.

Factors such as a strengthening US dollar and sustained lower interest rates have led to predictions that international equities will perform better in 2015. If you want to take advantage of this, only Market Vectors MSCI World ex Australia Quality ETF (ASX code: QUAL) tracks the MSCI World ex Australia Quality Index.

The other asset class that has been covered extensively in the financial press this year is Australian equities. The Australian share market, as measured by the S&P/ASX 200 Accumulation Index (S&P/ASX 200 Index) rose 5.61% in 2014. The environment for Australian equities remains positive as petrol prices fall and interest rates are predicted to remain low. As a result forecasts have been made for another positive (albeit moderate) rise in Australian equities in 2015. A way to invest in Australian equities is via the Market Vectors Australian Equal Weight ETF (ASX code: MVW) which tracks the Market Vectors Australia Equal Weight Index (MVW Index). The MVW Index rose 10.15% in 2014. Like 20/20 star David Warner, MVW Index has performed well in 2014. Like David Warner, this form extends to the longer comparison. Over five years to the period ending 31 December 2014, the MVW Index has returned 7.91% pa versus the S&P/ASX 200 Index of 6.76% pa. In 10 of the last 13 calendar years the MVW Index has outperformed the S&P/ASX 200 Index.

Sectors within Australian equities that have strong longer term returns are property and banks. Australian investors have an affinity with these sectors. They seem to be like spin bowlers – most teams like to have at least one. In the past few years their performances have been like Shane Warne – some amazing performances in the short term translating to strong long term returns, though there have been periods of volatility. Banks, like Muttiah Muralitharan may need to change their actions due to regulatory changes. The Market Vectors Australia A-REITs Index has returned 14.18% pa for the five years ending 31 December 2014 and over the same period the Market Vectors Australia Banks Index has returned 12.68% pa. These indices are tracked by the Market Vectors Australian Property ETF (ASX code: MVA) and the Market Vectors Australian Banks ETF (ASX code: MVB) respectively.

Another important sector of the Australian share market is the resources sector. Resources, over the long term have been a lot like the West Indian cricket team. It doesn’t seem like that long ago that they dominated. Now their test match or long term performance is relatively poor. The Market Vectors Australia Energy & Mining Index has fallen 3.41% in the past five years. But some of the best international imports in the T20 Big Bash League have been from the West Indies. As commodity prices bottom many commentators are predicting some short term volatility in this sector.

While 20/20 cricket is fun and entertaining, five-day test cricket remains the pinnacle of the sport and excelling in that arena is the aim of aspiring cricketers everywhere. Likewise, while short term gains are entertaining to read about, investors should be aspiring for their investment portfolios to excel over the long term.

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¹Only players who played 50 or more test matches included.
http://cricketarchive.com/Archive/Records/Australia/Test/Batting/Highest_Career_Batting_Average.html

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