Published in The Australian 6 February 2016
Australian bonds did slightly better than shares in 2015 with the benchmark Bloomberg AusBond Composite Index returning 2.59 per cent compared to the 2.56 percent returned by the ASX 200 Accumulation Index
I can almost hear the stock pickers claiming they had better returns than the index last year and it’s true the indices hide the best and worst performing investments, so let’s consider them individually.
The best performing share last year was vitamin company Blackmores which returned an eye-popping 519 per cent. Second was outdoor advertising company APN Outdoor with 140 per cent closely followed by gold miner, Evolution Mining on 130 per cent.
The worst performing was Slater and Gordon, down 86 per cent. Meanwhile, anyone heavily invested in the resources sector would have been hit with big losses. Seven out of the ten worst performing shares were from resource companies with losses ranging from 48 to 66 per cent.
The best Australian dollar bond returns were nowhere near the top three performing shares. Top was a Royal Women’s Hospital indexed annuity bond on 11.5 per cent, followed by two fixed rate Qantas bonds; the one maturing in 2022 returned 10.7 per cent and the 2021 maturity, 10.5 per cent. Proving that even in a low rate environment it is possible to get a double digit return in corporate bonds.
The analysis gets interesting when it comes to the worst performing Australian dollar bond, as the return was still positive. The bond was an Australian government inflation linked bond that returned 0.5 per cent.
This simple analysis of the two asset classes showcases a key reason that investors diversify into bonds, which is that the range of returns is much narrower than shares. Sure, it’s unlikely you will get returns of over 100 per cent in bonds, although it is not unheard of, but you do get less volatility and a lot more stability. Even if bond prices fall, investors also have the comfort of holding the bonds to maturity, when they can expect to get their capital back and their return will be positive.
Obviously both asset classes had a range of outcomes that are not reflected in the indices. Any asset class can outperform any other in a single year, which makes longer timeframes more insightful. Annualised returns over the last two years show the composite bond return was 6.14 per cent against the ASX 200 Accumulation Index of 4.07 percent. Over five years we would expect the shares to have outperformed, and they did at 6.97 per cent compared to bonds at 6.62 per cent, but the gap is much closer than many investors would have anticipated.
Bonds versus shares
| Returns over time | 1 year | 2 years* | 5 years* |
| AusBond Composite Index | 2.59% | 6.14% | 6.62% |
| S&P / ASX 200 Accumulation Index | 2.56% | 4.07% | 6.97% |
Source: Bloomberg Finance L.P.
Note: *Annualised returns
The one year returns from bonds and shares start to make cash look appealing. If you hold significant deposits, in some cases your returns may have beaten both the indices. But investing in term deposits in particular, doesn’t allow any upside nor access to liquidity if you need to access your funds compared to bonds and shares which have upside potential and are both tradeable.
Although this note focuses on historic returns, I’m not a fan of investing according to past performance. Diversification and a sound asset allocation strategy according to your stage in life will help you meet your financial goals.
Notes: The AusBond index contains around 60 per cent of very low risk government bonds.
Hybrids are not bonds, so have not been incorporated in this note.