The three tried-and-tested domestic asset classes – shares, the Australian dollar and residential property – are in for a "shock" with the factors that buoyed them for two decades "no longer in play", says Russell Investments.
The 2016 Long-term Investing Report, co-authored by the ASX and Russell Investments, poses a stark warning to Australian investors who are relying on local asset classes to meet their long-term investment goals.
In the 10 years to December 2015, Australian listed property and cash have returned a "meagre" 1.7 per cent and 3.1 per cent, respectively, said the report.
A standard CPI+4 per cent return for the decade ending December 2015 would have been 6.6. per cent per annum – yet only residential property (returning 8 per cent) and hedged global bonds (7.3 per cent) would have made the grade.
Over the decade to December 2015, a typical balanced fund with 70 per cent growth assets and 30 per cent defensive assets would have only returned 5.7 per cent on a gross basis, said the report.
While residential property was the best performing asset over the decade, there are "cracks appearing" in the much-loved asset class.
"In the fourth quarter of 2015, Australia as a whole posted a -0.6 per cent growth rate in median property prices, the first negative growth quarter since September 2012," the report stated.
Another indicator that property's "dream run" may be coming to an end is property prices in Sydney, according to the report. The median property price growth rate in Sydney peaked in the first half of 2015, fell during the second half of the year and turned negative by the final quarter of 2015.
Property aside, the report warned that traditional share and bond markets are expected to deliver lower returns and higher volatility than in the past few decades.
"Investors wanting to continue to achieve their required rate of return, at a risk level they can tolerate, should consider dynamically managed real return funds to gain exposure to a more diversified investment opportunity and be able to quickly respond to changing market conditions," it said.
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