Market Valuations 10 Years on from the Financial Crisis

Where have investors made money over the past 10 years - and what should they consider when analysing returns and future gains?

Emma Wall 23 August, 2017 | 4:17PM
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Emma Wall: Hello and welcome to the Morningstar Series "Ask the Expert". I'm Emma Wall and I'm joined today by Morningstar Investment Management's Dan Kemp, to talk about the last 10 years of investing.

Hello Dan.

Dan Kemp: Hello Emma.

Wall: So, this year marks 10 years since the beginning of the global financial crisis. And it has been a bumpy ride. But I thought it would be useful for investors to see how far we've come over the last 10 years. And if you had been brave enough to hold on to your hat, which have been the assets that have performed best over the last decade.

Kemp: Absolutely and it’s worth remembering that August 10 years ago was in some ways quite similar to where we are now. We'd come off the back of a very long run up in asset prices. The economy seemed to be doing very well. There were certain parts of the market doing much better than ours. But there also wasn’t a lot of value it was quite tightly constrained. So again, some similar characteristics. We don’t seem to have some of the bubbles that were so obviously visible that time – exactly – we hope we haven’t got them not underneath the surface. But there were some similarities. But it has made a huge difference what investors did at that time and what they have done subsequently.

Wall: So, which then have been the standout asset classes?

Kemp: Well, the key ones I have looked at are US equities have been one of the best performers, but of course it's made a huge difference whether you've been investing from the US or investing in the UK. One of the key trends we've seen over the last 10 years is a very sharp decline in the value of the pound. So, actually you would have done so much better as a UK investor investing in US equities than as a dollar based investor. So you must always remember it's not just the assets you are investing in it's the currency you are investing from. That’s been one of the key messages over the last years.

Wall: And indeed, to that point there are number of caveats when you are thinking about total return versus just looking at a line graph of what's performed over the last 10 years, fees being one of them.

Kemp: Absolutely and so fees have had a huge effect on many investors. So, if you think about what the UK stock market's done over that period it's been a return of about 6.5% annually. Now if you take off inflation - let's say that averages 2% over the long term- than you are down to about 4.5%. Well if you take 1% or 2% off that, that’s a huge proportion of the return. And so as ever investors need to be thinking about the fees they are paying. Paying as little as possible and making sure they are paying for the right things, not just for expensive trackers for example, but paying for advice maybe if that would be useful for them or equally paying for high quality management.

Wall: Flipping that though, because it's not all doom and gloom. That figure looking at that line graph doesn’t include something which does uplift total return and that of course is dividends.

Kemp: Absolutely and again that’s the other thing that makes an enormous difference to returns if you just look at the price return of the UK. stock market over the last 10 years. From this point 10 years ago it looks pretty lacklustre. If you add in reinvested dividends, it makes a huge difference and so there is two lessons there. The first is that you must think about making sure you are getting the dividends, that’s not always the case with all investments. But equally if you are an income investor than the outcome for your capital may be very different if you are then using those dividends to spend. So, dividends as we know this from very long term studies make a huge difference and need to be one of the key considerations for any investor.

Wall: Of course, it is worth noting that this is backward looking conversation and say you have been lucky enough to be a UK investor investing in US stock market over the last 10 years and you have done incredibly well for that investment. This can't continue forever, can it?

Kemp: No, absolutely right. Remember we had huge drawdowns along the way. So, whether you were invested in UK equities, US equities, emerging market equities, you'd have seen very significant falls and incredible returns from the bottom. So, when we are in a situation as we are now, and prices look high, and not many assets appear to offer good value, then it's really important to remember that we may have similar declines in the future. The markets do go up and down. If you’re a long-term investor, the last 10 years have taught us that you get a reasonable return. But you get a phenomenal return if you are able to invest when everyone else is scared. So, again look for good opportunities, look for unpopular assets rather than simply going after the most trendy investment.

Wall: Dan thank you very much. This is Emma Wall from Morningstar. Thank you for watching. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar