Strong first half puts investors on the front foot
Share market investors around the world enjoyed strong returns over the first half of 2021 as economic activity rebounded and corporate earnings continued to strengthen.
If you have share market investments, particularly through low-cost managed fund and exchange traded fund (ETF) products that provide broad exposures to markets, your returns over the six months to 30 June would, in most instances, have exceeded 10 per cent.
Those with diversification into developed international economies have enjoyed the strongest returns so far this year.
Developed economies have been recording strong gains for a variety of reasons including accommodative monetary policy and the steady progress in rolling out COVID-19 vaccines, which has seen a pathway towards an end to prolonged lockdowns.
On the other hand, many emerging market economies are still struggling to contain the pandemic and their share market performances, while still positive, haven't been as strong.
Leading the way in the first half were Europe and the United States, with the European Stoxx 600 and the S&P 500 indices each gaining more than 15 per cent.
The Australian share market, as measured through the S&P/ASX 300 index, rose around 14 per cent over the first half, with the bulk of the gain coming in the second quarter. Emerging market returns were around 8 per cent over the first half.
Following the investor money flows
Rising investment returns this year have added trillions of dollars to the total value of money invested on global markets.
But in tandem with this has been record new investment inflows into markets, particularly into shares and different fund products that invest across markets and different sectors.
For example, Australia's ETFs market surged through $100 billion for the first time in June, fuelled by the growing number of retail investors recognising the benefits of broad diversification.
Improved company earnings results also have translated into higher dividends and distributions, which have added to the market returns flowing to investors.
Vanguard has continued to see strong inflows into our ETFs and managed funds, coming directly through the Vanguard Personal Investor platform, third party advisers and from the Australian Securities Exchange.
The market conditions have been very strong, and investors are gravitating towards single-market exposures such as our funds covering Australian shares or global shares.
We are also seeing a growing interest in investing in our readymade diversified funds because they provide low-cost, easy access to multiple asset classes and they're rebalanced automatically.
Another trend over the first half of the year, which gained momentum during 2020 as the Australian dollar rose against other currencies such as the U.S. dollar and euro, was the use of hedged investment products.
Hedging involves locking in exchange rates when an investor, for example in Australia, is investing in a product that has assets priced in other currencies. This helps reduce the impact of currency movements on the value of investment holdings.
The goal of hedging is to provide investors with exposure to the underlying performance of an investment without being impacted by the movements created by currencies moving against each other.
The Australian dollar has increased from below US 60 cents in early 2020 to the current level around US 75 cents. This has befitted investors who are hedged into Australian dollars relative to unhedged investors providing hedged investors a greater total return. It's worth noting that investors in a hedged fund may receive additional income resulting in higher taxable distributions when the Australian dollar rises against major international currencies.
But the Australian dollar has lost some of its steam over recent months and any decision on whether to hedge or not to hedge needs to be well considered in line with your risk tolerance, your investment time frame and your overall goals.
You can read more on this in a recently published article on Smart Investing all about hedging which talks about the latest investment conditions and how and when hedging can be used as an investment strategy.
Investors are becoming more savvy
It's evident that investors are becoming savvier in terms of where and how they invest.
We saw during the COVID crash last year that many investors weren't panicked by the sudden falls on global markets and, instead of selling into the storm, they held on.
Investors have been well and truly rewarded because markets not only recovered quickly but are now at record levels. Imagine having sold out at the bottom and having missed out on all the upside that's happened since early last year.
It's a key lesson. Investing is about the long term and continuing to invest all the way through to reap the benefits of compounding returns, rather than trying to time markets – which is impossible because no one knows what markets will do from day to day.
Vanguard has been operating in Australia for over 25 years, serving investors directly or their advisers here, who've entrusted us with their money and our message to investors all this time has never changed. The most reliable way to build wealth is to switch off from the daily market noise and to stick to your long-term goals. It's a proven strategy.
Balaji Gopal, Vanguard Australia,
Note: If in doubt, speak to your Financial Advisor/Planner, or call Westmount Financial/Rick Maggi (Perth)