Update No. 168 – 21/06/14

We had a pretty strong rise in EGP’s share price this week. With 10 days until the end of financial 2014, we lead the market by 1.39% since January 1^st and our lead over the market has widened to an all-time high of 42.60% since inception.

One of our recent investors, who joined us with the January 1^st 2014 intake, wrote me this week to ask my views on this article in the SMH this week. He indicated surprise that the gain on residential property had beaten that of shares over the 20 years shown & wondered if the data had been cherry picked. He also asked if I thought the next 6 months would be better than the 6 nearly gone. Here is my reply, as I suspect some of our other investors may care to think about the same thing:

I will start by declaring my reluctance to forecast short-term returns, I am very hopeful of the next 6 months being good & more confident still that the next 10 years will be very good.

I can confidently say the underlying businesses in our portfolio have grown in value by more than the 3.06% (editor – after a good week, it’s now at 4.63%…) that has been reflected in our share price YTD. When that value will show up in the share prices is harder to tell.

I have attached (.pdf)  the performances in a few assets over the last 20 years and the total return for the ASX200 over the 20 years to Jan 1 2014 is 8.98%. $1 invested in the share market January 1 1994 was worth $5.58 by that time. That figure is of course subject to change depending on when the measurement starts, 1994 was a poor year & if 2014 continues as it has, the 20 years to Jan 1 2015 will average 9.99% ($1 becomes $6.73). I think a safe range expectation over the longer term is in the 8-10% range. We obviously hope to do a little better than that, if the foregoing occurred, I would be disappointed if EGP didn’t average close to 15%.

International shares measured over the past 20 years would have performed pretty close to Oz shares excepting the au$ has strengthened by over 30% in that time, stripping almost 1.5% annually from the gains.

When considering residential property over the last 20 years, I would urge you to consider some unusual factors that won’t be replicated in the next 20. Household size contracted from 3.1 to 2.5. All those extra people pushed up property demand (therefore prices). Household size is projected to drop to 2.4 per household in the next 20 years, so that tailwind has nearly played out.

Interest rates (as paid by borrowers) have declined from around 10% to around 5% (this also affects shares by the way, but affects property more…)

Number of dual income households has grown meaningfully.

And debt to household income has risen from around 80% to around 180%.

Each of the foregoing factors has pushed (especially residential) property values along and will not repeat in the next 20 years.

I am no housing ‘bear’, but if I had to pick an expected return for housing over the next 20 years, I would pick something like 6-8% at most, with roughly half each from capital appreciation and rental yield.

So I expect the median return from shares will probably exceed the median return from property by about 2% annually. 2% doesn’t sound much, but 7% for 20 years gets $1=$3.87 & 9% gets $1=$5.60 or 62.4% more growth…

I have over 80% of my net worth tied up in the share market, so my money is where my mouth is. I would only buy property if it had a special psychological pleasure (this is the reason for the one piece of property I own, I like owning my own place & its location perfectly suits my needs), or if I had value add skills in renovation or the like. – Tony Hansen 21/06/2014

EGP Fund No. 1 Pty Ltd. Up by 4.63%, leading the benchmark by 1.39% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 71.92%, leading the benchmark by 42.60% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1.000 cent per share Franking Credit & 31 May 2014 Dividend of 7.000 cents per share plus 3.000 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}