Daily Telegraph, 5 January 2006
BLUE-chip stocks may be unsuitable holdings for personal investors, says a Sydney professor who has produced a theory explaining the differences in returns produced by various assets.
UNSW’s Peter Swan argues patient investors should consider buying “illiquid” stocks – those which trade less frequently – as these stocks produce better returns.
After examining decades of data from the New York and Australian stock exchanges, as well as international bond markets, Professor Swan found that the more difficult it was to buy or sell an investment, the better its return. A company with shares that did not turn over frequently tended to deliver better returns than big blue-chips.
Illiquid stocks could be appropriate investments for “mums and dads”, Prof Swan said, because they do not need to trade regularly. It was mainly big investment firms that needed liquid portfolios.
“If you don’t want to trade much then you may be better off with such a portfolio,” he said yesterday.
“People think the higher returns we’ve seen on the stockmarket (than the bond market) are due to risk, but that only explains about half a percentage point of the higher returns enjoyed by equity.
“In my theory, the remaining 5.5 per cent to 7.5 per cent represents compensation for lack of liquidity,” he said.
This was borne out by the superior historical returns “small cap” managed funds produced when compared to funds filled with share- market heavyweights.
Over the three years to the end of September, the S&P/ASX Small Ordinaries Accumulation index returned 25.3 per cent a year, versus 20.8 per cent a year for the S&P/ASX 100 Accumulation index.
Prof Swan said he had yet to find an asset class which did not fit his theory.
Cash was the easiest asset to buy or sell, yet its return was almost always negative – with the purchasing power of a dollar declining whenever prices were on the rise.
Bonds came next on the scale and they delivered a return of barely better than zero.
Within equity investments, Prof Swan found that “letter stock” – that which cannot be bought on the open sharemarket and then cannot be on-sold for a specified minimum period of time – outdid other classes of shares.
The theory even applied to the stellar investment returns from real estate in Sydney’s Eastern Suburbs, including his own clifftop home at Tamarama.
Such properties were harder to buy and sell, due to scarcity and relatively high transaction costs.
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