Before offering our views on the future, it is sobering to look at just where markets are in terms of historical lows. Let's look at the three charts below before continuing our analysis.

Chart 1: Looking at extreme investment years
The chart below looks at the annual investment returns for Australian Shares (All Ordinaries Index) for the last 109 years. As you can see, in 81% of years the returns are positive; typically between 10 and 20%. This chart also shows how extreme 2008 has been, with the All Ordinaries Index falling over 40% to 29 October, recovering a bit in the past couple of days to be down 38% by 31 October 2008.

Australian Shares: Annual Return Range for last 109 years

Chart 2: Looking at actual rolling returns since 1884
This chart (to 31st October 2008) also shows just how extreme 2008 has been, with only the Great Depression in 1929 and the OPEC oil crisis in 1974 producing such difficult market conditions. Over this 124 year period, Australian shares have returned a median return of 11.8% p.a., which is well ahead of cash returns over that period.

Source: ASX, Perennnial (Please note the two different indices used - the All Ordinaries Index in Chart 1 and the All Ordinaries Accumulation Index in Chart 2).

It is quite interesting that a book first published in 1954 is now on the US business books best seller lists. “The Great Crash 1929”, by celebrated economist JK Galbraith, is selling out, as investors are increasingly concerned that we are in for another global depression. While some of the events in 1929 are eerily similar to today (land boom in Florida, excessive margin lending, stock market boom etc), comparison to the Great Depression should not be taken out of context, as the globalised world we live in today is vastly different to that of the 1930s (which I’ve heard about from my parents – not experienced firsthand!)

Important points of difference include:
• The US Government actually tightened rates in 1928 to choke margin lending, but managed to only exacerbate the economic slowdown. In contrast, the Fed cut the US cash rate from 5.25% in September last year to 1% today – a shift of 4.25%!
• The Gold Standard which operated back then meant that countries converted currency back to gold, contracting the world’s money supply and exacerbating the slowdown. In contrast, central banks today are pro-actively opening up their balance sheets to provide liquidity during stress.
• The speed of communication, increased productivity, flexible systems (such as just in time inventory), flexible labour markets, increased global trade and strong internal demand from emerging economies (such as China) are features of today’s environment which were not present in the 1930s.

How do stockmarkets behave in times of extreme stress? Typically, in these period markets exhibit the following characteristics:

Capitulation  Chaos Catalyst Confidence

We have certainly seen US retail investor capitulation, with net outflows out of US Equity Mutual funds of $US 33.7billion (3rd highest on record) for September and an estimated $US41.8billion (2nd highest on record) for October. The effect of capitulation is to drive stockmarkets down further, as stocks are sold to meet the redemptions. However, such capitulation may be a sign of a market near the bottom. Interestingly, US retail investors put their toe back into the water with estimated net inflows for the last couple of days of October.

From an investor’s viewpoint, there are unfortunately no clear signposts as to when markets will go through these transitions. Rather, markets typically bounce quickly once they have troughed. For instance, in the last nine bear markets, the stockmarket has bounced back an average of 22% in the first six months from the bottom.

Listed property was hit particularly hard during October, with US REITs falling by 32% in local currency terms. Perennial Real Estate has put together a paper to give some further clarification on the listed property sector. Click to download file.

We are experiencing history-making volatility in world financial markets, with 2008 shaping up, unfortunately, to be one of the worst years on record for investors in growth assets.

At current levels, markets are pricing in a large amount of uncertainty, as stockmarktes tend to overshoot on the downside in times of such stress. Two weeks ago, well known investor, Warren Buffett, who is currently buying US stocks, said “be fearful when others are greedy, and be greedy when others are fearful”. History tells us for those with cash (particularly in an environment of falling cash rates), averaging into the market at these levels has proven to be a long-term winning strategy.

For those investors who currently have a long-term, high quality, diversified portfolio, apart from looking at strategic rebalancing based on recent movement in asset prices, we believe that the key to long-term investment success is sticking to your existing long-term investment plan.

Brian Thomas
Head of Retail Funds Management
Perennial Investors Partners

Conservative, Growth and High Growth investors all experienced negative returns for the month and for the 12 months to October showing there has been nowhere to hide over the last 12 months, with the typical growth investor seeing their portfolio down by 25%.

Source: Perennial Investment Partners
Read more for Perennial Investors Index and market returns.

Equity market declines accelerated in October and volatility reached record highs, as concerns mounted that the global economy may be headed toward recession. The ASX300 Accumulation Index fell 12.9%, its worst month since October 1987. The Perennial Value Shares Wholesale Trust (the Trust) outperformed in this difficult environment, finishing down 12.1%.

For the year ending 31 October, the Trust’s return of negative 34.5%, compared to the Indexk return of negative 38.3%, delivered a 3.8% outperformance.

Globally, markets continued to turn their attention to the risk of a global economic slowdown and the potential impact of lower growth in developing countries including China. These concerns over the demand outlook for commodities in particular, flowed through to the local market, where resource equities were once again sold down. The Materials and Energy sectors were down 18% and 19% respectively, and had a negative impact on the Trust for the month.

October marked another challenging month for equities, with all major indices down double digits. Unprecedented volatility resulted in erratic intraday market movements, with the S&P 500 closing +/- 2.5% in 12 of the 23 trading sessions during the month. Commodities continued their downward spiral as a plethora of economic data pointed to signs that slower growth would curb demand. Tightening credit conditions also worsened during the month, having a pronounced impact on automobile sales and manufacturing activity. However, markets rebounded towards the end of the month as coordinated interest rate cuts by central banks assured investors that a complete market meltdown would be averted. In addition, better than expected earnings results and guidance from several blue chip U.S. companies allayed investor fears that a dramatic slowdown was imminent. The Trust experienced another difficult month as the continued sell-off in growth stocks had a negative impact on performance.

Despite the extreme market conditions of October, Australian fixed interest investors had another good month, with the UBSA Composite Bond Index (the Index), gaining 2%. Over the 12 months ending October, the Index is up 10.6%.

The Trust outperformed the Index. The main contributor was a narrowing in the yield spread between swap and government securities. High running yields from non-government securities also helped the Trust over the month. Duration decisions detracted a small amount of value, with the Trust’s slightly short duration for most of October. The Trust remains positioned to benefit from the eventual normalisation in credit markets.

An update to 2008 So Far: The Year of Investing Dangerously. Click to download file.

The original paper can be downloaded by clicking here.

The Lonsec/ Money Management Fund Manager of the Year for Equities (Broad Cap), Perennial Growth, secured a second van Eyk “A” rating, this time for their High Conviction Trust. The Trust consists of the Team's highest conviction 20 stocks with an index unaware approach. This product is available direct ($25,000 minimum) or through the IOOF Pursuit master trust.

In a difficult property market, bottom up research, with a team located around the world, selecting the best stocks makes sense. This month, Zenith reviewed Perennial’s global property capability and awarded it their highest rating.

It is business as usual at Perennial in these difficult times for the industry. Importantly, our business remains profitable and stable, with zero turnover of senior investment professionals. Times are certainly tough for many investors and we are committed to helping you communicate market issues and our investment strategies across all our boutique businesses.

Click here for Perennial's Investment Strategist, Frank Uhlenbruch's Monthly Strategy Update.