Keeping You

2016 Was a Special Year

02 Mar 2017

2016 was a year very close to our hearts. There have been many reviews of 2016 - disbelief around the election in the United States, the referendum in the UK - but 2016 was special for another reason.

2016 was the year when our tilt to value companies came home in spades, to a lessor extent internationally, but handsomely in Australia. Value companies are the shares of companies that are cheap compared to their underlying value.

We always say that past returns do not tell us anything about future returns over the short to medium term. There are more important services we provide to our clients than trying to shoot the lights out with performance. That approach only leads to the taking of more and more risk and ends in tears. But we do take risks that other advisers don’t take when we allocate large proportions of our clients’ money to value and small companies.

These companies are higher risk than large companies so why do we do it? “The evidence, my dear Watson!” The evidence from independent researchers tells us that these risks are worth taking; over time they pay off with higher returns than normal companies. And after a relatively quiet period for a number of years they did pay off in 2016.

How much extra performance are we talking about?

  • Australian large company shares (normal companies) returned 10% for the year*
  • Australian small company shares returned 11% for the year
  • Australian value shares returned 25% for the year


That is a whopping out-performance for value companies over large companies of 15% for the year (value companies represent half of our total allocation to Australian shares).

To be fair our Australian value companies had under-performed for a number of years and so we were due for this out-performance. In a way it was catch-up and we were glad to get it.

Note that we are not comparing apples with apples when we compare value companies with large companies. We are highlighting the difference in return and also the difference in risk between the two types of investment.

As an aside, I checked the impact of our currency against the Australian dollar and we gained 2.4% against the Aussie dollar over 2016. That means the returns we received and quoted above were 2.4% lower than they would have been in Australian dollars. We don’t hedge the Australian dollar.

We hesitated before bringing out this note on last year’s returns. Trying to be top performer is not our objective. We are too conservative for that. Being consistently in the top half of competitor returns is a much better objective. Our primary concern is to make sure that our clients meet their objectives over the long term and one year’s performance is not particularly meaningful.

What the past year does show us is how lumpy the returns from small and value companies can be. One needs to remain invested for the long term and every so often one’s patience is rewarded.

Our international shares also produced a pretty good year for small and value companies. Take our NZ dollar hedged returns:

  • International large company shares returned 11%*
  • International small company shares returned 17%
  • International value company shares returned 17%


That again is a great out-performance for value and small companies over international large companies (around 6% for the year). Remember that only half of the international shares are hedged. The other half returned 5% less than their hedged counterparts for the year due to a rise in the NZ dollar.

Putting all that together – our diversified portfolios managed to strongly out-perform a number of other big names in the investment world by quite a large margin. Our tilts to value and small companies are likely to account for a good portion of that.


For an outfit that focuses on ‘steady as you go’ and avoids the risk of stock-picking and market-timing we had a pretty good year in 2016.

I am sure you will agree.

Rhodes Donald


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*All returns rounded to the nearest whole number, after all investment management costs but before adviser costs and tax

Past returns tell you nothing about future returns and are not a good guide to selecting investments or investment managers. This article does not constitute advice. Figures prepared by Polson Higgs Wealth Management from original sources. A Polson Higgs Wealth Management Discretionary Investment Management Service Disclosure Statement or Disclosure Statement for Rhodes is available on request. See