The market was very kind to investors in most major asset classes during the December quarter, driven by a positive change in the narrative around inflation and Global Central Banks easing monetary conditions earlier than expected in 2024. A more supportive tone from the U.S. Reserve Bank in December started the trend, but markets quickly started to reprice the outlook for the world’s other major central banks to follow suit.
Global share markets experienced heady returns with the MSCI World Index gaining 4.2% over the month of December and emerging markets up by 3.2% (or 10.0% and 5.6% respectively over the quarter). Fixed interest yields also continued to decline, and the Bloomberg Global Aggregate index rose by 4.2% over
the month (8.1% for the quarter) (total returns in local currency).
In the month of November, the S&P ASX 300 Accumulation Index registered positive returns, having the best month since January 2023. This was followed in December by Australian share markets remaining the standout performer across the wider Asia-Pacific region with all sectors positive over the month with a final quarterly return of 8.36%.
For Australian investors, economic conditions also started to stabilise during the December quarter. The Reserve Bank of Australia (RBA) raised interest rates only once by 25bps to 4.35% which was in line with forecasts and 3rd quarter GDP was revised up to 2.1%, which came in below market expectations. CPI inflation fell from 6.0% to 5.4% showing some relief in the cost of living in Australia. The unemployment rate ticked up slightly from 3.8% to 3.9%. All these adjustments provided the market with a sense that the inflation experience and response may be starting to move in the right direction for the RBA to release the pressure valve at some point in 2024.
The average after fees and tax returns on the reported Tax Optimised options for the 12 months to 31 December 2023 was 8.27%, whereas the comparable average after fees and tax return of an investor assuming a 47% marginal tax rate (including Medicare levy), was 5.71%. This equates to an uplift in average after fees and after-tax returns of 2.56% for these high marginal tax rate investors.
Our average Tax Optimised investment series returns for the last 12 months was 10.83% on a pre-tax basis and 8.27% on an after-tax return basis. At Generation Life, our investment performance considers the tax paid on income annually and considers what the impact of tax would be if withdrawing and selling down the assets in our funds at the end of the investment. Investors get to keep this return and there is no further tax to be paid by investors in their personal tax return, if held for more than ten years. Our core focus at Generation Life is to review tax and costs on portfolio returns for our investors and generate better after-tax outcomes.
The average annual uplift in performance for our Tax Optimised series over the last 3 years assuming a 30% company tax investor was 0.79%, with the Generation Life Tax Effective Australian Share Fund being the best performing with a 1.87% p.a. uplift in returns on an after-tax basis.
Since inception of the portfolio in May 2019, the after-tax return of the Tax Effective Australian Share Fund has been 7.88% p.a. Over the same period, the pre-tax S&P ASX Accumulation Index return was 7.76% p.a. Pleasingly, our fund has since inception provided investors with an after tax return greater the pre-tax S&P ASX Accumulation Index return.
Utilising a Generation Life investment bond can generate significant tax alpha over time without increasing investment risk for investors.