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Opportunities In Global Equities For Australian Investors

Published 07/10/2016, 12:02 pm
Updated 09/07/2023, 08:32 pm

There’s a popular myth that individual investors, especially trustees of their own self-managed super funds (SMSFs), do not invest much in global equities. While it’s true SMSFs are less diversied than large institutional funds, global equities are readily available and eagerly sought by trustees and personal investors.

The myth is conveniently perpetuated by managers of global funds, who often claim the SMSF allocation is less than 1%. They argue investors should correct the asset allocation and lack of diversication by placing more money into their funds.

At a recent global fund launch, a high-prole manager even talked about how his product lled a ‘gap’ in the market. Let’s see if he was right.

How does the ATO collect the SMSF data?

The major reason for this mistake is the way the Australian Taxation Office (ATO) collects statistics on SMSFs. The ATO’s SMSF Statistical Report for March 2016 shows ‘overseas shares’ and ‘overseas managed investments’ worth only $2.4 billion, while total assets were $590 billion. That’s a paltry 0.4%. Unfortunately, the data is misleading and counterproductive.

The ATO collects data via annual tax returns. In the recent report, the ATO says its ‘estimates’ are extrapolated from 2013-2014 data, and it guesses some allocations. Crucially, a wide range of global equity investments held by SMSFs which are reported as listed trusts, unlisted trusts, other managed investments and even listed ETFs are assumed to be Australian equity investments. The vast majority of global investments is lost in the data collection.

On enquiry, the ATO confirmed to me that the small amount listed under ‘overseas shares’ is only the direct share investments held on overseas exchanges. The ATO looks at the first point of domicile of the investment vehicle, and the vast majority of global shares are held in domestic vehicles.

How much should be invested in global equities?

Professional asset allocators handling billions of dollars of client money in multi-asset funds spread their exposure to reduce risk and take advantage of diverse opportunities. A typical balanced fund suitable for most investors will hold about 60% in ‘growth’ assets (mainly equities and property) or 40% in ‘defensive’ assets (such as cash and fixed interest).

The Australian Prudential (LON:PRU) Regulation Authority’s (APRA) Quarterly Superannuation Statistics for June 2016 (http://www.apra.gov.au/Super/Publications/Documents/2016QSP201606.pdf) reports asset allocation by large super funds as shown in the following table.

Chart

Institutional funds allocate about the same amount, 22%, to both global and Australian listed equities, with another 5% to unlisted equities. Plus there is another 9% in infrastructure and hedge funds, much of which is also outside Australia. The total global equity exposure for most large funds is therefore between 25% and 30% (and another 8% in global xed income). This is far more than most SMSFs.

What is a more accurate number for SMSFs in global equities?

The ATO number of 0.4% in global equities is inaccurate, but what’s better? Nobody knows the exact number. A study which looks through the structure to the nal investment is produced by SMSF administrator, SuperConcepts, based on data inside 3,300 funds. It shows SMSFs hold about 13% of assets in international shares. As these particular SMSFs have a large number with adviser connections, this is perhaps on the high side for all SMSFs, most of which are non-advised. A more accurate overall number is about 10%. This is less than half the allocation by professionals managing diverse funds, suggesting SMSFs investors should and more global investing opportunities.

Why should Australian investors buy global shares?

There are two main reasons to invest in global equities:

1. More and better opportunities

The Australian Securities Exchange (ASX) is highly concentrated, with the Top 10 companies comprising 50% of the market weight of the S&P/ASX 200 index, and banks making up about 30%. Other big names are BHP Billiton Ltd (AX:BHP), Telstra Corporation Ltd. (AX:TLS) and Wesfarmers Ltd (AX:WES), each facing their own headwinds. There are important market sectors such as technology and consumer goods which are not well-represented on the ASX. Consider, for example, the excellent long-term outlook for companies like the FAANGs of Facebook Inc (NASDAQ:FB), Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), Netflix Inc (NASDAQ:NFLX), Google (now called Alphabet (NASDAQ:GOOGL)).

2. Currency diversity

Investments in global shares can also benefit from a declining Australian dollar, perhaps a useful hedge against the overall prosperity of Australia for portfolios where most of the assets are local. Currency gain may add to the equity performance.

Where can Australians invest in global equities?

SMSF trustees are eager to use funds to gain exposure to global companies because they are less familiar with transacting on foreign exchanges than they are on the ASX.

1. Unlisted managed investments or trusts

There are dozens of unlisted global managed funds available either directly from fund managers or via an administrative platform from any of the large providers. Watch for the cost as the platform fee may be additional to the manager fee, with most managers available for around 1% (excluding advice fees). The two most popular are Platinum (funds under management $23 billion, mainly Australian retail) and Magellan (funds under management $39 billion, of which Australian retail is $12 billion). The global funds of Schroders (LON:SDR), Lazard, Fidelity, Vanguard, BT, Colonial First State, AMP Capital, Henderson, Aberdeen, Ibbotson and dozens of other popular managers have large SMSF support, not only in broad markets but specific sectors like infrastructure and resources.

2. Listed Investment Companies

Many popular LICs on the ASX have global exposure, such as Hunter Hall International Ltd (AX:HHL), Templeton Global Growth Fund Ltd (AX:TGG), Platinum Asset Management Ltd (AX:PTM), Global Value (ASX:GVI) and Magellan Flagship Closed (AX:MFF). One unusual structure, issued by Future Generation Global Investment Company (ASX:FGG), passes the fees received to selected charities, and the fund managers are a select group who offer their services without charge.

Care should be taken when investing in LICs as they are closed-end funds (that is, the liquidity comes from buying and selling on an exchange rather than units being redeemed or created) which can trade at a discount or premium to the value of the underlying investments, or the Net Tangible Asset value.

3. Exchange Traded Funds (passive or index)

Index ETFs are increasingly popular as they are easy to transact on the ASX, and usually carry a lower cost than actively-managed funds. According to BetaShares, in July 2016, there were 179 ETFs trading on the ASX, with a value of $23 billion, up 18% in the previous year. At the moment, the fund category with the highest monthly inflows is international equities, while Australian equities are in outow.

Most of the ETFs offer broad index exposure, such as Blackrock’s iShares S&P500 ETF (ASX:IVV) or State Street’s SPDR Global Dividend Fund (WDIV). However, there are also specialist sector ETFs, such as a range from BetaShares with exposure to healthcare (ASX:DRUG), agriculture (ASX:FOOD), energy (FUEL) and global technology (ASX:NDQ).

4. Exchange Traded Funds (active or managed)

In the last year, a wider range of actively-managed ETFs has hit the ASX, bringing convenient access with the potential performance of professional management. The largest is Magellan’s Global Equity Fund (ASX:MGE), while AMP Capital recently launched three funds; Dynamic Markets (ASX:DMKT), Global Infrastructure (ASX:GLIN) and Global Property (ASX:RENT). Schroders has a global multi-asset ‘real return’ fund (ASX:GROW).

5. Direct Investments on Foreign Stock Exchanges

Most stock brokers, including online providers such as nabtrade and CommSec, provide services which allow investors direct access to foreign stock exchanges. This enables Australian investors to buy some of the world’s greatest companies directly.As evidence of demand for global funds, a recent Investment Trends/Vanguard survey of financial planners who specialise in SMSFs reveals the popularity of ETFs and funds with international exposure, as shown in the following chart

Chart

In summary, SMSFs and self-directed investors are far more active in global equities than is popularly believed, worth about 10% of their portfolios. This allocation should be more like 20% in a typical diversied portfolio, and there are now more exciting and accessible ways to create this exposure than ever.

Graham Hand is Managing Editor of the Cuffelinks newsletter.

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