Wider global choice for SMSF
Australian investors now have easier access to international shares.
Self-managed superannuation fund (SMSF) investors are increasingly aware of the benefits associated with portfolio diversification and are looking to allocate a greater portion of their portfolios to international equities.
The Investment Trends SMSF Report 2014 highlighted that the number of SMSF investors intending to invest in international equities had almost doubled in 12 months.
Although Australian shares have historically been high yielding and benefit from franking credits, the downsides of an excessive home bias (too much of a portfolio concentrated in Australian shares) are well documented.
To date, the limited allocation to international equities by SMSF investors can largely be attributed to the complexities and administrative challenges in accessing overseas equity markets.
The chart below shows average asset allocations in SMSFs
Source: Financial System Inquiry 2013
Given this backdrop, investors have welcomed the recent launch of the Magellan Global Equities Fund (ASX: MGE), a new ASX-quoted managed fund.
It is, in short, a new structure through which SMSF and retail investors can get easy access to global equities. In only its first three weeks of trading, the Magellan Global Equities Fund had attracted more than 1,700 investors and has more than doubled in size.
The argument for asset allocation offshore
There is increasing argument that SMSF trustees remain overly reliant on Australian listed equities and cash. Australian Taxation Office data for the December 2014 quarter shows Australian equities and cash made up more than 60 per cent ($339 billion) of the $568 billion of SMSF funds under management.
A low weighting towards international securities reduces diversification and limits exposure to attractive investment opportunities. The Australian sharemarket represents only 3 per cent of world equity markets and is heavily weighted towards banks and the resources sector, and as a result has limited exposure to key global investment themes and significant growth opportunities.
In 2014, the MSCI World Accumulation Index, in local currency terms, returned 15 per cent, three times more than the ASX All Ordinaries Accumulation Index. Over the past five years, the global index's annualised return was more than double the Australian index.
Accessibility of global equities on ASX
Until now, investors looking for international equities exposure through ASX had a choice of listed investment companies (LICs), exchange-traded funds (ETFs) and unlisted managed funds through the ASX mFund settlement service.
LICs have been around in some form since 1868. While they are actively managed and can be traded by investors on ASX, as a company structure they are closed-ended and their inability to continuously raise or redeem capital can result in pricing and liquidity issues from some LICs. They can frequently trade at a significant premium or discount to the net asset value.
The global exchange-traded product market has been growing at an average rate of 24 per cent per annum over the past 10 years. There is now more than US$2.9 trillion in ETF assets and it is the fastest-growing segment of the global funds management market. Surprisingly, less than 1 per cent of these assets are actively managed, as portfolio disclosure requirements continue to be the key obstacle to active managers developing ETF-like products.
ETFs generally have a trust structure, are open-ended and tend to trade at a tight spread around the net asset value (the price is close to asset backing), due to their ability to continuously raise and redeem capital. They are passively managed and index-linked, reducing flexibility around choice of portfolio holdings.
The mFund settlement service is a relatively new platform, having been launched by ASX in 2014. It provides access to unlisted managed funds through CHESS. It eliminates much of the paperwork involved in investing in unlisted funds, but investors do not enjoy the benefits of live pricing and cannot actively trade units in the underlying funds.
Exchange-quoted managed funds
Solving these issues for investors was central to the development of the new Magellan Global Equities Fund, an exchange-quoted managed fund (EQMF). The fund combines the actively managed features of unlisted funds and LICs with the open-ended, highly liquid characteristics of ETFs.
The fund was developed with the aim of providing investors with a unique and simple way to gain exposure to Magellan's high-quality, low-volatility actively managed global equities strategy. The fund is an ASX-quoted version of Magellan's successful unlisted Magellan Global Fund (MGF) but investors enjoy the benefits of live pricing while not being subjected to the administrative burden associated with investing in unlisted funds.
Investors now have the ability to buy and sell the fund's units in the same way, and with the same ease, as any ASX-listed security. The fund is open-ended, resolving many of the liquidity and pricing issues often associated with closed-ended LICs. The full portfolio is disclosed to the market quarterly and the unit price is generally expected to trade around the net asset value of the fund.
There is now significantly more choice in ASX-traded funds, enabling investors to build more dynamic and diversified portfolios of both active and passive funds. Investors have the option to diversify away from their historical home bias in domestic shares with the ability to access a portfolio of actively managed, high-quality international equities.
About the author
Jennifer Herbert is a key account manager at Magellan Asset Management.
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