Go global and future proof your portfolio
Learn why Self-Managed Super Funds should consider a higher allocation of global equities.
One of the more unusual features of the SMSF sector is that despite a largely unconstrained investment universe, the “home bias” is alive and well.
SMSF trustees have the opportunity to construct portfolios tailored perfectly to the needs of a small number of members, yet the average asset allocation remains heavily weighted toward cash, term deposits and direct Australian shares, with a smaller amount to direct Australian property.
In total, these asset classes account for more than 75 per cent of the average SMSF portfolio, according to the latest ATO data. International shares represent just 0.4 per cent of total assets.
Over the past decade, this skew to Australian assets has not damaged returns. Indeed, the average SMSF has outperformed the average public-offer super fund by a small but significant margin, helped in part by large cash weightings held through the GFC.
In a new global economy, however, it is worth asking whether a heavy skew to Australian assets can continue to deliver superior performance over time. A large allocation to cash could create a significant drag on returns in a “lower for longer” environment.
Reserve Bank governor Glenn Stevens has noted that current yields are “not just the lowest in living memory, but in all likelihood the lowest ever in human history”. As a result, he and others have suggested that retirees and other savers will need to take greater risks than those retiring a decade ago in order to achieve comparable returns.
Australian equities also present an interesting challenge. Although strong yields and tax advantages from high levels of franking have given investors much to cheer about, the future of the Australian economy appears less certain.
The Australian sharemarket is heavily concentrated in just two sectors, resources and financials; and after a decade of stellar performance, they now face significant headwinds. The ASX has approached post-GFC highs and investors are questioning what value remains at current prices.
The property market continues to confound commentators, delivering record growth in key markets (predominantly Sydney and Melbourne). While record low interest rates offer inducement to investors and homebuyers, regulators are talking down future returns and applying pressure to lenders to tighten access to credit for investors.
So where to look for opportunity? Professional investors have taken a very different approach to SMSF trustees, holding 20 to 30 per cent or more in international equities.
The Future Fund, worth more than $100 billion, had 23 per cent of its assets allocated to listed global equities in developed economies in 2014, with a further 10 per cent in emerging-market securities. Its allocation to cash is less than 10 per cent.
The reasons professional managers give for investing offshore are varied but they largely boil down to diversification: ASX represents less than 3 per cent of global sharemarket capitalisation. For blue-chip investors, large-cap stock (companies valued above $10 billion) increases from just over 30 (shares and ETFs) to more than 1,200 once they look offshore.
In addition, a globally diversified portfolio can correct for domestic positions underweight in critical and growth-oriented sectors such as technology, healthcare and consumer goods.
Australia’s top three industries represent more than 50 per cent of market capitalisation on ASX compared with 25 per cent in the US. For those who have diversified offshore, recent currency movements have been tailwinds.
It is not just the headwinds for cash, Australian equities and property that give investors reason to look for future-proof investments elsewhere. The world is changing and portfolio allocations are likely to change accordingly. Change is constant; over the past 50 years the average company lifespan on the S&P 500 has declined from 60 years to 12.
In a simple example, railways dominated market capitalisation in both the US and UK in 1900 (50 per cent in UK, 63 per cent in the US). With the advent of the affordable car, their presence dropped dramatically. Global megatrends such as digitisation, ageing populations and climate change are changing the way people live, and represent both a threat to the unwary and an opportunity for the far-sighted.
Companies focused on furthering advancements in healthcare and technology, for example, are heavily represented on global markets, while offering only scant opportunities for the domestic investor.
While the reasons for investing offshore are powerful, no one is suggesting that SMSF trustees should blindly replicate the asset allocation of professional managers. The ability to construct one’s own portfolio allocation is one of the key attractions of the SMSF structure, and international equities are not for the risk-averse – with the added complexity of currency fluctuations and jurisdictional differences to consider.
There is, however, a view that SMSF trustees have resisted moving into offshore assets because of constraints in access, cost and confidence, rather than a desire to avoid these markets altogether. Interestingly, regular surveys have shown that SMSF trustees have long indicated a desire to move into international equities, which has failed to translate into practice.
Although offering one simple point of entry, traditional managed funds have failed to hit the mark with SMSF investors, representing less than 5 per cent of overall portfolio allocation.
Easy to invest offshore
The perceived impediments to investing directly offshore have started to diminish as investment product providers bring more interesting and innovative solutions to investors.
Sharemarket offerings for those interested in investing in international equities now range from direct access to managed and fully implemented portfolios. As with all investments, it is critical that investors have a strong understanding of the asset they are purchasing; the variety of instruments now available offer a range of options from “toe in the water” to “jump in with both feet” strategies.
For those wishing to take a direct approach across their entire portfolio, nabtrade’s online trading platform offers real-time access to equities across four different countries, settled in Australian dollars, from $14.95. It also offers research on more than 5,000 individual stocks and investment selection tools.
Where research, time and/or confidence are limited, taking a passive or professionally managed approach can deliver better outcomes for investors. For those who wish to increase their exposure to global investments but are not sure where to start, ASX offers a suite of managed solutions, including exchanged-traded funds, listed investment companies and the new mFund service of managed portfolios.
These products all offer the benefits of global diversification without the complexity of managing individual stock selection across multiple exchanges and jurisdictions.
Ultimately, the decision to diversify into global equities represents a dramatic shift for many investors, and both the decision and the transition need to be managed accordingly. All trustees must appreciate the opportunity and any reallocation should be documented in full in an SMSF’s investment strategy.
About the author
Gemma Dale is Head of SMSF Solutions at nabtrade.
Gemma Dale is Head of SMSF Solutions at nabtrade.
The ASX mFund service is a convenient way to access some of the market’s top global equities funds. To find out more about mFund and how to diversify your portfolio with less effort, visit mFund.com.au where you can register your interest in upcoming mFund events, view detailed information about the available funds and see through which brokers you can buy and sell.