Get international exposure with one click in 2016
If you are feeling increasingly pessimistic about the outlook for the domestic economy, it might be time to look abroad. The United States and Japan are touted as regions to watch in the years ahead and should the Australian dollar sink further relative to other currencies, having some money parked overseas could be a profitable move. But how do you invest internationally?
Few have the expertise to successfully stock-pick in the US, Japan or China. An alternative is to buy a listed investment company (LIC), which behaves like a stock but in reality is a basket of handpicked shares managed by a professional investment manager.
The drawcard for self-managed super funds (SMSFs) is that LICs can be effortlessly sold on ASX, much like offloading any ordinary share. Hit the sell button for your LIC and your investment funds will be transferred to your account.
International LICs have performed exceptionally well in recent times, up 20.8 per cent in 2014 compared to 4.8 per cent for traditional Australian LICs. When we extract the performance from China (where a year-long rally in China A-shares rocketed performance), international LICs still managed to pull in 14.5 per cent in 2014, according to Morgan Stanley Wealth Management.
Clearly, buying into these LICs two years ago was a winning strategy, but what about now?
When to buy
An astute investor is well advised to wait and purchase an LIC when it is trading at a discount. This, of course, hinges on knowing when it is actually trading at a discount.
In short, to do this you compare the price of the LIC to its pre-tax net tangible assets (NTA) after adjusting for fees. When an LIC is priced below its pre-tax NTA it is trading at a discount (essentially it is trading for less than its assets are worth) and when it's above its NTA it is trading at a premium.
A discount to NTA may signal that an LIC is a bargain, or it may not. Discounts can persist over time and can even deteriorate further, so your best defence against buying a future dud is to compare the current discount to previous years.
If an LIC has historically traded at a premium and only momentarily seems to be trading at a discount, you might well assume this discount will not persist for long. Theoretically, LICs have a tendency to revert to long-term premiums and discounts throughout their cycle. But an LIC that pretty much always trades at a discount – forever ignored by the market – may well remain unpopular unless, of course, something drastically changes its fortunes.
When buying an international LIC, remember that you are effectively buying a basket of foreign stocks priced in the respective foreign currency. Some LICs may hedge (insure against) this currency exposure, others may not. Currency gains are made or lost when you transfer returns back into Australian dollars.
The precipitous drop in the Australian dollar, from above parity with the US dollar in 2013 to around 71 cents in early December 2015, certainly propelled returns for investors in unhedged international LICs.
These investors scooped on the currency alone, even if the shares went nowhere (although any LIC invested in a basket of US shares probably made money on the shares as well). Of course, if the Australian dollar continues to drift lower relative to other major currencies, investors in international LICs may win further currency gains.
How to pick international LICs
When sizing up international LICs, evaluate them on total return, dividend and underlying investment performance, or NTA growth. A manager’s investing skills are assessed by comparing the LIC’s yearly returns to its benchmark index. A successful manager should be able to swing better returns than the index over three, five and even 10 years.
Second, look at its yearly fees. The Management Expense Ratio (MER) for international LICs ranges from 1.76 per cent to 0.33 per cent or lower, but be aware that some also charge performance fees.
Testament to the healthy growth of the LIC sector, a total of 20 international LICs trade on ASX today. One of the largest, Magellan Flagship Fund (MFF), has thrilled investors with outstanding returns in recent years, with major holdings in "very high profitability" companies such as Visa, Wells Fargo, Lloyds Banking Group and Microsoft.
Other international LICs include Hunter Hall Global Value (HHV) that invests in a mix of Australian stocks, such as Sirtex Medical, and offshore stocks including Citigroup and Viacom. AMP Capital China Growth (AGF) aims to achieve long-term capital growth by investing in China A-shares. Platinum Capital (PMC) scours the globe as far as Nigeria, Norway and Vietnam.
The Asian Masters Fund (AUF) is a “fund of funds” approach to gaining equities exposure to stocks in Asia or companies that derive the majority of their business from Asia. And Templeton Global Growth (TGG) offers a spread of investments from Europe and the US to Israel and Turkey.
New LICs keep coming. PM Capital recently listed its Global Opportunities Fund (PGF) and Asian Opportunities Fund (PAF), which were both well supported by investors at their IPOs. In 2015, Platinum Asset Management listed its second LIC, Platinum Asia Investments (PAI), specialising in shares in Asian economies including Thailand, the Philippines, Taiwan and India, but excluding Japan.
Other recent listings include Future Generation Investment Company (FGG), which has a charity component to the fund, with 1 per cent of its assets each year being gifted to Australian children's charities.
Listed Investment Companies provides a wealth of information on LICs. Use ASX Market Update information to review LIC premiums and discounts to NTA.