International Equity Asset Allocation – A timely reminder

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A timely reminder for International Equity Asset Allocation

 

Last Tuesday PRIME were fortunate to host a presentation to 60 clients by Damian Craven from Magellan Asset Management in Melbourne.

 

The event was a tremendous success and involved an engaging presentation and subsequent interactive discussion as to both Magellan’s in-house investment views, and their advocacy for international equity assets within Australian portfolio’s.

 

It is a view we concur with, and for that reason we felt it timely to re-cap our simple philosophy on international asset allocation.

 

Why PRIME advocate for International Equity holdings?

 

There are two simple reasons why we continue to believe there is a place for foreign equity positions in most long-term Australian investment portfolios, and they centre around the need for GROWTH and DIVERSITY.

 

From a GROWTH standpoint, it’s important to acknowledge that the single most valuable reason long-term investors hold equity positions in portfolios is the prospect of earnings growth.

 

Unlike bonds or cash, equities do not offer investors any guarantee on the return of capital. This clearly makes equities a significantly higher risk asset class, and so to compensate for this acceptance of greater risk, an equity investor demands a higher return.

 

A large component of this return is the prospect that the income stream provided by any given equity can grow alongside the economy and inflation.

 

Sadly, Australia’s share-market is dominated by banks, miners, utilities and retailers – all ‘old-economy’ sectors. It is difficult for Australian investors to gain access in sufficient size and within appropriate levels of risk to the emergent economic and business themes of today such as the internet-of-things, social media platforms, new-energy, e-gaming, autonomous vehicles and the like.

 

Put simply, Australia’s economy and share-market offer scant prospect of exciting earnings growth in the coming 2-3 years at least.

 

To gain access to these new and increasingly substantial industries of growth, Australian investors need to look at markets beyond our shores.

 

Similarly, DIVERSIFICATION is another motivating factor behind holding international equity assets.

 

Again, with such a concentrated share-market, local investors are arguably locked into an inherently risky leverage to Australia’s rampant housing market by virtue of the banks substantial market weights and the related issuance by the banks of hybrid income-securities.

 

The big-4 banks alone comprise 25%+ of the ASX300 index and many portfolios would hold significantly more than this.

 

When coupled with the large bank hybrid-securities positions held by many investors, Australian investment portfolios have a particularly large exposure to the underlying health of Australian house prices, since banks, after all, make the vast majority of their high quality income from mortgage lending.

 

In Australia it seems, we are all tied to the one trade: housing.

 

Our Recommendation

 

In September 2015 we sent out a similar note advocating for clients to strongly consider a place for international equities within a well-diversified investment portfolio.

 

We accept and acknowledge that all investors have individual portfolio needs and characteristics, however we would encourage all investors to discuss the appropriateness of international equities to their personal situation with their advisor.

 

Our PRIME International Equity Separately Managed Account (SMA) has been up and running now since mid-February 2016 and is currently up ~7% since inception.

 

The Magellan Global Fund forms the anchor position in the portfolio, and is our obvious ‘go-to’ international option for those clients considering a simple international exposure.

 

Alongside the Magellan Global Fund, PRIME have positions in funds from other well-known global funds management groups such as MFS, Platinum and Vanguard.

 

Related Post: Why international equities is a must for Australian investors?

 

Disclaimer:

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

 

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By | 2017-06-16T15:16:18+11:00 September 5th, 2016|Chief investment officer, Investment Advice|0 Comments

About the Author:

As the Chief Investment Officer (CIO) for Prime Financial Group, I work closely with the national advisory team, high net worth individuals, family groups and Prime’s broader accounting network to provide considered and pro-active investment advice.