Before the GFC, they were too heavy in equities; after the GFC, they held too much cash – until the market rally in 2009 provided a classical example of a dead cat bounce. Now they are supposed to be listening to the siren call of the retail property markets spruikers. As for international shares, they are simply off the radar.
Well, don’t believe all you hear or read. A survey we have conducted of financial advisers has found their clients (mostly SMSF trustees) have a strong interest in overseas shares. It’s not to suggest they are going to jump into this market with their ears pinned back, but it does say they are definitely cognisant of what overseas markets have to offer.
First, the results: of those polled, only 11 per cent of advisers reported that their clients had no interest in overseas markets, with the vast majority – 89 per cent – saying their clients are considering investing. Breaking this 89 per cent down further, 55 per cent are going down the ETF route, 22 per cent via a managed fund and 11 per cent directly.
At the very least, these numbers refute the proposition that SMSF trustees have no interest in overseas equities; quite the opposite. But it has taken quite some time since the GFC for them to put their toe back into international waters – and who could blame them? In doing this they are shadowing the big end of town that has also been increasing its exposure to this asset class.
There are several factors behind this increased interest in overseas markets, all of which demonstrate a degree of sophistication that might surprise the institutional heavyweights.
It reflects a belief that the Australian dollar, currently trading around 93 US cents, remains overvalued. Certainly at 93 cents it remains well above its historical average since it was floated in late 1983. A survey of advisers two months ago showed the majority expected the Australian dollar to be below 95 cents by year end – with 41 per cent thinking it would be below 85 cents
Going hand in glove is a growing appreciation by advisers and their clients of how currency movements pose an additional risk to an overseas share portfolio. While some managed funds and ETFs do hedge the currency, the majority are unhedged, leaving the trustee doubly exposed to currency and market risk. Obviously the same risk occurs for those who chose to invest directly.
It also reflects an appreciation that it’s important to balance a portfolio (only having cash and fully franked Australian blue chips has its obvious shortcomings) and investing in global companies with strong market access (especially to Asia) is a smart way to diversify.
The emergence of the ETF market, too, has played its role. They are easy to get in and out off and can come with lower fees than a managed fund.
So where are the trustees looking to place their hard-earned? Despite the fact many advisers believe the US market to be fully priced, and despite the mixed economic and business signals emanating from the world’s largest economy, there is still demand for US stocks.
But somewhat surprisingly, it is European stocks that appear to be getting the most attention. Much of this is due to the “valuation arbitrage” where global companies are trading at lower PEs than US companies in similar businesses simply because they are listed on US exchanges.
Emerging markets aren’t on the horizon, but that’s understandable due to the prolonged underperformance of these markets. There are complexities in these markets that even challenge the resources of large institutions.
The survey doesn’t suggest this is the equity equivalent of the California gold rush. It would be worrying if it did. But it is evidence that advisers and trustees are far more sophisticated investors than they are often given credit for. When you consider it’s their money, perhaps that’s not so surprising after all.
George Lucas, managing director, Instreet Investment
