An increasing number of retail investors are seeking exposure to global equities as part of a strategy to diversify their investment portfolios. Statistics show a trend towards investing offshore with the latest Australian Bureau of Statistics figures revealing that for the first time in at least 25 years the total capital Australians have invested in offshore equities surpasses the amount invested by foreigners in Australia. Australians now own $889 billion in overseas equities, exceeding the $884 billion foreigners have invested in the local share market.
Recently reported findings from research house Investment Trends also show that more than 31% of assets of financial advisers’ clients were invested overseas (in shares and property) over the last year. This figure had jumped by a remarkable 19% over the previous 12 months.
Why invest offshore?
The primary reason investors are motivated to invest in overseas assets is to diversify their investment portfolio to reduce risk and increase their returns.
Given Australia’s share market accounts for around 2% of the market capitalisation of the world’s equity markets, investing solely in Australian equities limits the opportunities to diversify.
According to Investment Trends’ analysis, demand for offshore investing is driven, in part, by investors seeking exposure to an improving US economy. Another factor contributing to more international investment is the persistently high Australian dollar and a belief that it cannot remain at current levels over the long term. In my view, our currency is overvalued and I expect that it will fall against the greenback in time. If this happens as we predict and if investments are unhedged, then investors’ offshore assets will rise in value in Australian dollar terms.
Superior offshore exposure through LICs
The best opportunity for investors to gain diversified international exposure is through a Listed Investment Company (LIC). Australian LICs are a superior investment structure for a variety of reasons, including their ability to pay fully franked dividends. LICs provide investors with a diversified portfolio of assets with shares in LICs bought and sold ‘on market’ like other listed companies. As LICs use a company structure, they have a board that oversees corporate governance. Unlike other managed funds that use a trust structure, LICs provide a high degree of transparency and accountability.
In assessing a LIC, investors should review the track record of performance and consider the investment manager’s commitment to marketing the company to ensure its share price fully reflects the value of the company’s underlying assets – these are often referred to as the net tangible assets or ‘NTA’ and are made up of the investments held by the LIC. The prospective investor should also give consideration to the LIC’s historical total shareholder return – the change in the share price together with the dividends expressed as a percentage.
Currently, there is a small, but growing pool, of capital invested in global markets by a handful of LICs including the following: Magellan Flagship Fund (ASX: MFF); Platinum Capital (ASX: PMC); Templeton Global (ASX: TGG); PM Capital Global Opportunities Fund (ASX: PGF); and Hunter Hall Global Value (ASX: HHV). In addition to these, Global Value Fund Limited (ASX: GVF) is a new IPO set to close on 4 July 2014 and lists next month – it will focus on investing in undervalued assets and employing active and passive investment strategies (Geoff Wilson will be an investor in and a director on the board of Global Value Fund Limited (GVF).
Trend to continue
In our view, the demand from investors for exposure to offshore assets through LICs will continue to grow steadily driven by Australia’s swelling pool of superannuation assets, including investments held by self managed superannuation funds (SMSFs). Assets held by SMSFs have surged 68% since the GFC to reach a value in excess of $530 billion today. By 2033, assets held by SMSFs are estimated to increase to $2.23 trillion.
Alternate strategy for offshore exposure
Anther opportunity for investors to get exposure to overseas assets is through Australian companies that have overseas earnings, albeit this type of direct investment is a higher risk approach. An investment portfolio can gain exposure to global industries such as: global media, through News Corporation (ASX: NWS); global insurance, through QBE Insurance (ASX: QBE); a global registry business, through Computershare (ASX: CPU); and global logistics and transportation, through Brambles Limited (ASX: BXB).