With the Australian dollar ($A) having spent most of the past two years valued above the greenback, Australians have had a godsend of an opportunity to diversify their investments overseas, without the currency penalty that has usually applied.
Australians have been able to buy into overseas assets virtually at a one-for-one currency basis.
Recent ructions on the foreign exchange market have re-introduced the currency ‘loading’ for Australians investing abroad, but at 95–96 US cents to the $A, it is still a fairly favourable transaction in terms of what has most often been the case – given that the argument for international diversification does not go away, even with the strong home bias that the dividend franking system guarantees.
There is always currency risk in investing in another currency. Investors can choose to hedge their investment – that is, run it in the foreign currency, so that currency fluctuations do not affect the returns – or leave it unhedged (that is, in $A). Hedging will help you if the $A rises, but it’s better to be unhedged if the $A is falling.
However, many investors do not see this exposure as ‘currency risk’ at all: they want to remain unhedged, for the possibility that the currency could boost their returns. These investors see foreign currency exposure as effectively another level of diversification.
When investing overseas, you’ve got to be thinking long-term – at least ten years. With that in mind, Switzer Super Report has looked at a group of funds that offer great prospects of doing a really good job investing overseas. The principle here is not to focus so much on the return comparisons, but to go on what the manager offers you.
Platinum, the funds management house founded by Kerr Neilson in 1994, has been a hugely successful Australian funds manager. The flagship International Fund, a $7.6 billion fund, has delivered investors 12.1% a year since inception in 1995. The $3.5 billion Platinum Asia Fund, established in 2003, is up 15.6% a year. There is also a European Fund, a Japan Fund, an International Brands Fund, an International Health Care Fund and an International Technology Fund.
Platinum is usually pigeon-holed as a “value” fund, meaning that it buys stocks it thinks are trading well below intrinsic value, but this description doesn’t tell the whole story. Platinum’s team are stock-pickers, but they think with a macro-economic ‘thematic’ perspective. The Platinum team, now led by co-founder Andrew Clifford, resists easy classification: it is almost an absolute-return hedge fund. The Platinum team sees the world as their oyster, they will buy stocks from anywhere, any industry, whether large-cap or small-cap, they are prepared to sell short, and to move heavily into cash if they can’t find value at any particular time.
Platinum actively manages its currency exposure, being prepared to take positions for profit. The International Fund has shown disappointing performance recently, but the longer-term track record is outstanding, and investors prepared to give this fund a decade to work for them are unlikely to be disappointed.
Magellan Global Fund
Established in 2007, the $2.9 billion Magellan Global Fund is managed by a team led by Hamish Douglass, rightly considered an excellent investor. The key to the Magellan strategy is to be positioned in the stocks that will be the major beneficiaries of the one billion new consumers that will emerge in the major developing markets of the world, in particular China and India, over the next 15 years. Magellan buys the stocks that produce the goods and services that these consumers will buy. This means it buys global stocks that have big chunks of their revenue coming from developing economies. For example, its top portfolio holdings at present are Danone, eBay, Google, Lowe’s, Microsoft, Target, Tesco, Wells Fargo and Yum! Brands. Consumer defensive is the largest sector, at 23.8% of the fund, with financials at 15.3% and mass-market retail at 14.6%. The fund is concentrated, holding about 30 stocks.
Since inception in July 2007, the unhedged fund has returned 7.3% a year, compared to –2.7% a year for the MSCI World Net Total Return Index ($A). While the theme behind the Fund is a popular one – Douglass says the theme is more expensive now, so Magellan owns less of it than it did three years ago – he also says the fund is “positioned where China is changing to,” as in a more consumer-driven economy.
Grant Samuel Epoch Global Equity Shareholder Yield Fund
A different approach to Magellan and Platinum (and which sits well between them in a portfolio) is that of Epoch Investment Partners, whose Global Equity Shareholder Yield Fund – offered in Australia through Grant Samuel Funds Management – targets a dividend return of at least 4.5%. Epoch tries to add another 1.5% a year from share buybacks or other capital management, and with 3% from capital growth, Epoch targets a total return of about 9% a year.
The hedged version of the fund ($239 million) has returned 16.5% a year over the past three years, while the unhedged version ($737 million) has generated 9.5% a year. At present, about 70% of inflows are going into the unhedged version, as investors bet on the $A falling.
MFS Global Equity Trust
Another US-based fund, this vehicle is offered in Australia through Equity Trustees. The $4.3 billion fund (hedged and unhedged versions available) invests with a capital-growth focus, and turns over stocks very infrequently, making it tax-efficient for investors. A return of 12.4% over the past three years is a strong validation of the philosophy, although (in common with many longer-lived funds, given the market slumps of the GFC) the ten-year return falls away a bit, to 6.3% a year – which is still well ahead of the MSCI World Net Total Return Index ($A), on 3.5%.
The fund benefits from high-quality stock-picking, with any one stock limited to 5% of the portfolio and exposure to any single industry limited to 25%. The MFS team invests in companies, not countries. It’s a high-quality approach.
Fortrend Securities Relative Value Model
The last portfolio is not a managed fund: it is a portfolio chosen by Melbourne-based full-service global broker Fortrend Securities, through its proprietary Relative Value Model (RVM). You won’t find the Fortrend RVM in any fund manager surveys or tables: but many Fortrend clients invest in it as a separately managed account (SMA), for 2% a year. At the moment, the $100 million portfolio contains General Motors, Microsoft, Oracle, semi-conductor company Nvidia, healthcare equipment supplier Thermo Fisher, media and entertainment group McGraw-Hill, non-alcoholic beverage group Dr Pepper, truck and busmaker Navistar International and technology manufacturer Honeywell.
Since inception in September 1993, Fortrend’s RVM portfolio has gained 12.2% a year, compared to 6.6% a year for the S&P 500 Index. In the last 12 months the portfolio is up 45.5%, versus 27.5% for the S&P 500. Fortrend Securities chief executive Joe Forster says the portfolio is a long-term investor, but there is no set time frame: for example, it has owned Microsoft for six years, but in March it “flipped” Deutsche Bank after making 22% on the stock in four weeks. Forster says the portfolio looks to invest in sectors of the economy not available on the ASX.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
information in regards to your circumstances.
Also in the Switzer Super Report
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- JP Goldman: Aussie dollar hasn’t fallen enough to stop RBA rate cuts…yet
- Super Report Subscriber: My SMSF – stick to the growth path
- Paul Rickard: Question: Can I sell shares before EOFY to get a capital loss, then buy them back?