Australia's rich take offshore trip

Just a week ago, we ran a Barron’s cover story on where the rich in the US are investing. This week, we get closer to home and find there has been a marked shift among Australia’s wealthy to preference growth over income investments.

Not only that, but as our richest look offshore for growth, wealthy foreigners are pouring even more money into Australia, investing in droves not only in residential real estate, but into commercial property too.

With the global recovery underway and cash and term deposits having little appeal, it was only a matter of time before growth assets became more prominent in the portfolios of Australia’s wealthy.

“Our view, both domestically and internationally, is that we’re moving into a period of less uncertainty, which is why we’re moving away from some of the defensive stocks and increasing exposure to cyclical stocks,” says Riccardo Briganti, head of research at Macquarie Private Wealth.

Credit Suisse head of private banking research, David McDonald, echoes this sentiment.

“Last year we were in the high yield theme and globally we had some dividend portfolios that we were recommending. We’re pulling away from those and certainly moving more into the cyclical-type areas, probably more so in global markets,” he says.

McDonald is still cautious about volatility in the short term, warning that investors should be mindful of events in the US and Europe that could rattle equity markets.

Of course, while growth assets are getting more attention it certainly doesn’t mean retail investors should rush to switch out of dividend-paying stocks all at once. Far from it. As Adam Carr pointed out last week that yield stocks still have their attractions (see Stay with the yield play).

But wealth advisers are increasingly advocating a mix of both income and growth.

“Every portfolio at the moment should have a combination of a growth and income focus,” says Equity Trustees chief investment officer, George Boubouras.

We’re all well-versed in the dividend-paying stocks, thanks to extensive coverage of the hunt for yield. Now, it’s time to look at investing in growth.

Offshore opportunities

When pursuing growth, wealthy Australians are increasingly looking offshore.

“Within growth assets, we’ve had an overweight international equity allocation rather than Australian equities. We’ve had that in place for the last 18 months as a tactical asset allocation decision,” says NAB private wealth senior adviser, Catherine Wong Doo.

“It’s something that we really needed to educate our clients on, because typically there’s a very strong bias and perhaps comfort to Australian equities. But we’ve been able to provide that shift in international equities to an overweight position, which has clearly benefitted the clients over the past 12 months, where we’ve seen that disparity of performance start to flow through,” she says.

There is, without doubt, a strong bias among Australian investors for domestic equities: a bias that has delivered handsome rewards in recent years. But with so much volatility playing through, diversification is more critical than ever. The wealthy are being advised to invest offshore, not only to take advantage of companies trading at a discount but also to gain exposure to sectors we don’t have access to here.

“The key [industries] are technology, healthcare, pharmaceutical and consumer goods companies, because we’re quite limited in those companies from an Australian context,” says Wong Doo.

Capital goods and financials are two sectors the wealthy are being advised to snap up.

Platinum Asset Management boss Kerr Neilson told Eureka Report earlier this month that he has been cutting back his holdings in defensive stocks and focusing more on undervalued European financials.

“Essentially, we’re going after the jugular. We’re not looking for defensives in Europe; we want to participate in the improvement,” he said.

Credit Suisse likes European banks and insurers, such as BNP, AXA and Alliance, while French electrical company, Schneider Electric and US-listed agricultural company Deere are both cyclicals they favour.

“We’re recommending financials in international equities. It’s an area we’re keen on, both European and US financial stocks, and also some of the more cyclical; capital goods, autos and engineering,” McDonald says.

Briganti says that within financials, for Macquarie the preference is towards investment banks like UBS and JP Morgan rather than retail banks. On the capital goods side, he says investing in General Electric in the US is “a call on economic improvement that leads to a business investment improvement”.

“If businesses start buying plant equipment, we want access to the companies that sell those items to business. That’s a longer-term view, a view over about the next 12-18 months,” he says.

Home grown

But not all the action is offshore, as there are also growth opportunities at home.

“Domestically, part of the move to get ahead of the curve in terms of an economic recovery is looking at housing and consumers,” says Briganti.

Macquarie added Dulux to its model portfolio about three months ago, he says, while more recently, they’ve been looking at Fight Centre, JB Hi-Fi and Wesfarmers.

Boubouras also mentions JB Hi-Fi and Harvey Norman in terms of growth opportunities as a result of the recovery of the household wealth effect, while Boral and Adelaide Brighton are also getting attention, he says.

Meanwhile, wealthy investors are being advised to hold on to resources, despite the headwinds facing the sector.

“For a balanced portfolio we’re still telling people to hold exposure to resources because clearly there’s growth out there,” says Chris Selby, head of Private Wealth at Deutsche Bank.

Alternatives

While the rich are increasing their exposure to equities overseas and shifting to growth opportunities at home, interest in alternatives is also on the rise.

Indeed, specialist asset manager Investec is now touting aircraft leasing as a viable alternative asset class to property and infrastructure for Australian institutional and high net-worth investors.

Aircraft leasing may be set to take off, but within this space, hedge funds and private equity are the most well-known. Hedge funds have yet to regain their shine post-GFC, but private equity is back with a bang.

“Where we’re seeing the most interest right now is in private equity,” Selby says.

“Private equity has been quite out of favour and if you’re looking at growth coming back and we’re getting closer to some normality of the environment, then private equity will get busy again,” he says.

Private equity investing means sacrificing liquidity for a longer-dated return. That investors are willing to part with their money for three or five years, or even longer, is a good sign and something that hasn’t been seen for a while, Selby says.

Again, that means looking overseas. “Our private equity market is very small on a relative basis, with limited industry so for the broader trading market and private equity markets, global is very much where we want that exposure to lie,” says Wong Doo.

Exposure to private equity may provide an important element of diversification and risk-adjusted returns for the wealthy, but strict ASIC regulations mean it’s not an investment readily available to retail investors.

Average returns aren’t too great either. As per the below data from the Australian Private Equity and Venture Capital Association, in Australian dollar terms the one-year return of 6.72% doesn’t come close to the 19.15% return from the ASX 300 index. Over a 15-year period, the private equity return of 8.99% in $A terms is only marginally better than the ASX300’s 8.57% return.

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For retail investors keen to get some exposure to alternatives, Boubouras says it’s best to access the asset class via a fund of funds. But he warns that more than any other asset class, it’s important to be aware of the cost involved when investing in alternatives. Fees can be very high.

Wealth flooding in

While Australia’s wealthy investors are increasingly looking for opportunities offshore, there is evidence that foreign investors have been stepping up their interest “down under”.

“We have seen significant money come into Australia over the last four weeks, a lot of it in property, commercial real estate,” says Selby.

“A lot of our Australian-domiciled clients geared into commercial real estate in that price range between the $25-$75 million price mark, which is an interesting space because it suffered quite badly during the last three-four years.”

Selby says people were just letting go of assets mid-GFC, leaving the ultra-wealthy to snap them up at a bargain. From what he’s seen, these same investors are now selling these assets “principally to foreign investors out of Asia, and at quite large premiums”.

“Clients are faced with the problem that they’ve made great money on these properties, but they’ve been sold. So what do they do with the money? That’s where we’re directing them towards selective US strategies, certain selective infrastructure strategies and certainly private equity.”

Ultra-high-net worth individuals have seen significant wealth appreciation over the last few years. For them, the focus is recirculating that wealth by taking some profit, as seen with commercial property, and moving into longer-dated risk.