Growth the lure in going offshore
Superannuation assets increased 15.5 per cent last year to $1.6 trillion. About $1.1 trillion of this is managed by retail and industry funds that allocate on average 17 per cent of their funds into international equities.
Elsewhere, however, international equities seem to be a secret for many who own self-managed super funds (SMSFs). The average allocation for these funds is way down at 0.3 per cent. But we're sure that many SMSF investors will go looking for bigger returns as the hyper-concentrated Australian market starts to wilt due to factors such as the end of the resources boom, and a bursting of the yield bubble.
SMSF investors could have generated the above returns had they invested in exchange-traded funds (ETFs), which are managed by, among others, Vanguard and State Street. They are manna from heaven for SMSFs, which are looking to reduce their costs. These funds charge only 0.15 per cent in management fees. So if you give them $10,000, they charge $15 a year. This is the difference between their "gross" performance and their "net" performance.
These funds are designed to closely track indices. In the case of Vanguard, the fund that returned 28 per cent is based on the FTSE All-World ex-US Index, while the one that returned 48 per cent tracks the CRSP US Total Market Index. Both give investors exposure to thousands of companies.
Compare this with the Magellan Global Fund, started by ex-UBS investment bankers Hamish Douglass and Chris Mackay. This fund has managed to outperform the index, but only slightly. Its Global Fund owns 26 stocks, so there is more risk involved.
If Magellan's fund doesn't perform, the investors are up for massive fees. It charges 1.35 per cent, plus a performance fee of 10 per cent if it outperforms either its benchmark index MSCI World Net Total Return Index by 10 per cent, or the Australian 10-year government bond yield. Instead of $15 a year on your $10,000, you're looking at $130 and more for "performance".
Last year, the winds couldn't have been more favourable for international equities: it saw massive rallies in two of the biggest markets, North America and Japan; and a weakening Australian dollar against the US delivering big currency-related returns.
The type of performance from last year isn't likely to occur again for some time. But there is also the risk the big companies driving the Australian sharemarket returns falter. The 10 biggest companies by market cap represent about half of the total market capitalisation of the whole of the ASX.
Under the Radar's philosophy is to invest the bulk of your money in cash and in index-linked funds, and invest a smaller portion of your funds at the smaller end, where you should take stock-specific risk. This also is the end where you can get the biggest growth. We want the best of all worlds.
Richard Hemming edits fortnightly newsletter Under the Radar Report: Small Caps.
Frequently Asked Questions about this Article…
Last year international equities saw big rallies — the FTSE All-World ex‑US rose about 38% and the US S&P 500 about 48% in Australian‑dollar terms, versus a 19% gain for the S&P/ASX 200. That outperformance was driven by strong gains in North America and Japan and a weakening Australian dollar, which boosted currency‑related returns for Australian investors.
Retail and industry super funds manage roughly $1.1 trillion of the $1.6 trillion in super and allocate on average about 17% to international equities. By contrast, self‑managed super funds (SMSFs) have a very low average allocation — around 0.3% to international equities, according to the article.
Yes — the article notes that SMSF investors could have captured international returns by using exchange‑traded funds (ETFs) from providers such as Vanguard and State Street. These index‑tracking ETFs typically charge low management fees (around 0.15%), making them a cost‑efficient way to gain broad international exposure.
According to the article, a Vanguard ETF based on the FTSE All‑World ex‑US Index returned about 28% and another tracking the CRSP US Total Market Index returned about 48% (both in Australian‑dollar terms for the period referenced). These ETFs give exposure to thousands of companies and closely track their underlying indices.
The Magellan Global Fund, run by Hamish Douglass and Chris Mackay, is a concentrated, active fund that holds about 26 stocks and has outperformed its benchmark only slightly. It charges a higher base fee (1.35%) plus a performance fee of 10% if it outperforms certain benchmarks by a set margin — meaning investors can pay substantially more in fees than with low‑cost ETFs, and they take on higher stock‑specific risk due to the concentrated portfolio.
The article warns that the exceptional performance of last year — helped by big rallies in major markets and a weaker Australian dollar — is unlikely to be repeated for some time. While international exposure can help diversify concentrated domestic risk, investors should be cautious about expecting the same level of returns every year.
The article points out that the 10 biggest companies by market capitalisation make up about half of the total ASX market cap, creating a hyper‑concentrated market. If those large Australian companies falter (for example, post‑resources boom or a yield correction), investors with heavy domestic exposure could face setbacks — which is one reason to consider international diversification.
Under the Radar’s approach, as described in the article, is to keep the bulk of money in cash and index‑linked funds for broad market exposure and low cost, while investing a smaller portion in smaller, stock‑specific opportunities where there’s potential for higher growth. It aims to combine the stability of indexed investments with selective higher‑growth bets.
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