One of the best-kept secrets, it seems, is the performance of international equities. In Australian-dollar terms, the FTSE All-World ex-US Index climbed 38 per cent in the year to the end of last month, while the US S&P 500 Index rose 48 per cent. Compare this with the 19 per cent gain in the S&P/ASX 200.
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.