Why you need more global equities in your super fund - Morphic Asset ...
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Morphic
Perspectives Series
September 2016
Why you need more
global equities in
your super fund
Decades of Australian shares beating
global markets are over. Don't let your
retirement travel plans pay the price.
Change Creates Opportunity
Morphic
Asset ManagementIntroduction comes to protecting your wealth over the long
term, there are many things that can go wrong
You open the papers daily to hear about the rise in a manner in which you had not anticipated,
of a new superpower and the collapse of old such as a collapse in your home country’s terms
empires. Your friends talk about the opening of trade coupled with a succession of poor
of new markets globally and of free trade and governments.
travel. Your country is perfectly positioned to
provide the food to fuel this growing demand The hidden dangers in an Argentine pension
with ample room to expand for cattle and crops. portfolio in 1909 might have come from
Your fellow citizens are amongst the richest in too narrow a dependency on local assets
the world: five times richer than the nearest compounded by currency risk.
large neighbour (regarded as more of a holiday
In response to some questions from a number
destination than a serious competitor) and 50%
of SMSFs, we have put together these thoughts
higher than the country from which many of
on why we think it is incredibly important for
your citizens originated. In short – your country
SMSFs to look offshore for their investments to
is on the cusp of great things.
protect their future retirement plans.
You could read the above and think of Australia.
Indeed you’d be forgiven for thinking that:
GLOBAL EQUITIES ARE OUTPERFORMING AUS-
expecting the neighbour to be Indonesia and
TRALIAN EQUITIES
the UK to be the country of origin.
“A first-rate organizer is never in a hurry. He is
In fact the story above refers to Argentina in
never late. He always keeps up his sleeve a margin
1909, with Brazil and Italy being the neighbour
for the unexpected.”
and source country respectively.
Argentina is a sad story and a tale of blown Arnold Bennett
opportunities. A country endowed with both
natural resources and new population that has After a decade of stunning performance by
been stuck in the slow lane for 100 years, racked Australian shares, a clear break in the trend
with recurrent inflation and instability. started in 2010 as can be seen in Figure 1
So why is this relevant to you as a Self Managed below.
Super Fund (SMSF) trustee? Because when it
Figure 1 - Long term performance of Global vs Australian equities
MSCI World Index vs All Ordinaries Index, AUD, 1971-2016
0.8
0.7 1970-2000 2000-2011 2011-?
Global equities Australian Global
0.6
outperform equities equities
outperform outperform
0.5
0.4
0.3
0.2
0.1
0
1971 1974 1977 1980 1984 1987 1990 1993 1997 2000 2003 2006 2010 2013 2016
Source: Morphic Asset Management, Bloomberg
Change Creates Opportunity 2 Morphic
Asset ManagementThere are good macroeconomic reasons for the “China story” is over, just that there will be
that. Chinese booming demand for resources different drivers of growth. Indeed, the Morphic
in the Noughties has normalised and spending Global Opportunities Fund holds investments
on investment (in infrastructure, property and in Chinese companies set to benefit from
machinery) is set to decline in the next decade. progressive modernisation and the growing
(see Figure 2 and 3 below). This is not to say middle class.
Figures 2 & 3 - Metal prices drive Australian stock market but China's demand is declining
Figure 2 - Industrial Metals Index vs All Ordinaries Index
1995 - 2016
7000 250
6000 All Ordinaries Index (USD, LHS)
200
5000
Metal Prices Index (USD, RHS)
150
4000
3000
100
2000
50
1000
0 0
1995 1998 2001 2004 2007 2010 2013 2016
Source: Morphic Asset Management, Bloomberg
Figure 3 - China Investment % GDP
1995 - 2019
50
45
40
35
30
1995 1998 2001 2004 2007 2010 2013 2016 2019
Source: Morphic Asset Management, Bloomberg
Change Creates Opportunity 3 Morphic
Asset ManagementGLOBAL EQUITIES ARE A GOOD DIVERSIFIER an exposure to banks and resource companies,
FOR AUSTRALIAN STOCKS with this combination representing almost 2/3
of the Index (see Figure 4 below).
“In investing, what is comfortable is rarely
profitable.” Global equities provide greater diversification
across all other sectors, with important investing
opportunities in information technology,
Robert Arnott
healthcare, industrials, consumer discretionary
and to other currencies.
Part of successful portfolio construction is to
diversify your risks. Most investors see this in Global equities are also good for “de-risking” a
terms of having some equities along with cash, typical portfolio of Australian stocks. One way
bonds and property. Yet it would seem that the to look at this, is to examine the returns of
SMSF community hasn’t taken the next step of Global equities when Australian shares lose in
looking at currency risks. value. Since inception (August 2012), Morphic
Global Opportunities Fund, for example, has
By adding some international funds to your
outperformed the All Ordinaries Index in all of
SMSF, you can also gain exposure to sectors
the ten worst months for the Australian stock
which are under-represented in Australia. The
market (see Figure 5 next page).
Australian stock market essentially represents
Figure 4 - Global equities are more diversified than Australian shares
All Ordinaries Index sector diversification vs Morphic Global Opportunities Fund, 2016
100%
90%
80%
70%
60%
50%
Materials 15%
40%
30%
20% Financials 36% Materials 7%
10% Financials 15%
0%
ASX 200 Morphic
Financials Materials
Real Estate Consumer Staples
Industrials Health Care
Consumer Discretionary Telecommunication Services
Energy Utilities
Information Technology
Source: Morphic Asset Management, Bloomberg
Change Creates Opportunity 4 Morphic
Asset ManagementFigure 5 - Morphic outperforms Australian shares when market goes down
Morphic Global Opportunities Fund vs. All Ordinaries, Ten worst local market months since August 2012
8%
Average Australian market: -5% per month
6% All Ordinaries Index MGOF
Average Morphic: +1% per month
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Mar 2013
May 2013
Nov 2014
Aug 2015
Jun 2013
Jan 2014
Sep 2014
Jun 2015
Sep 2015
Jan 2016
Source: Morphic Asset Management, Bloomberg
Perhaps the most startling thing about SMSFs’ just 0.3% of SMSF asset allocations. To say that
currency allocation strategies is that they don’t the SMSF sector is taking a large bet on Australia
seem to have any! ATO figures below in Figure and the continuation of the current trends in
6 put average international equity holdings at China, would be an understatement.
Figure 6 - Pension funds allocations to Domestic vs. Global Equities
2013 or latest available
100% 0.33
23
80%
50
60
60% Global equities
Domestic shares
40%
20%
0%
SMSFs Large Super Funds Small European Large European
Pension Funds Pension Funds
Source: Morphic Asset Management, ATO, Mercer
Change Creates Opportunity 5 Morphic
Asset ManagementA recent international survey of retirement We believe it is entirely possible that the next
plans suggests that SMSFs need to increase 10 to 20 years could see the Australian dollar
the investment in Global Equities to about 14% fall by 30 to 40% against the standard basket of
of their portfolio just to match the average of Australia’s trading partners, which is represented
international savers. by the so called “Trade Weighted Index” or
TWI charted below (Figure 7). Investors who
only have Australian assets will need these to
INTERNATIONAL ASSETS ARE A GOOD MATCH
appreciate by at least this amount to just match
FOR FUTURE EXPENSES the currency fall. Historically, times when the
“Paris is always a good idea.” Australian dollar is weak have also often been
times when the Australian stock market gives
lacklustre returns.
Audrey Hepburn
By looking offshore, if SMSF investors find
We’re not sure about you, but one of our aims one day the outlook at home less rosy, they
in retirement is to spend time travelling to parts will be safe in the knowledge that their global
of the world that we had always wanted to visit, purchasing power for those overseas trips they
but never had the time – what with four weeks always planned in their retirement hasn’t ended
annual leave and then the trips with the kids in tears!
that came after that.
SMSF trustees should also consider how much
Australia over the last 10 years has enjoyed money they spend each year on imports. The
one of the highest exchange rates in real terms, most obvious example is imported cars. Then
since either 1950 or 1890 depending on how they should think how their lifestyle would be
it is measured. As such most people have effected if the Australian dollar falls sharply
become accustomed to travelling with their and they have no offsetting foreign assets and
Australian Dollars buying a good holiday. We income to pay for these things.
would just point out that this period has been
the exception, rather than the norm over the
last 50 years.
Figure 7 - Australian dollar is at least 7% overvalued by historical standards
Australian Dollar Trade Weighted Index, 1971 - 2016
180
160
140
7%
120
100
80
60
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Source: Morphic Asset Management, Minack Advisors, Bloomberg
Change Creates Opportunity 6 Morphic
Asset ManagementHOW TO GO ABOUT INVESTING OVERSEAS it comes to Australian equities and probably
feel qualified to pick on a few big international
“When preparing to travel, lay out all your clothes stocks, like Microsoft, Coke and Apple, and feel
and all your money. Then take half the clothes and this might meet risk and return challenges.
twice the money.”
But this would ignore a number of investing
rules. This is more oriented towards investing
Susan Heller
based solely on a company’s past reputation
If SMSFs are to overcome their home bias and without necessarily delving very deeply into its
change their asset allocation strategy, they will future prospects. Nor does it take into account
have to choose whether to invest direct in a some of the macroeconomic risks, like which are
few stocks or choose a managed fund or the the best economies and sectors to be investing
Exchange Traded Fund (ETF) route. in at any given time, microeconomic risks like
comparative stock performances and differing
Even the biggest Australian Super Funds mostly individual currency trends.
outsource the investment process to specialist
fund managers. If SMSFs do recognise the risks of stock picking
themselves they will need to take the managed
Many SMSFs take a direct investing stance when fund route.
About the authorS
JACK LOWENSTEIN CHAD SLATER, CFA
Managing Director & Joint CIO, Morphic Asset Management Joint CIO, Morphic Asset Management
Before founding Morphic Asset Management in 2012, Jack Chad co-founded Morphic Asset Management in 2012.
was previously Deputy Chief Investment Officer at Sydney He was previously a Portfolio Manager and Head of
based global equity manager Hunter Hall with responsibility Currency and Macroeconomics at Hunter Hall for five
for risk management and portfolio construction. As a stock years. He has worked at BT Investment Management,
picker Jack has invested in a variety of markets and sectors, Putnam and the Federal Treasury over his 15 year career.
but developed in-depth knowledge of markets in Asia-Pacific
region as well as global finance and resources sectors.
© 2016. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security by the sender or Morphic
Asset Management Pty Ltd (“Morphic”) (ACN 155 937 901) (AFSL 419916). This report does not take into account the investment objectives, financial situation or particular
needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision. Any person
considering investment in the Morphic Global Opportunities Fund (“MGOF”) should first review the Product Disclosure Statement (PDS) for the Fund issued by Perpetual Trust
Services Ltd dated 23/01/2014 and available at www.morphicasset.com. Initial Applications for units in the MGOF can only be made pursuant to the application form in the PDS.
Morphic does not guarantee repayment of capital or any particular rate of return from the MGOF. Past performance is no guarantee of future performance. Investment returns
have been calculated in accordance with normal industry practice utilising movements in unit price and assuming reinvestment of all distribution of income and realised profits.
Statements of fact in this report have been obtained from and are based upon sources that Morphic believes to be reliable, but Morphic does not guarantee their accuracy, and any
such information may be incomplete or condensed. All opinions and estimates included in this report constitute Morphic's judgement as at the date of this communication and
are subject to change without notice.
Change Creates Opportunity 7 Morphic
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