The case for investing offshore is pretty compelling. Firstly, the Australian market is small – less than 2% of global stock markets by capitalisation. This means that 98% of opportunities are outside Australia.
Secondly, our market is dominated by financial and resources stocks. The financials sector makes up 36.9% of the Australian market, compared to 14.24% in the USA. (as at 31 August 17). For materials, it is 17.4% compared to 2.9%. Conversely, information technology stocks make up 23.5% of the US market compared to a trifling 1.4% in Australia. Our market simply doesn’t have the Apples, Alphabets, Amazons, Microsofts or Facebooks, or in the healthcare sector, pharmaceutical giants like Pfizer, or industrial giants like General Electric.
Thirdly, international share markets will often outperform the Australian market. While this can be true over any short term period, it is also true over a longer period. The following graph from the RBA shows the Australian (black), US (red) and World (developed markets, blue) over a 22 year period, using a common base and logarithmic scale. Over this longer period, the US market has outperformed the Australian market.
Investors can access offshore markets directly by buying shares in individual companies, or indirectly through a managed investment vehicle such as a managed fund or listed investment company. Managed vehicles are either passively or actively managed, the former typically through exchange traded funds.
The advantages of exchange traded funds, which slavishly track an index, include lower management fees, ability to target a country/region or industry sector, and guaranteed “index minus a small fraction” performance. The obvious disadvantage is that the concept of outperformance doesn’t exist. If you want to see more on exchange traded funds, please review these articles here [1] and here [2].
In this article, we are going to look at actively managed investments and how to choose a manager.
Primary offers open now
Magellan, one of Australia’s leading international equities managers, currently has the Magellan Global Trust (MGG) open to subscribers. This is a closed-end ASX listed unit trust that will invest in a portfolio of high quality global companies. I reviewed this offer two weeks ago (see here [3]).
The offer is scheduled to close on Friday 22 September for broker and general public offers, and Friday 29 September for existing Magellan investors. The minimum subscription is 1,500 units or $2,250. Trading on the ASX under stock code MGG is expected to commence on Wednesday 18 October.
For existing Magellan investors, the offer is very attractive because they will be entitled to a loyalty reward of 6.25% of the amount invested up to a cap of $30,000. Magellan is also meeting the costs of the offer and the cost of the 5% discount on new units issued under the distribution reinvestment plan.
Fees are 1.35% (including GST), plus a performance fee of 10% of any excess return (subject to a high water mark).
Investors should note that the Magellan’s Global Trust is somewhat unique in the international equities category as it intends to target a cash distribution of 4% pa, and also has a dynamic cash allocation whereby the weighting to cash could be as high as 50%.
ASX Quoted Managed Funds
ASX Quoted Managed Funds are open ended managed funds that are quoted on the ASX. They can be purchased through any stockbroker or investment trading platform with a minimum of $500. Like ETFs, they engage market makers to help ensure that the units are traded as close as possible to the underling NTA (net tangible asset value), and publish real time indicative NTAs to keep investors fully informed.
Magellan Global Equities (ASX Code: MGE) is the largest ASX quoted managed fund at just under $900m. Established a little over two years ago, it uses the same investment approach/strategy as Magellan’s core international fund, the Magellan Global Fund.
Magellan seeks to invest in outstanding companies at attractive prices, while exercising a deep understanding of the macroeconomic environment to manage investment risk. Magellan perceives outstanding companies to be those that are able to sustainably exploit competitive advantages in order to continually earn returns on capital that are materially in excess of their cost of capital.
While Magellan is focused on fundamental business value, it is not a typical ’value’ investor. It will invest in companies that have relatively high price-to-earnings and price-to-book multiples, provided that their shares are trading at an appropriate discount to their assessed intrinsic value.
The portfolio comprises 20 to 40 investments, which Magellan says can provide sufficient diversification to ensure that investors are not overly correlated to any single company, industry-specific or macroeconomic risk. The allocation to cash can be up to 20%.
Management fees are 1.35%, with a performance fee of 10% of any excess return (subject to a high water benchmark).
Since inception in 2007, Magellan has delivered exceptional performance, although the returns have been closer to benchmark in more recent years. The benchmark covers companies from 23 developed markets.
Magellan Global Fund – Performance vs Benchmark (to 31/8/17)
* Inception is 1 July 2007. Benchmark is MSCI World Net Total Return Index (AUD)
Magellan also offers a currency-hedged version of the strategy, which is available as an ASX quoted managed fund. This trades under stock code MHG. The fund is $55m. Magellan Infrastructure Fund trades under stock MICH.
This Friday, units in the Platinum International Fund (ASX Code PIXX) and the Platinum Asia Fund (ASX Code PAXX) will commence trading on the ASX. These are ASX quoted funds that will act as feeder funds into Platinum’s flagship Platinum International fund and Platinum Asia Fund respectively. Platinum is a value manager.
The Platinum International Fund has been going for 22 years and has $9.9bn in funds. It aims to provide capital growth over the long-term by investing in undervalued companies from around the world. It invests primarily in listed securities, and runs a portfolio of between 70 to 140 securities that Platinum believes to be undervalued by the market.
Management fees for the Platinum International Fund have recently been changed, with the base management fee now 1.1% pa and a performance fee of 15% on any excess returns (subject to a high water benchmark).
Platinum benchmarks to the MSCI All Country World Net Index in $A (which covers both 23 developed countries and 24 developing countries). Performance is shown below. Since inception in 1995, it has outperformed its benchmark by 6.4% pa.
Platinum International Fund – Performance vs Benchmark (to 31/8/17)
* Inception is 30 April 1995. Benchmark is MSCI AC World Net Index (AUD)
The Platinum Asia Fund invests in undervalued companies in the Asian region. This includes companies from China and India, but excludes Japan. It has $4.3bn in funds. Management fees are now 1.1%pa plus a performance fee of 15% of any excess return.
Performance (relative to the benchmark MSCI All Country Asia ex Japan in $A) is shown below.
Platinum Asia Fund – Performance vs Benchmark (to 31/8/17)
* Inception is March 2003.Benchmark is MSCI All Country Asia ex Japan Net Index (AUD)
Listed Investment Companies
There are several listed investment companies (LICs) that specilaise in international equities. Apart from being quoted on the ASX, advantages of listed investment companies include the ability for the Company/Manager to smooth or nurture any dividend, plus the finite capital structure. A disadvantage is that the LIC may trade at a discount or premium to its net tangible asset value (NTA).
Two LICs to consider are Ellerston Global Investments (EGI) and Contango Global Growth (CQG). I am a Director of CQG, so I will keep my comments very brief.
Ellerston Global Investments Limited (EGI) was listed back on October 2014 and has a current market capitalization of around $80m. Managed by Ellerston Capital, the Company owns a concentrated portfolio of 20 to 40 global companies representing high conviction ideas with the most compelling risk/reward asymmetry. The investment process combines both qualitative and quantitative approaches. Investment opportunities often result from catalysts including spin offs, fallen angels, management changes, corporate restructures, post IPO and embedded optionality.
Over 1 year to the end of July, the fund returned 9.9% compared to the MSCI World Index return of 15.8%. Since inception in November 2014, it has outperformed the index by 1.85%. The management fee is 0.75%.
It is last traded at $1.02, an approximate discount of 12% to its NTA.
Contango Global Growth Limited (CQG) listed on 23 June. It is advised by WCM Investment Management from Laguna Beach in California, a specialist equities manager with approximately $21bn under management. The company will run a high conviction portfolio of quality companies that are industry leaders and have rising competitive advantages (economic moats).
It last traded at $1.03, an approximate discount of 4% to its NTA.
How to choose
The starting point is the manager’s style or investment thesis. While some active managers offer regional or sector propositions (for example, Platinum Asia or Magellan Infrastructure Fund), most will want the freedom to employ their style over a range of global equity securities. They will have qualifiers to reduce the investment universe (for example, market capitalisation greater than $3bn), but because they are in the main stock pickers, they want the flexibility to find the best companies, irrespective of geography.
So, are you after a value manager, high conviction manager, growth at reasonable price manager, or some other style? Does their investment thesis suggest that the manager can add sustainable value?
Next is performance or track record. Ideally, you should consider this over multiple timeframes. Consistency is probably the key.
Finally, consider the management fee. Arguably, this is has already been taken into account with the net performance data, but if the fee is higher, then the manager needs to work harder to give you the same performance.
If you are investing in listed investment companies, consider the discount or premium to the NTA. While consistent discounts are often associated with companies that underperform, and premiums with companies that outperform, it doesn’t make a lot of sense to pay more (a premium) than what it is actually worth.
My advice – look for two or three quality managers and take out some manager diversification.
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.