Last year was a fantastic year to be invested offshore! The US stockmarket rose by almost 30%, the little Aussie battler, or dollar, fell by more than 15%, and so returns of 45% for investors were not uncommon. Two of the leading managed funds did even better – the Platinum International Fund did 47.2% after fees, the Magellan Global Fund even better, at 48.7% for the year.
Although history says it is extremely rare for one asset class to be the best performer two years in a row, the outlook for offshore investing is still reasonably favourable, with world economic growth trending up, and an expectation that the Aussie dollar has a little further to fall. Moreover, the long-term numbers suggest that an exposure to offshore equities should be a core part of most SMSF portfolios.
Of course, you can get exposure by buying individual shares directly – for example, Apple, Pfizer, GE, etc – however for most SMSFs, that proves to be too hard (and arguably, high risk), so the ‘managed’ option will suit. Let’s review the two main options – ETFs (exchange traded funds) or managed funds – and some individual funds within each category.
Exchange traded funds
The key thing to remember about ETFs, is that they are passively managed funds that track an index – your return will be whatever the performance of the index is, less a small management fee. While some of the managers are “better” at tracking the index and/or charge a smaller management fee and/or arrange better secondary market liquidity on the ASX – the critical decision is what index to “invest” in.
For most investors, it comes down to the USA versus rest of the world versus emerging markets, or some combination of these. You can also invest in specific countries (for example, Japan, through the iShares MSCI Japan ETF, ASX Code IJP, which tracks the MSCI Japan Index), or sector ETFs (for example, iShares Global Healthcare ETF, ASX Code IXJ, which tracks the S&P Global Healthcare Index.
However, most investment activity is in the following six ETFs.
Returns are to 31 December 2013, and net of any management or other fees.
Source: Switzer Super Report
Managed funds
There is a plethora of fund managers with unlisted international funds. Broad market based, almost index style funds are dying and being replaced by lower cost ETFs, so most unlisted managed funds are now actively managed. The managers’ investment style and their investment theme, as well as the countries they invest in, are important considerations.
The current market stars include Platinum and Magellan. We have thrown in Epoch (via Grant Samuel) into the mix, and as their styles are quite different, there is quite a degree of “manager risk”. If you are considering investment via an active manager, some diversification by spreading your investment across a couple of managers may make sense. Here is the run down on these managers.
Platinum International Fund
Platinum, the funds management house founded by Kerr Neilson in 1994, has been a hugely successful Australian funds manager. The flagship International Fund, a $9.9 billion fund, has delivered investors 13.44% per annum since inception in 1995. The $4.1 billion Platinum Asia Fund, established in 2003, is up 16.48% per annum. There is also a European Fund, a Japan Fund, an International Brands Fund, an International Health Care Fund and an International Technology Fund.
Platinum is usually pigeon-holed as a “value” fund, meaning that it buys stocks it thinks are trading well below intrinsic value, but this description doesn’t tell the whole story. Platinum’s team are stock-pickers, but they think with a macro-economic ‘thematic’ perspective. The Platinum team, now led by co-founder Andrew Clifford, resists easy classification: it is almost an absolute-return hedge fund. The Platinum team sees the world as their oyster, they will buy stocks from anywhere, any industry, whether large-cap or small-cap, they are prepared to sell short, and to move heavily into cash if they can’t find value at any particular time.
Platinum actively manages its currency exposure, being prepared to take positions for profit. The International Fund has improved its performance over the last year (recovering from a couple of disappointing years), and over the long term, the track record is very strong. Investors who are prepared to take a long-term view are unlikely to be disappointed.
Magellan Global Fund
Established in 2007, the rapidly growing $5.1 billion Magellan Global Fund is managed by a team led by Hamish Douglass, rightly considered an excellent investor. A key to the Magellan strategy is to be positioned in the stocks that will be the major beneficiaries of the one billion new consumers that will emerge in the major developing markets of the world, in particular China and India, over the next 15 years. Magellan buys the stocks that produce the goods and services that these consumers will buy. This means it buys global stocks that have big chunks of their revenue coming from developing economies. For example, its top portfolio holdings at present are eBay, Oracle, Microsoft, Lowes, Target, Visa, Tesco, Nestle, DirecTV and Yum! Brands. Consumer defensive is the largest sector, at 17.3% of the fund, with payments at 14.6% and mass-market retail at 13.7%. The fund is concentrated, holding about 27 stocks.
Since inception in July 2007, the fund has returned 11.0% per annum. Over the last 12 months, the fund returned an impressive 48.7% – and over the last five years, 16.1% per annum.
Grant Samuel Epoch Global Equity Shareholder Yield Fund
A different approach to Magellan and Platinum (and which sits well between them in a portfolio) is that of Epoch Investment Partners, whose Global Equity Shareholder Yield Fund – offered in Australia through Grant Samuel Funds Management – targets a dividend return of at least 4.5%. Epoch tries to add another 1.5% a year from share buybacks or other capital management, and with 3% from capital growth, Epoch targets a total return of about 9% a year.
The hedged version of the fund ($262 million) has returned 16.47% a year over the past five years, while the unhedged version ($1,064 million) has generated 8.96% a year. However, the performance gap has reversed somewhat over the last 12 months, with the unhedged fund returning 43.29% for the year and the hedged fund 25.66%. With investors sensing the Aussie dollar has further to fall, more than 80% of inflows are going into the unhedged fund.
Fund performance and key data
The table below show the performances of the individual funds to 31 December 2013. These are net of any fees and costs, which are measured by the MER or Management Expense Ratio.
* Magellan also charges a performance fee on excess returns.
With James Dunn [1].
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.
Also in the Switzer Super Report:
- Peter Switzer: Don’t panic. It’s just a buying opportunity [2]
- James Dunn: Commodity price outlook and shares to buy [3]
- Gary Stone: Time to reckon with Reckon [4]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [5]