Diversification and home bias have been hot topics for Australian investors in recent years. In an increasingly globalised equity market, investors have come to realise that Australian shares represent less than 2% of the available investment opportunity. Naturally, Australian investors show a home bias, in that they know the companies on their home exchange better, and they like to transact in their home currency without exposure to currency risk (foreign exchange risk).
In Australia, the home bias is amplified by the dividend imputation system, in which franking credits can add another 1% a year to investors’ returns. In particular, the huge demand from Australia’s growing ranks of self-managed superannuation funds (SMSFs) for franked dividend income – which is extremely tax-effective in their hands, particularly when an SMSF moves into pension phase – creates heavy preference for local stocks, although the attractiveness of franking credits has recently been threatened politically.
But more recently, it has become much more widely understood that Australian investors without some exposure to global shares are hindering their portfolios unnecessarily.
Australia for income, global for growth
A big problem for Australian investors is that the Australian stock market is one of the most concentrated in the world. The top 10 companies represent nearly 50% of the capitalisation of the market benchmark, the S&P/ASX 200 index. The top four companies are the ‘big four’ banks: financials make up about 40% of the index. This means that the movements (and returns) of the S&P/ASX 200 index do not track the overall share market as much as they track the performance of a small number of large listed companies.
Australian investors pick up on an improving global growth outlook through the miners, but the realisation has grown in recent years that investors who confine their investments to the highly concentrated Australian stock market risk missing out on the broader growth picture, because the ASX does not offer exposure to all the industries and sectors that are benefiting. In the US, European and Asian stock markets, Australian investors can tap into long-term growth opportunities that may not be accessible in a purely domestic share portfolio.
Australian investors are realising the need to bring global exposure into their portfolios. According to SMSF administrator SuperConcepts’ latest Investment Patterns Survey for March 2018, SMSFs have lifted their allocation to international shares over the past year from 12.9% to 14.2%, mostly through using exchange-traded funds (ETFs) and managed funds. The allocation is a long way short of that to Australian shares, at 35.9%, and property, at 19.5%, but it is on the rise.
Product manufacturers have responded to the increasing demand by bringing to market ETFs and listed investment companies (LICs) that create discrete, highly targeted funds that offer investors very particular exposures, that efficiently fill gaps in overall investor portfolios. That is very much the motivation of the new exchange-traded managed fund, WCM Quality Global Growth Fund, which will list on the ASX in August, with the stock code WCMQ. The fund will be managed by US-based global investment management firm, WCM Investment Management. Switzer Asset Management Limited is the Responsible Entity (RE) for the fund.
The WCMQ proposition
The fund will provide investors with international exposure and participation in high-growth global industries, in the one vehicle. Investors in WCMQ will gain access to a high-conviction, actively-managed portfolio of typically 20–40 high-quality global growth companies, diversified across individual stocks and sectors, and countries (except Australia). The stocks may come from developed markets – including the US, the UK, Europe and Japan – or from “emerging” markets, such as China, India and Brazil: if a stock meets the rigorous growth criteria of WCM, its domicile will not matter. The sectors targeted will include information technology, consumer staples, consumer discretionary, healthcare, financials and industrials: the opportunity set is very broad, but the stocks have to qualify under the bottom-up stock analysis that WCM conducts, and the criteria it sets.
In practice, that means that the stocks chosen must have a market capitalisation of at least US$3.5 billion ($4.7 billion) – to put that in context, there are only 82 Australian-listed stocks larger than that. WCM says its listed universe covers more than 2,100 companies. Once the manager puts these stocks through a range of quantitative filters, which include whether it has high/rising returns on invested capital that exceed the cost of capital; low or no debt; high or rising margins; and historical growth, WCM expects to have about 450 companies to choose from.
The fund will aim to exceed the return of its benchmark, the MSCI (Morgan Stanley Capital International) All Country World Index ex-Australia (with gross dividends reinvested reported in Australian dollars, and unhedged), before tax and fees, over rolling three-year time periods, but with less volatility than the benchmark. The fund can have a cash weighting of as much as 7%, meaning that it will not ever be anything less than 93% invested in the global stock market.
The fund will be managed for 1.25% a year, with an administration fee of 0.1% a year, for total cost of 1.35% (inclusive of GST) a year. A performance fee of 10% of any outperformance above the benchmark is also payable. Normal ASX brokerage charges apply when buying or selling units.
The verdict
The fund should particularly suit investors who have an Australian-dominated portfolio and want to diversify it. Adding an allocation to high-quality global growth can help to diversify such a portfolio, at a stroke. The fund can also be seen as helping to solve, in an individual portfolio, the problem of Australia’s highly concentrated stock market – because WCMQ gives the portfolio exposure to companies in industries and sectors that are limited, or unavailable, in Australia.
Against that, the fund is not hedged, meaning that you are taking currency risk by investing in WCMQ – changes in the Australian dollar’s exchange rate can worsen any losses you make, or wipe out any gains. However, the opposite can also be true: currency movements can also increase your gains, and protect against investment losses in the portfolio. For many investors, the diversification benefits will outweigh this risk. In fact, some Australian investors actually want the exposure to overseas currencies: instead of seeing it as currency risk, they see it as another layer of diversification in their portfolios.
The WCM Quality Global Growth Fund offer will close on Thursday 22 August. The application price is $5 a unit, with the minimum application amount of 2,000 units, meaning a minimum initial investment of $10,000.
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 regard to your circumstances.