Asset allocation is the core driver of performance through a portfolio’s life cycle. It is no surprise that the appropriate asset allocation will differ for most investors, depending on their return expectations, risk tolerance (can you sleep at night?), time horizon and the stage of your life cycle (for an individual). We will review why an allocation towards Global Equities “within” an investor’s equity weighting can benefit investors.
Why do Global Equities belong in portfolios?
Given the relatively small size of the Australian equity market versus the global MSCI, it is important to have exposure to Global Equities for the diversification characteristics this brings. It is true that the dividend of other developed bourses is not as high as the local market, but there is a bias locally to financials and materials. Broadly the Australian equity weighting will have a higher dividend yield than global equities, which is an important characteristic. This is also before the franking. The exposure to Global Equities will however deliver diversified earnings via key global multi-national stocks.
What should investors look for in Global Equities?
When looking for exposure to Global Equities, Australian-based investors need to understand whether they require the same weighting to large material/resource companies in their global portfolios given they already have the leveraged exposure in their domestic equity weighting.
Further, exposure to the growth premium from the emerging economies can be seen in many companies that are not reflected locally. For example, technology (Apple, Google, Qualcomm), global payment systems (AMEX, MasterCard, VISA, EBay), core global luxury brands (Ralph Lauren, Hermes, LVMH) and other multinationals (Johnson & Johnson, Nestle, Procter & Gamble, Unilever, Danone, John Deere, Caterpillar) all have earnings linked to the strong performing emerging economies which is not replicated in our local market.
How to invest in Global Equities
A sample international equity portfolio that aims to deliver some diversified earnings attributes are listed in Table 1. The direct holdings aim to provide a portfolio of mega-cap, International companies with solid future growth prospects. Further, these “perpetual” global stocks have some good pricing power and growing earnings to both developed and increasingly the emerging economies. When determining companies to add to the International Equity Portfolio, some of the metrics to consider include ensuring a focus on sector representation that is not adequately represented on the Australian market, e.g. Information Technology, Global Industrials and Telecommunications, as well as companies with a globally recognised business line that provide an opportunity to participate in earnings upside in the years ahead.
In summary
In summary, we have aimed to explore the basic concepts and investment opportunities for Global Equities within a portfolio context. It is quite clear that diversification across all the asset classes, and importantly within, are such key concepts that all investors need to be cognisant of in their wealth accumulation.
An investor’s asset allocation must reflect their return expectations, the amount of risk they employ (volatility) to meet their objectives and their time frame (which reflects the stage of their lifecycle). An investment in Global Equities is an important investment decision for all investors, as it adds diversification to portfolios, thereby reducing risk and potentially increasing expected returns over time.
Important: No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities referred to in the materials. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS. To the extent that UBS has sourced any material in this document from a third party, UBS accepts no liability for the accuracy, currency or completeness of that material. Prices, values, rates and yields are indicative only. UBS is under no obligation to update or keep current the information contained herein.
