Australian investors have gradually increased their allocation to international equities in recent years at a time when the local market has persistently underperformed.
After several years of strong gains, it might be appropriate to question whether it is time to batten down the hatches and bring cash back home.
Yet one top money manager offers a novel and slightly scary reason to maintain an exposure to the growth and earnings of companies in offshore markets.
“We have got a wild property market here,” says Andrew Clifford, chief investment officer at Platinum Asset Management.
“We only need to look at what has happened in other countries ultimately at the end of some of these downturns. So I have this concern that there are some real shocks we are going to take, and that’s the best argument for having a very decent amount of other currencies in your portfolio,” Clifford says.
Platinum, whose $11.7 billion international fund has returned 23 per cent per year over the past three years, specialises in finding unloved and undervalued companies and is heavily weighted towards IT, financial and consumer discretionary sectors.
Clifford says in an environment where investors have been extremely risk averse, he looks to take on risk and would always pick a company that is investing in growth over one that is simply handing cash back to shareholders.
Clifford was not the only fund manager at a Morningstar investment conference in Sydney this week to express worries about distortions in the housing market, but he was the most bearish on its potential impact.
The overheated property market in Sydney was generally seen as another unwanted side effect of extremely low interest rates that have fostered chronic imbalances in stock, bond and currency markets around the world and is keeping Australia’s top fund managers awake at night.
“Environments where interest rates are held at extremely low levels for too long create instability and it’s a very difficult environment to exit from,” says MLC head of private investment consulting Michael Karagianis.
“Investors can get very badly burned by investing in asset classes that they thought were less risky than they proved to be. I am quite nervous at the present time, I must admit.”
He says to be confident in the outlook for domestic companies, you would either have to bet that the monetary policy induced liquidity will continue indefinitely, or that firms will somehow produce a surge in earnings growth. “Frankly at least for the next year or so, that does look somewhat questionable,” he says.
“Should you be as exposed to equities at this point in the cycle given everything that’s happened, or should you pull back a little and wait for better opportunities? That is an important decision for investors and advisers to think about,” Karagianis said in front of an audience of more than 500 financial advisers in Sydney.
The sense of caution was widespread among presenters, especially with the client base of so many advisers moving into retirement phase and unable to take another lifestyle-affecting hit to portfolios like the one suffered after the global financial crisis.
Schroder Investment Management head of multi-asset Simon Doyle says his total asset allocation to equities is down to 25 per cent, including both domestic and international, with the total exposure cut partly because of the overvaluations in US stocks.
Ironically, the growing interest in diversifying internationally from small investors looking for better returns after the collapse of the mining boom may be coming too late, with Wall Street hitting successive record highs and European equities bouncing after the start of QE.
Morningstar research suggests that for the first time, Australian investors’ exposure to international equities may overtake their long-held domestic bias in the coming year.
Source: Morningstar
Fund managers say expectations have been distorted by the stellar returns in international equities and investors need to be more realistic.
“Guess what – you’ve had the good years, the next few years are perhaps going to be a little leaner,” Karagianis warns.