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Offshore stock investing rapidly overtaking Aussie shares

Nicki Bourlioufas  |  12 Jun 2018Text size  Decrease  Increase  |  
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Australia’s managed fund industry increased in size during the first quarter of 2018, with an increase in assets invested offshore, while investments in local Australian equities dipped. Offshore investment has overtaken Australian shares investments for the first time in at least 30 years.

As at 31 March 2018, the consolidated assets of managed funds institutions were $2.76 trillion, an increase of $8.5 billion or 0.3 per cent on the December quarter 2017 figure of $2.75 trillion, according to Managed Funds data from the ABS.

Most of the managed fund assets are invested in superannuation. At 31 March 2018, total assets of superannuation funds were $2.66 trillion, an increase of $6.1 billion on the December quarter 2017 figure. Increases were recorded in assets overseas of $21 billion, up 5.4 per cent and derivatives, up 12.4 per cent to $3.3 billion while share investments fell $15.2 billion or 3.4 per cent.

The data revealed a shift towards offshore overseas assets, which rose by $21.2 billion or 4.7 per cent to $468.6 billion. However, investment in local shares dropped by $18.4 billion or 3.6 per cent to $486.3 billion. Cash deposits fell by $1.7 billion or 0.6% to $263.4 billion.

According to ABS data stretching back to June 1998, this is the first time the value of investments in offshore assets has exceeded the value of Australian share investments. Such a movement of investment assets offshore will help to reverse a strong bias to invest in local assets.

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Investments in offshore assets have exceeded the value of Australian share investments

According to Anthony Serhan, managing director, research strategy, Asia-Pacific at Morningstar, the data reveals a story of returns as much as flows.

"Over the last five years, international shares – unhedged have returned around 17 per cent per annum compared to 7.7 per cent per annum for Australian shares. For the first three months of 2018, Australian equities were down close to 4 per cent while international equities were mildly positive. This obviously has an impact on asset levels.

"The thing that has lit international up for retail investors has been returns fuelled by the big drop in the Australian dollar and the attention the FANG stocks have received,” Serhan says, referring to the rise of US technology stocks Facebook, Amazon, Netflix and Google's parent, Alphabet.

"These stocks are getting a lot of mainstream media attention and that has helped to raise the attention of retail investors on the opportunities in international markets. That has been a big driver," says Serhan. With the potential listings of Uber and Airbnb in coming years, providing even more media attention on offshore opportunities, he adds.

An unhedged exposure to offshore investments also provides portfolio diversification. “If things go really bad locally, the Australian dollar will likely fall, which will increase the returns from offshore investments and give more diversification,” said Serhan. So if, for example, the Australian dollar fell by 10 per cent, the value of your offshore investments would rise by 10 per cent.

Aussie dollar diminishes returns

However, any rise in the Australian dollar diminishes returns when assets are converted into the local currency so institutional investors, for example, often take a 50:50 position, decided to leave equal portions of their portfolio hedged and unhedged given the currency’s moves can be unpredictable, says Serhan.

A recent survey by Crestone Wealth Management also reveals an uptick in offshore investment. By the end of March 2018 quarter, its clients – who are mostly high net worth or ultra-high net worth investors – held 62 per cent of their assets in equities, with the domestic/international split at about 50 per cent each.

Crestone’s funds under advice (FUA) in international equities rose to 30 per cent in the March 2018 quarter, up from 29 per cent in the December 2017 quarter. Domestic equities accounted for 33 per cent of clients’ portfolios by March 31, 2018.

This move to towards offshore assets was broadly consistent with Crestone’s tactical overweight to international equities.

“We view global equities as presenting more opportunities to access some of our more favoured sector themes, such as technology, energy and financials, stronger emerging market population growth and markets less dominated by bond-sensitive equities,” said Crestone chief investment officer Scott Haslem.

Haslem adds that Australian economic growth is lagging growth in Europe and the US. “This is also reflected in 2019 corporate earnings, where UBS puts consensus growth for global markets at around 10 per cent, twice the 5 per cent seen for Australia,” said Haslem.

In contrast to the investments of managed funds, the investments of self-managed superannuation funds (SMSF) still show a huge bias towards local investments. As at 30 September 2017, SMSFs held total assets of $701.6 billion, of which just $8.8 billion was invested in offshore assets, according to data from the Australian Taxation Office (ATO). In contrast, $206.2 billion was invested in Australian shares and $158 billion in cash and term deposits.

Clarification added 12 June, 2018: This ATO data only measures SMSF trustees' direct investments, not exposure through global fund managers or other indirect holdings.

 

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Nicki Bourlioufas is a contributor for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a Morningstar contributor.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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