Australian superannuation fund trustees have known for a long time that international equities represent a key element in their asset allocations and the recent decline in the value of the Australian dollar has only enhanced returns.
There is a very good reason why retail master trusts have managed to close the returns gap with their industry fund counterparts over the nearly seven years since the global financial crisis – their heavier exposure to both domestic and international equities.
But, as returns for the 2014/15 financial year demonstrated, exposures to international equities were particularly beneficial in circumstances where their relative performance was assisted by the declining value of the Australian dollar.
When the major superannuation fund research and ratings houses were analysing 2014/15 returns they specifically noted the benefits driven by listed investments, noting that while Australian shares had provided a return of 5.1 per cent last financial year, international shares had recorded an 11.5 per cent rise, “ greatly assisted by the falling dollar”.
Indeed, according to data generated by Chant West, both hedged and unhedged international equities represented a good bet in terms of super fund allocations over the past five years with returns varying between 14.5 per cent and 26 per cent in unhedged terms and between 8.5 per cent and 17 per cent in hedged terms.
The pattern was broken by the re-emergence of the Greek debt crisis in early August combined with less certain economic news out of China.
Notwithstanding the less certain economic environment, the performance of international equities over the past five years has resulted not only in some superannuation funds adjusting their asset allocations, but also in IFM Investors establishing an international equities arm.
The industry funds-backed group announced in April that it would be establishing an open-ended international equities arm, operating on a mandate basis with its ultimate scale depending on how much clients wanted to invest.
Commenting on the move earlier this year, IFM Investors chief executive, Brett Himbury, acknowledged that clients were looking to increase their international equities exposures.
“Our clients have invested in international equities for a long time, but they are increasing allocation to that in a systemic and structural way,” he said.
Himbury was quoted as suggesting that Australia’s super system was outgrowing Australian capital markets, including equity and bond markets, as well as the property market,.
But while international equities clearly remain an attractive part of superannaution fund asset allocations, those charged with providing the advice are being suitably cautious.
Discussing the outlook during a recent Super Review roundtable, Frontier Investment Advisers consultant, Justine O’Connell, said the firm was still positive on equities.
“We have a positive tilt across Australian, global and emerging markets. We’ve actually now revised that with a slight tilt towards Australian equities versus global equities, just on a valuation basis. Also, from a business confidence perspective, we’re relatively slightly more positive on Australian equities versus global, but that’s not a meaningful allocation by any extent,” she said.
During the same roundtable exercise, JANA senior consultant, Greg Michel, reinforced the point that it made sense to diversity away from the limited opportunities provided by Australian equities.
“So if you look across the asset classes, obviously with equities, diversifying away from a relatively small company base in Australia to a global opportunity, so particularly in the US, is providing opportunities and we believe that’ll continue to be the case. So we certainly agree with that view,” he said.
But while many of the asset consultancy firms have been continuing to counsel suitable exposures to global equities, one of the firms which has been viewed as having a sharper than average focus has signalled that it is moderating its approach.
Nikko Asset Management, which regarded itself as overweight global equities from about late 2011, in early October signalled what might prove to be a long-term moderation of its strategy.
It said that its Global Investment Committee had decided to move from overweight on global equities to neutral.
Our clients have invested in international equities for a long time, but they are increasing allocation to that in a systemic and structural way
– Brett Himbury
According to Nikko, this pull back had been prompted by the continued delay in the forecasted US Federal Reserve’s credit tightening.
Commentng on the company’s thinking, Nikko’s chief global strategist and head of its Global Investment Committee, John F. Vail said the company had calculated that global equity valuations were at reasonably fair levels and that stocks could rise in Europe, Japan and Australia.
“But because we are less optimistic on the United States, we do not think it is worthwhile, especially with the recently increased volatility, to be aggressive on global equities overall,” he said.
“We have been overweight global equities for US dollar based investors, except for one neutral quarter, since September 2011 but we now believe that neutral is the proper stance,” Vail said.
But while events in China, Greece and the attitude of the US Federal Reserve may have caused some investors to trim their sails, Bank of New York Mellon Wealth Management, Director of Investment Strategy, Jeff Mortimer, has argued that not enough thought has been given to the ability of markets to reach new highs despite the prevailing turbulence.
Writing in late August, Mortimer said that, “after much discussion, our assessment of the most recent pullback was that it was driven by a temporary growth scare and would not be accompanied by a recession in the US economy. Thus, we looked to take advantage of the market’s weakness”.
“Given our belief that we are in a sub-cycle slowdown within a broader, long and gradual recovery and that US equity markets are still fairly valued, we shifted our equity mix in search of more compelling risk/ return trade-offs. We recommended a shift from US equities — an asset class we have favored for the past few years — to international developed equities, both in small and large capitalizations.”
“For the remainder of 2015 and even into 2016, we expect that U.S. equities will post more modest returns as compared to the last few years and that international developed equities will offer higher potential returns given the infancy of their recovery cycle,” he said.
