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The case for Global Equities - their place in an investment portfolio

Posted by Neal Durling on 17 November 2016
The case for Global Equities - their place in an investment portfolio

Do you know Australian equities make up less than 2% of the world equity market? The Australian domestic market is limited and dominated by the relatively big four banks and resource companies. 98% of the world's equity market capitalisation is made up of businesses not listed in Australia and many industries don't exist here at all.

Despite this, it is understandable that many Australians focus on investing in their local market. This is a theme throughout the world. But to ignore global markets is, in my view, a missed opportunity.

As an experienced financial planner, my advice is a well-diversified portfolio is particularly relevant for higher income earners such as medical specialists, who are looking for leverage opportunities to build wealth, or to invest to provide (inflation protected) income in retirement.

This is the subject of our upcoming Christmas event on Thursday 1st December 2016 at the Fireworks Gallery in Brisbane. Come and join us as we celebrate Christmas and address the benefits of developing an investment strategy that leverages global equities to create long term wealth.

What sets global equities apart

1. Access to a broader range of industries and high-growth companies

As stated, the Australian market is quite limited. By investing in the global equity market, you can tap into a bigger and more diversified pot of investment opportunities and growth-oriented companies.

Growth-oriented companies tend to generate significant positive cash flows and earnings, but reinvest more of this into capital projects for future growth. You might say they are operating in fields that have stronger growth opportunities than traditional industries and can leverage retained profits more effectively.

More traditional companies, such as those which dominate the Australian market, tend to distribute more of their profit as income. Often this is because they don't feel able to maintain a strong return on capital by reinvesting it within their business.

What's more, because of the more expansive playing field, global fund managers are able to employ a broader range of strategies and ways of investing and managing money. This may lead to higher growth potential and a better financial solution than investing solely in the Australian market.

2. Lower income and higher growth returns

While global equity funds tend to provide lower income because they are reinvesting more, they often provide higher growth than Australian equities.

Generally speaking it is not unusual for Australian funds to pay 5.5-6.0% in dividends, whereas a growth orientated global fund would usually pay significantly less than this. That said, in developing an investment strategy, there are real benefits for high income earners to invest in a global equity fund that takes a long-term 'buy and hold' investment approach and provides lower income in the pursuit of higher growth.

This is principally because this kind of investment strategy results in:

  • lower taxable income (making this an effective tax planning strategy) for those already paying high rates of tax
  • higher potential for growth with capital gains being more concessionally taxed by the Australian Government.

Including global equity exposure in an investment strategy creates a more diversified portfolio compared with an Australian only strategy.

In short, it can be a very solid, long-term, tax-effective strategy.

3. The option to hedge

The final reason concerns hedging. You can choose to invest in a hedged version of a global equity fund to reduce the fund's exposure to foreign currency movements. Currency movements can represent gains or losses on global investment portfolios depending on which way the Australian dollar and other currencies move.

Because we tend to consume in Australian dollars, hedging can provide a more stable or "accurate" portfolio return for most investors. This is because you end up with a return in Australian dollars which is influenced less by currency fluctuations.

However, investors may choose an unhedged version for a portion of their portfolio if they think the Australian dollar is going to devalue or for protection in down markets. While this is by no means guaranteed, when global stock markets trend lower due to uncertainty or unfavorable sentiment, the Australian dollar tends to weaken as currency flows back to the traditional safe havens. This can result in a degree of insulation from market volatility when the return is converted back to a weaker Australian dollar.

Looking for financial solutions or tax planning advice when it comes to investing? If you're interested in finding out more, attend our upcoming Investment Insights event in Brisbane on Thursday 1 December 2016 - click here to register your interest.
Author: Neal Durling
Tags: Financial planning Investment Global equities Hedging Diversified portfolio

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The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

The financial planning services are provided by Medical Financial Pty Ltd trading as Medical Financial Planning (AFSL 506557)