Docstoc

Real Value Investing Internation

Document Sample
Real Value Investing Internation Powered By Docstoc
					The real value of investing internationally 2009

Investing in international shares can provide greater diversification and more interesting investment opportunities.

Contact us
Please contact us for further information or a copy of any brochure or product disclosure statement. Reply Paid 4171 Perpetual Investments GPO Box 4171 Sydney NSW 2001 Australia No stamp required if posted in Australia Phone (for calls in Australia, during business hours, Sydney time) Investor Services Australia 1800 022 033 Investor Services New Zealand 0800 442 261 Adviser Services Australia 1800 062 725 Adviser Services New Zealand 0800 441 656 Email Web investments@perpetual.com.au www.perpetual.com.au

This information was prepared by Perpetual Investment Management Limited (Perpetual) ABN 18 000 866 535, AFSL 234426. The information provided is of a general nature only and is not intended to provide advice to particular investors, or take into account an individual’s investment objectives, circumstances or needs for investment. Investors should consult a financial adviser. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. The offer to invest in the funds will be made in a copy of the relevant product disclosure statement (PDS). The PDSs, including any supplements, issued by Perpetual, are available from a Perpetual office. Anyone wishing to invest will need to complete the application form in the relevant PDS. The relevant PDS should be considered before deciding whether to acquire or hold units in the funds. Published August 2009

Contents
Investing in global shares You can invest in global household brands A world of investment opportunity Investing internationally – the other 98% More investment opportunities overseas The global sharemarket offers diversification Diversification across industry sectors Diversification across stocks Diversification across countries Diversification is the key to growth and income Investing internationally can reduce risk International investing can lower risk Exchange rates and foreign exchange Exchange rates can affect your returns Hedging can impact your investment returns About Perpetual Investments Experience. The difference. More about our investment business Investing with Perpetual to reach your goals About Perpetual’s International Share Fund Learn more 3 3 4 4 4 7 7 8 8 9 11 11 12 13 13 15 15 15 16 16 17

There are many big-name companies available for investment around the world.
2

Investing in global shares
You can invest in global household brands
You may be familiar with the benefits of investing in Australian shares, but did you know that there are great benefits through investing in international shares too? For a start, many international companies have brand names that are recognisable around the world. Chances are that most of the computer equipment you use, take-away food you eat, and medicines you consume were made by companies overseas or their Australian subsidiaries. For example, Microsoft, McDonald’s and Johnson & Johnson are all based overseas. Many of these companies are world leaders and can charge significantly more for their products because of their strong brands. You could share in the future profitability of these and other companies by investing in international shares. As these companies are not listed in Australia, the easiest way to access them is through an international managed share fund.

Example
Well-known global brands available for investment
There are many big-name companies available for investment around the world. Figure 2 – Well-known brands in Perpetual’s International Share Fund
Company name Johnson & Johnson Nestlé Total SA Wal-Mart Stores Country of origin United States Examples of product lines Johnsons’ Baby Care, BAND-AID, Listerine Purina, Kit Kat, Nescafé Oil, gas and exploration Various apparel, pharmaceuticals, electronics, grocery Voltaren Emulgel, No Doz, FreshLook Color Contact Lenses Calculators, copiers, printers, scanners, cameras Fast food, including burgers, desserts and healthy options Groceries, wine, entertainment and digital Cars, trucks, SUVs and hybrids

Switzerland France United States

Figure 1 – Common global brands around the home

Novartis

Switzerland

Canon

Japan

BATHROOM

BEDROOM

STUDY

McDonald’s

USA

Tesco
LIVING/DINING

UK

Toyota
KITCHEN

Japan

Source: Perpetual. As at 31 December 2008.

3

A world of investment opportunity
Investing internationally – the other 98%
There are many opportunities to invest in global household brands outside of the Australian sharemarket. With more than 2,000 companies listed on the Australian Securities Exchange (ASX), the Australian sharemarket might seem large. But when you compare its size by market capitalisation (ie the value of the sharemarket) to other countries, it only represents 2% of the value of the world’s total sharemarkets (Figure 3). This is small compared to the US (50%), Japan (12%) and the UK (10%). In fact, the Australian sharemarket is not much larger than some international companies. The combined size of the three biggest US stocks (Exxon Mobil, Walmart and General Electric) is larger than the entire Australian sharemarket (Figure 4).

More investment opportunities overseas
There are around 14,000 more listed companies to choose from on major overseas stock exchanges outside of Australia (Figure 5). So by investing only in Australian listed companies, you may be missing out on great investment opportunities that the other 98% of the world’s sharemarkets have to offer. Also, some of the world’s fastest growing industries, such as healthcare and biotechnology, are not well represented on the Australian sharemarket. With the world’s ageing population, and biotechnology extending beyond just the field of medicine, many market analysts believe these sectors will continue to grow over the long term. So if you want to tap into some of this growth, you may need to look overseas by investing in an international managed share fund.

Key point
Market capitalisation
Market capitalisation is used to measure the value of a sharemarket. This is calculated by multiplying the number of stocks listed on the market exchange by the price per share.

Figure 3 – Australia represents 2% of the world’s total sharemarkets Market capitalisation of Australia compared to the rest of the world

Australia 2% Rest of the world 98%

Source: Morgan Stanley Capital International. As at 31 December 2008.

Figure 4 – The Australian sharemarket versus the three largest US stocks Sharemarket capitalisation

$1,152 billion General Electric

$982 billion

Wal-Mart

Exxon Mobil

Top 3 US stocks

All Australian listed companies

Source: The Online Investor and ASX. As at 31 December 2008.

Figure 5 – Major stock exchanges around the world
Exchange London Stock Exchange New York Stock Exchange Nasdaq Tokyo Stock Exchange Australian Securities Exchange National Stock Exchange India Hong Kong Exchanges No. of companies 3,096 3,011 2,952 2,390 2,009 1,406 1,261 Country UK USA USA Japan Australia India Hong Kong Sector Broad market Broad market Technology Broad market Broad market Broad market Broad market

Source: World Federation of Exchanges. As at 31 December 2008.

5

The global sharemarket offers diversification
With so many investment opportunities overseas, international shares can offer diversification benefits in several ways.

Key point
Diversification
It’s a good investment strategy to spread your investments around, or diversify, not only between asset classes but also across countries. This can reduce risk and enhance returns because it’s unlikely that all investments will perform the same way at the same time. See our ‘Real value of diversification’ booklet for more on the benefits of diversification.

Diversification across industry sectors
The largest sector in global markets is financials, which represents 17.9% of global sharemarkets (as measured by the MSCI World ex Australia Index). In contrast, Australia’s largest sector, also financials, represents 36.8% of the Australian sharemarket (as measured by S&P/ ASX 300 Accumulation Index). In fact, the top three sectors in the market (financials, materials and consumer staples) make up almost 70% of the total Australian market. As Figure 6 shows, the international market provides greater diversity. Figure 6 – Sector breakdown of Australian and global market sectors

Global sharemarkets (MSCI World ex Australia)

Australian sharemarket (S&P/ASX 300)
0.7% 1.7% 3.8%

Financials Information technology Utilities Consumer discretionary Healthcare

17.9%

10.5% 5.9%

4.7% 5.6% 36.8% 9.0% 6.9% 7.5% 12.1% 9.3%

5.3%

11.1%

Telecommunications Industrials Energy Consumer staples Materials

11.8% 11.1%

5.3% 23.0%

Source: Standard & Poor’s, IRESS. As at 31 December 2008.

7

By diversifying your investment portfolio across sectors, you can reduce the risk that the underperformance of any one sector will skew the performance of your portfolio.

Diversification across countries
Strong economic growth is not always a sign of how a country’s sharemarket is performing. In fact, there doesn’t seem to be much of a link between gross domestic product (GDP) and sharemarket returns. For instance, Figure 8 shows GDP and the sharemarket returns of eleven countries over 20 years. You can see that:
1

Example
Weighting can skew performance
In 2005, 2006 and 2007, the Australian sharemarket was heavily weighted towards the resource sector. Over this period resources, measured by the S&P/ASX 300 Resources Accumulation Index, delivered strong returns of 39.0% pa. As a result the Australian sharemarket also experienced strong gains (of 21.1% pa). In this example, being overweight to one sector has positively affected performance – but it can also work the other way.

Italy had the worst GDP growth rate and medium sharemarket returns. Germany’s economic performance was mediocre yet it had the second highest sharemarket return. Korea had the highest economic growth over the period, but the second worst sharemarket returns.

2

3

This is why diversification across countries is important – a well-diversified portfolio will not be over-exposed to any one economy or sharemarket return.

Diversification across stocks
The top 10 global stocks represent 11.1% of the global market as at 31 December 2008. In fact, the top 50 stocks represent 31.5%. This means that your investment is unlikely to be dominated by a few key stocks. In contrast, Australia’s top 10 companies represent more than 50% of the market (Figure 7), and the top 50 companies represent more than 80%. This concentration means that if one particular company underperforms, it can have a significant effect on the market’s return. Figure 7 – The global sharemarket is highly diversified across stocks The top ten companies represent more than 50% of the Australian market
Percentage of global sharemarket (MSCI World ex Aus) Top 10 stocks Top 50 stocks 11.1% 31.5% Percentage of Australian sharemarket (S&P/ASX 300) 50.7% 83.3%

Key point
Sectors
Companies around the world are categorised by ‘sector’ according to the type of business operation they perform. This is called the Global Industry Classification Standard (GICS). The sector categories are: Consumer discretionary (eg Nike) Consumer staples (eg Nestlé) Energy (eg Total) Financials including property trusts (eg HSBC) Healthcare (eg Johnson & Johnson) Industrials (eg Seimens) Information technology (eg Microsoft) Materials (eg CRH Plc) Telecommunications (eg Vodafone) Utilities (eg Hong Kong Electric)

Source: IRESS. As at 31 December 2008.

8

Figure 8 – Strong economic growth not always linked to strong sharemarket returns Economic growth and sharemarket returns from December 1988 - December 2008
30%

25%

20%

15%

10%

1
5%

2

3

0% GDP Sharemarket

-5%

-10% Italy Japan France United Kingdom Germany Canada United States Spain Mexico Australia Korea

Source: Macquarie Equities as at 31 December 2008.

Follow the leader rarely pays offs
Global shares experience periods of outperformance and periods of underperformance relative to Australian shares (Figure 9). Importantly, global shares can potentially capture higher returns than those available in not only the Australian sharemarket, but also the local bond, property and cash markets. Figure 9 - Australian market is not always the top performer Performance of world sharemarkets (in Australian dollar terms, unhedged)
UK Hong Kong -37.8% 33.3% 29.4% 0.3% 3.4% 62.9% 6.7% -15.8% -23.3% 6.0% 12.5% 16.1% 28.9% 28.4% -32.1% Germany USA Japan Australia MSCI World (ex Aus) -7.6% 26.7% 6.7% 42.2% 32.8% 17.6% 2.5% -9.1% -27.3% -0.3% 10.4% 16.9% 11.5% -2.6% -24.9%

Diversification is the key to growth and income
Australian companies tend to pay out a high proportion of profit as income and our dividend imputation system allows you to receive a tax credit if the company has already paid full company tax. By diversifying your portfolio across Australian and international investments, your Australian shares can provide regular income as well as capital growth, while your international shares can provide long-term capital growth – particularly to industries not well represented in the Australian market.

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-13.5% 30.4% 20.6% 50.8% 26.2% 9.5% 0.2% -9.1% -21.7% -2.0% 14.7% 15.4% 21.4% -2.0% -34.8%

-8.9% 20.8% 11.5% 53.7% 35.0% 11.3% 2.0% -17.4% -39.9% 23.1% 11.2% 17.9% 26.9% 21.7% -28.6%

-11.3% 43.5% 15.2% 62.6% 36.6% 13.5% 7.0% -4.4% -29.2% -3.8% 6.6% 12.1% 7.8% -5.3% -20.7%

6.8% 2.9% -21.8% -12.3% 14.4% 65.0% -20.8% -23.3% -17.2% 3.6% 11.9% 34.7% -5.0% -14.9% -7.8%

-8.7% 20.2% 14.6% 12.2% 11.6% 16.1% 4.8% 10.5% -8.6% 15.0% 27.9% 22.5% 24.5% 16.2% -38.9%

Source: Datastream. Shares indices used in this table are all accumulation indices and are the Hang Seng (Hong Kong), DAX30 Index (Germany), FTSE100 Index (UK), S&P500 Index (US), TOPIX Index (Japan) and the S&P/ASX 300 Accumulation Index. Past performance is not indicative of future performance.

9

10

Investing internationally can reduce risk
International investing can smooth volatility
If you combine Australian shares with international shares in your investment portfolio, you can lower your investment risk and potentially smooth out volatility (see example). By investing in an international managed share fund, your money is spread across a far greater mix of countries, currencies, industries and companies than it would be if you invested entirely in the Australian sharemarket. This means you have greater protection from wide swings in any one market or industry sector.

Key point
Risk and return
Different investments carry different levels of risk and return. Typically, higher risk investments (like shares and property) return more than low risk investments (like some fixed income securities and cash), to compensate for the risk of owning them.

Example
Risk is reduced when you combine international and Australian shares
Tony’s investment portfolio is made up entirely of Australian shares. Laurel’s investment portfolio is made up of 50% Australian shares and 50% international shares. While their returns are very similar over a 25 year period, Laurel’s portfolio has been significantly less volatile because it is diversified across Australian and international shares. Figure 10 – Combining international and Australian shares Tony’s portfolio Laurel’s portfolio

International shares 50% Australian shares 100%

Australian shares 50%

Tony 100% Australian shares Return % pa Volatility % pa Worst one year return % Worst cumulative three year return % Worst cumulative five year return % 11.7 17.8 -40.5 -28.0 -16.1 Return % pa Volatility % pa Worst one year return % Worst cumulative three year return % Worst cumulative five year return %

Laurel 50/50 Australian shares and international shares 12.0 13.8 -31.9 -30.6 -1.0

Source: Datastream, Perpetual. Annualised average risk versus returns Dec 1983 – Dec 2008

11

Exchange rates and foreign exchange
An exchange rate shows how much one country’s currency is worth in terms of another. Figure 11 shows how the Australian dollar has moved relative to the US dollar over the last 15 years, to 31 December 2008. The average of the Australian dollar to the US dollar over the period was 0.70.

Example
Foreign exchange
Sam is about to take a European holiday and has $10,000 Australian dollars ($A) to take with him. Before he leaves he considers how much foreign currency he will receive for his Australian dollars. If, for example, the exchange rate is one Australian dollar to 0.55 euros, Sam will have €5,500 spending money for his trip.

Figure 11 – Australian dollar versus the US dollar
1.05

0.95

0.85

0.75

0.65 $A/$US Average 0.55

0.45 93 94 95 96 97 98 99 00 Dec 01 02 03 04 05 06 07 08

Source: Datastream. As at 31 December 2008.

12

Exchange rates can affect your returns
When you buy international shares, you buy them in the currency of their home country. And if you invest in an international managed share fund you are effectively holding overseas assets. The value of these assets (in Australian dollar terms) is affected by changes in the overseas currency relative to the Australian dollar. For example, a rise in a country’s currency relative to the Australian dollar translates into a rise in the value of your investment (Figure 12). A decline in that country’s currency relative to the Australian dollar translates into a decline in the value of your investment. Figure 12 – The effect of currency on your investment Assuming no change in share prices

Example
The effect of hedging
Lynne is invested in an international managed share fund which does not hedge. Figure 13 shows how hedging can either benefit or detract from returns. Column A shows the annual returns of Lynne’s unhedged portfolio, and column B shows the annual returns of a hedged portfolio. In 1997 and 1998, the Australian dollar fell relative to the US dollar (see Figure 11), positively impacting Lynne’s unhedged investment returns. However, in 2003 and 2004 the rise in the Australian dollar (see Figure 11) negatively impacted Lynne’s unhedged portfolio. If Lynne’s fund manager had the ability to hedge, her investment may have been protected. Figure 13 – Hedging can either help or detract from returns Investment returns of hedged and unhedged portfolios, December 1994 – December 2008
Year to 31 December 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Datastream. 1 Unhedged returns shown are the MSCI World (ex Australia) U$ Price Index. 2 Hedged returns shown are the MSCI World (ex Australia) Hedged A$ Price Index.

Foreign currency

A$

Your international share fund investment value

Foreign currency

A$

Your international share fund investment value

Lynne’s unhedged portfolio1 A -9.6 23.8 4.6 39.2 30.4 15.8 1.2 -10.8 -28.2 -2.2 8.5 14.9 9.8 -3.9 -27.1

A hedged portfolio2 B -1.7 20.2 17.8 22.2 17.8 26.3 -10.2 -15.6 -24.1 26.1 13.5 16.7 15.6 4.4 -40.5

Hedging can impact your investment returns
It is possible to exclude the impact of currency by hedging, ie a fund manager can hedge away their currency risk as part of their investment strategy. However, hedging can either benefit or detract from returns. Over the long term, the impact of currency tends to smooth out but over the short term fully hedged returns still vary compared to unhedged returns. The decision to invest in hedged or unhedged funds will depend on your individual circumstances. Your financial adviser can advise you on what’s appropriate for you.

13

* Perpetual Group means Perpetual Limited (ABN 86 000 431 827) and its subsidiaries.

14

About Perpetual Investments
Experience. The difference.
Perpetual is one of Australia’s most experienced investment services groups, with an enduring passion for protecting and growing our clients’ wealth. Founded in Sydney in 1886 as Perpetual Trustees, we have managed and invested our clients’ money with integrity and expertise for over 120 years. Today we are one of the Top 200 companies listed on the Australian Securities Exchange, manage investment funds exceeding $24 billion, administer client funds of over $200 billion and advise clients on over $7 billion of investments (as at 31 December 2008). We provide quality investment products, financial advice and corporate services to individuals, families, financial advisers and corporates.

More about our investment business
▪ Investment products. We offer a broad range of investment, superannuation and retirement income products. Our choice of investment funds includes all major asset classes, managed by Perpetual or other leading fund managers, as well as multi-manager funds. Investment management. Our investment teams in Australia and Ireland manage investments across all major asset classes including shares, fixed interest and property. We make active investment decisions based on our intensive analysis of an investment’s intrinsic quality, value and risk.

▪

15

Investing with Perpetual to reach your goals
About Perpetual’s International Share Fund
If you’re looking for a global investment that can offer long-term capital growth and income, Perpetual’s International Share Fund may suit you. Perpetual’s International Share Fund aims to add value in overseas markets using our bottom-up, quality and value stock selection process. The Fund is managed by our global equities business, PI Investment Management Limited (PIIML). The team focuses on mid- to large-cap quality companies that are attractively valued, without reference to the benchmark. When looking to invest in quality global companies at attractive prices, we focus our attention on those companies that exhibit characteristics including: ▪ ▪ ▪ ▪ ▪ ▪ a track record of earnings and cashflow strong interest cover a strong balance sheet and sound capital structure a conservative level of debt a history of dividends a sound management team with a strong shareholder focus.

We believe that our disciplined approach of focusing on quality companies at attractive prices gives our investors the best chance of achieving consistent returns and dividends over the long term, and peace of mind that these companies will survive even in the most difficult of times. For current returns, visit www.perpetual.com.au

To learn more about Perpetual’s International Share Fund, please contact your financial adviser or phone Perpetual’s Investor Services on 1800 022 033.

16

Learn more
We have a range of educational tools to help you understand various investment concepts and to give you an overview of our products. ▪ ▪ ▪ ▪ ▪ ▪ ▪ The real value of investing in shares The real value of investing in income The real value of diversification Guide to investing flyers Fund summaries Sharemarket charts Glossary of investment terms

You can find them at www.perpetual.com.au/investor_education

New South Wales Angel Place Level 12 123 Pitt Street Sydney NSW 2000 Queensland Level 6 260 Queen Street Brisbane QLD 4000 South Australia Level 11 101 Grenfell Street Adelaide SA 5000 Victoria Level 28 360 Collins Street Melbourne VIC 3000 Western Australia Exchange Plaza Level 29 2 The Esplanade Perth WA 6000 www.perpetual.com.au

Experience. The difference.

25071_ACRVII1_0809


				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:3
posted:12/22/2009
language:English
pages:20