Real Value Investing Internation by ldd0229

VIEWS: 5 PAGES: 20

									The real value of investing internationally
                                      2010




                                              Investing in international
                                              shares can provide
                                              greater diversification
                                              and more interesting
                                              investment opportunities.
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Contents
Investing in global shares                        3
You can invest in global household brands         3

A world of investment opportunity                 4

Investing internationally – the other 98%         4
More investment opportunities overseas            4

The global sharemarket offers diversification     7
Diversification across industry sectors           7
Diversification across stocks                     8
Diversification across countries                  8
Follow the leader rarely pays off                 9
Diversification is the key to growth and income   9

Investing internationally can reduce risk         11
International investing can smooth volatility     11
Exchange rates and foreign exchange               12
Exchange rates can affect your returns            13
Hedging can affect your investment returns        13

About Perpetual                                   15
Investing for generations                         15
More about our investment business                15

Investing with Perpetual to reach your goals      16

About Perpetual’s international share funds       16

Learn more                                        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                 Example
shares, but did you know that there are great benefits through
investing in international shares too?                               Well-known global brands available for
For a start, many international companies have brand names           investment
that are recognisable around the world. Chances are that most        There are many big-name companies available for
                                                                     investment around the world.
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,   Figure 2 – Well-known brands in Perpetual’s
McDonald’s and Johnson & Johnson are all based overseas.             International Share Fund

Many of these companies are world leaders and can                    Company name             Country of             Examples of
charge significantly more for their products because of their                                   origin               product lines
strong brands.                                                       Johnson &               United States         Johnsons’ Baby
                                                                     Johnson                                       Care, BAND-AID,
You could share in the future profitability of these and other
                                                                                                                       Listerine
companies by investing in international shares. As these
companies are not listed in Australia, the easiest way to access     Nestlé                   Switzerland           Purina, Kit Kat,
                                                                                                                       Nescafé
them is through an international managed share fund.
                                                                     Total SA                   France                Oil, gas and
                                                                                                                      exploration

                                                                     Wal-Mart Stores         United States          Various apparel,
                                                                                                                   pharmaceuticals,
                                                                                                                  electronics, grocery
Figure 1 – Common global brands around the home
                                                                     Novartis                 Switzerland       Voltaren Emulgel,
                                                                                                               No Doz, FreshLook
                                                                                                              Color Contact Lenses

                                                                     Canon                       Japan            Calculators, copiers,
                                                                                                                   printers, scanners,
                                                                                                                        cameras
BATHROOM             BEDROOM                 STUDY
                                                                     Microsoft                   USA                Windows and
                                                                                                                    Office software

                                                                     Tesco                        UK                Groceries, wine,
                                                                                                                   entertainment and
                                                                                                                         digital
                     LIVING/DINING

                                                                     Siemens                   Germany            Factory automation,
                                                                                                                   locomotives, traffic
                                                                                                                  control systems and
           KITCHEN
                                                                                                                      power plants

                                                                     Source: Perpetual. As at 31 December 2009.




                                                                                                                                          3
A world of investment
opportunity
Investing internationally – the other 98%                               More investment opportunities overseas
There are many opportunities to invest in global household brands       There are around 14,000 listed companies to choose from on
outside of the Australian sharemarket.                                  major overseas stock exchanges outside of Australia (Figure 5).
                                                                        So by investing only in Australian listed companies, you may be
With more than 2,000 companies listed on the Australian
                                                                        missing out on great investment opportunities that the other 98%
Securities Exchange (ASX), the Australian sharemarket might seem
                                                                        of the world’s sharemarkets have to offer.
large. But when you compare its size by market capitalisation (ie
the value of the sharemarket) to other countries, it only represents    Also, some of the world’s fastest growing industries, such as
2% of the value of the world’s total sharemarkets (Figure 3).           healthcare and biotechnology, are not well represented on the
                                                                        Australian sharemarket. With the world’s ageing population, and
This is small compared to the US (50%), Japan (12%) and the
                                                                        biotechnology extending beyond just the field of medicine, many
UK (10%).
                                                                        market analysts believe these sectors will continue to grow over
In fact, the Australian sharemarket is not much larger than some        the long term. So if you want to tap into some of this growth,
international companies. The combined size of the five biggest US       you may need to look overseas by investing in an international
stocks (Exxon Mobil, Microsoft, Walmart, Johnson & Johnson and          managed share fund.
Proctor & Gamble) is almost the same size as the entire Australian
sharemarket (Figure 4).

                                                                                  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 2009.


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



                                                                                  $1,403 billion
                                             $1,338 billion


                                          Proctor & Gamble



                                         Johnson & Johnson



                                               Wal-Mart




                                            Microsoft Corp




                                             Exxon Mobil



                                           Top 5 US stocks                All Australian listed companies




Source: UBS and ASX. As at 31 December 2009.




Figure 5 – Major stock exchanges around the world
Exchange                                       No. of companies               Country                         Sector

New York Stock Exchange                                3,164                    USA                         Broad market

Nasdaq                                                 2,852                    USA                          Technology

London Stock Exchange                                  2,792                     UK                         Broad market

Tokyo Stock Exchange                                   2,335                   Japan                        Broad market

Australian Securities Exchange                         1,966                  Australia                     Broad market

National Stock Exchange India                          1,453                    India                       Broad market

Hong Kong Exchanges                                    1,319                Hong Kong                       Broad market

Source: World Federation of Exchanges. As at 31 December 2009.




                                                                                                                           5
The global sharemarket
offers diversification
With so many investment opportunities overseas, international
shares can offer diversification benefits in several ways.
                                                                                       Key point
Diversification across industry sectors
                                                                                       Diversification
The largest sector in global markets is financials, which represents                   It’s a good investment strategy to spread
19.6% of global sharemarkets (as measured by the MSCI World                            your investments around, or diversify, not only
ex Australia Index).                                                                   between asset classes but also across countries.
                                                                                       This can reduce risk and enhance returns
In contrast, Australia’s largest sector, also financials, represents                   because it’s unlikely that all investments will
38.9% of the Australian sharemarket (as measured by S&P/ASX                            perform the same way at the same time. See our
300 Accumulation Index). In fact, the top three sectors in the                         ‘Real value of diversification’ booklet for more on
market (financials, materials and consumer staples) make up                            the benefits of diversification.
over 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                                  Australian sharemarket
          (MSCI World ex Australia)                                  (S&P/ASX 300)

                                                               3.7%
                                                               1.3%
                                                                                                                Financials
                     4.5%
              4.8%                                                                                              Information technology
                                19.6%
       6.7%                                                                                                     Energy

                                                                                                                Industrials
                                                          25.2%
   9.6%                                                                                38.9%
                                                                                                                Healthcare
                                        12.4%
                                                                                                                Consumer staples

    10.2%                                                                                                       Consumer discretionary
                                                          3.9%

                                  11.1%                                                                         Materials
                                                              8.4%
            10.4%                                                                                0.8%           Utilities
                                                                                7.5%
                        10.7%                                            6.8%
                                                                                                                Telecommunication services
                                                                                                 3.4%




Source: UBS and IRESS. As at 31 December 2009.




                                                                                                                                             7
By diversifying your investment portfolio across sectors, you can    Diversification across countries
reduce the risk that the underperformance of any one sector will
                                                                     Strong economic growth is not always a sign of how a country’s
skew the performance of your portfolio.
                                                                     sharemarket is performing.

                                                                     For instance, Figure 8 shows economic growth (GDP) and the
                                                                     sharemarket returns of nine countries over 20 years. You can
              Example                                                see that:

    Weighting can skew performance                                    1   Japan had positive economic growth, yet a negative
    In 2005, 2006 and 2007, the Australian sharemarket was                sharemarket return.
    heavily weighted towards the resource sector.                     2   Mexico’s economic performance was mediocre, yet it had the
    Over this period resources, measured by the S&P/ASX 300               highest sharemarket return.
    Resources Accumulation Index, delivered strong returns
    of 39.0% pa. As a result the Australian sharemarket also          3   Korea had the highest economic growth over the period,
    experienced strong gains (of 21.1% pa).                               but the second worst sharemarket returns.
    In this example, being overweight to one sector has              This is why diversification across countries is important –
    positively affected performance – but it can also work the       a well-diversified portfolio will not be over-exposed to any
    other way.
                                                                     one economy or sharemarket return.



Diversification across stocks
The top 10 global stocks represent 8.6% of the global market as                 Key point
at 31 December 2009. In fact, the top 50 stocks represent 28.0%.
This means that your investment is unlikely to be dominated by a                Sectors
few key stocks (Figure 7).                                                      Companies around the world are categorised
                                                                                by ‘sector’ according to the type of business
In contrast, Australia’s top 10 companies represent more than                   operation they perform. This is called the Global
50% of the market, and the top 50 companies represent more                      Industry Classification Standard (GICS). The sector
than 80% (Figure 7). This concentration means that if one                       categories are:
particular company underperforms, it can have a significant effect
                                                                                 Consumer                  Industrials
on the market’s return.
                                                                                 discretionary (eg Nike)   (eg Seimens)
Figure 7 – The global sharemarket is highly diversified                          Consumer staples          Information technology
across stocks                                                                    (eg Nestlé)               (eg Microsoft)
The top ten companies represent more than 50% of the
Australian market                                                                 Energy (eg Total)        Materials (eg Xstrata)

                        Percentage                 Percentage                    Financials including      Telecommunications
                          of global               of Australian                  property trusts           (eg Vodafone)
                        sharemarket               sharemarket                    (eg HSBC)
                     (MSCI World ex Aus)         (S&P/ASX 300)
Top 10 stocks                 8.6%                   50.8%                       Healthcare (eg            Utilities (eg Hong Kong
                                                                                 Johnson & Johnson)        Electric)
Top 50 stocks                28.0%                   81.2%

Source: IRESS and UBS. As at 31 December 2009.




8
 0%



-5%



-10%




Figure 8 – Strong economic growth not always linked to strong sharemarket returns
Economic growth and sharemarket returns from December 1989 - December 2009
15%

                                                                                                                         2



10%




                                                                                                                                                                      3
 5%



                        1

 0%




                                                                                                                                        GDP growth
 -5%
                                                                                                                                        Sharemarket returns




-10%
              Japan              France               UK               Canada               USA               Mexico           Spain       Australia          Korea
Source: IMF and Factset as at 31 December 2009.


Follow the leader rarely pays off
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          Germany             USA             Japan          Australia          MSCI         Diversification is the key
                               Kong                                                                               World         to growth and income
                                                                                                                 (ex Aus)
                                                                                                                                Australian companies tend to pay out a
 1995          30.4%           33.3%            21.7%            43.5%              2.9%           20.8%            26.7%       high proportion of profit as income and
 1996          20.6%           29.4%            10.8%            15.2%           -21.8%            14.5%             6.7%       our dividend imputation system allows you
 1997          50.8%             0.3%           53.2%            62.6%           -12.3%            12.2%            42.2%       to receive a tax credit if the company has
 1998          26.2%             3.4%           35.9%            36.6%            14.4%             9.7%            32.8%       already paid full company tax.
 1999           9.5%           62.9%             11.2%           13.5%            65.0%            19.5%            17.6%       By diversifying your portfolio across
 2000           0.2%             6.7%             2.0%             7.0%          -20.8%             6.3%             2.5%       Australian and international investments,
 2001          -9.1%           -15.8%           -17.4%            -4.4%          -23.3%            10.5%            -9.6%       your Australian shares can provide regular
 2002         -21.7%          -23.3%           -39.9%           -29.2%            -17.2%           -8.6%           -27.1%       income as well as capital growth, while your
                                                                                                                                international shares can provide long-term
 2003          -2.0%             6.0%           23.1%             -3.8%             3.6%           15.0%            -0.3%
                                                                                                                                capital growth – particularly to industries not
 2004          14.7%            12.5%            11.2%             6.6%           11.9%            27.9%            10.4%
                                                                                                                                well represented in the Australian market.
 2005          15.4%            16.1%            17.9%           12.1%            34.7%            22.5%            17.4%
 2006          21.4%           28.9%            26.9%              7.8%           -5.0%            24.5%            12.0%
 2007          -2.0%           28.4%            21.7%             -5.3%          -14.9%            16.2%            -2.1%
 2008        -34.8%           -32.1%           -28.6%           -20.7%             -7.8%          -38.9%           -24.5%
 2009          10.9%            21.4%            -0.9%            -2.0%          -18.8%            37.6%             0.3%
Source: Datastream. Shares indices used in this table are all accumulation indices and are the FTSE100 Index (UK), Hang Seng
(Hong Kong), DAX30 Index (Germany), S&P500 Index (US), TOPIX Index (Japan) and the S&P/ASX 300 Accumulation Index
(Australia). 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                           Key point
investment portfolio, you can lower your investment risk and
potentially smooth out volatility (see example).                                             Risk and return
                                                                                             Different investments carry different levels of risk
By investing in an international managed share fund, your money is                           and return. Typically, higher risk investments (like
spread across a far greater mix of countries, currencies, industries                         shares and property) return more than low risk
and companies than it would be if you invested entirely in the                               investments (like some fixed income securities and
Australian sharemarket. This means you have greater protection                               cash), to compensate for the risk of owning them.
from wide swings in any one market or industry sector.



               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   Australian shares
                                                                                                       50%                  50%

                               Australian shares
                                    100%




                                                  Tony                                                                           Laurel
                                           100% Australian shares                                                     50/50 Australian shares and
                                                                                                                          international shares
     Return % pa                                      12.4                        Return % pa                                      11.4
     Volatility % pa                                  16.6                        Volatility % pa                                  13.3
     Worst one year return %                          -40.5                       Worst one year return %                         -31.9
     Worst cumulative three year                      -28.0                       Worst cumulative three year                     -26.8
     return %                                                                     return %
     Worst cumulative five year                       -16.1                       Worst cumulative five year                       2.4
     return %                                                                     return %
    Source: Datastream and Perpetual. Annualised average risk versus returns Dec 1984 – Dec 2009.



                                                                                                                                                    11
Exchange rates and foreign exchange
An exchange rate shows how much one country’s currency is                               Example
worth in terms of another.

Figure 11 shows how the Australian dollar has moved relative to
                                                                              Foreign exchange
the US dollar over the last 15 years, to 31 December 2009. The                Sam is about to take a European holiday and has $10,000
average of the Australian dollar to the US dollar over the period             Australian dollars ($A) to take with him. Before he leaves
was 0.71.                                                                     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
       95      96        97        98         99   00       01        02      03       04        05       06       07        08       09
                                                                    January

Source: Datastream. As at 31 December 2009.




12
Exchange rates can affect your returns
When you buy international shares, you buy them in the currency                     Example
of their home country. And if you invest in an international
managed share fund you are effectively holding overseas                  The effect of hedging
assets. The value of these assets (in Australian dollar terms)           Lynne is invested in an international managed share fund
is affected by changes in the overseas currency relative to the          which does not hedge.
Australian dollar.
                                                                         Figure 13 shows how hedging can either benefit or
For example, a rise in a country’s currency relative to the Australian   detract from returns. Column A shows the annual returns
dollar translates into a rise in the value of your investment (Figure    of Lynne’s unhedged portfolio, and column B shows the
12). A decline in that country’s currency relative to the Australian     annual returns of a hedged portfolio.
dollar translates into a decline in the value of your investment.
                                                                         In 1997 and 1998, the Australian dollar fell relative to the
Figure 12 – The effect of currency on your investment                    US dollar (see Figure 11), positively impacting Lynne’s
Assuming no change in share prices                                       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,
                                          Your international             her investment may have been protected.
       Foreign                               share fund
      currency         A$                 investment value               Figure 13 – Hedging can either help or detract
                                                                         from returns
                                                                         Investment returns of hedged and unhedged portfolios,
                                                                         December 1994 – December 2009

                                          Your international             Year to               Lynne’s unhedged          A hedged
       Foreign                               share fund                                            portfolio1            portfolio2
                                                                         31 December
      currency         A$                 investment value
                                                                                                       A                     B
                                                                         1995                       23.8                   20.2
                                                                         1996                         4.6                  17.8
                                                                         1997                       39.2                   22.2
                                                                         1998                       30.4                   17.8
                                                                         1999                       15.8                   26.3
Hedging can affect your investment returns                               2000                         1.2                 -10.2
It is possible to exclude the impact of currency by hedging, ie          2001                      -10.8                  -15.6
a fund manager can hedge away their currency risk as part of             2002                      -28.2                  -24.1
their investment strategy. However, hedging can either benefit or        2003                       -2.2                   26.1
detract from returns.                                                    2004                         8.5                  13.5
Over the long term, the impact of currency tends to smooth out           2005                       14.9                   16.7
but over the short term fully hedged returns still vary compared to      2006                         9.8                  15.6
unhedged returns.                                                        2007                       -3.9                    4.4
                                                                         2008                      -27.1                  -40.5
The decision to invest in hedged or unhedged funds will depend           2009                        -1.6                  24.1
on your individual circumstances. Your financial adviser can advise      Source: Datastream.
you on what’s appropriate for you.
                                                                         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.




                                                                                                                                           13
14
About Perpetual

Investing for generations                                             More about our investment business
Perpetual is one of Australia’s most experienced investment           ▪   Investment products. We offer a broad range of investment,
and trustee groups, with an enduring passion for protecting and           superannuation and retirement income products. Our choice
growing our clients’ wealth.                                              of investment funds includes all major asset classes, managed
                                                                          by Perpetual or other leading fund managers, as well as
Founded in Sydney in 1886 as Perpetual Trustees, we have
                                                                          diversified and multi-manager funds.
managed and invested our clients’ money with integrity and
expertise for over 120 years.                                         ▪   Investment management. Our investment teams manage
                                                                          investments across all major asset classes including shares,
Today we are one of the Top 100 companies listed on the
                                                                          fixed interest and property. We make active investment
Australian Securities Exchange, manage investment funds
                                                                          decisions based on our intensive analysis of an investment’s
exceeding $29 billion, administer client funds of over $222 billion
                                                                          intrinsic quality, value and risk.
and advise clients on over $8 billion of investments (as at
31 December 2009).

We provide quality investment products, financial advice and
corporate services to individuals, families, financial advisers
and corporates.




                                                                                                                                         15
Investing with Perpetual
to reach your goals
About Perpetual’s international share funds
If you’re looking for a global investment that can offer long-term
capital growth and income, our international share funds may
suit you.

Our international shares investment philosophy is 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.

Our broadly-diversified international share fund is:

▪    Perpetual’s International Share Fund. A diversified portfolio
     of quality international shares with the potential for long-
     term capital growth. Investment decisions are based on
     fundamental quality and value characteristics rather than
     benchmark weightings. The fund is managed by our global
     equities team.

We also offer a specialist international share fund:

▪    Perpetual’s Global Resources Fund. Offers investors access
     to global resource shares, diversified by geographic region
     and commodity sector. The Fund is managed by our specialist
     resources team.

For current returns, visit www.perpetual.com.au




            To learn more about Perpetual’s international share funds, please contact your financial adviser
            or phone our 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




                                                              17
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