The real value of investing internationally 2010 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 firstname.lastname@example.org Web www.perpetual.com.au This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. 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 guarantees the performance of any fund or the return of an investor’s capital (Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries). The relevant PDSs, issued by PIML, should be considered before deciding whether to acquire or hold units in the fund. 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 27057_ACRVII2_0410 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.