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Investing globally: Key benefits and considerations

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Learn about the advantages of investing offshore as well as some strategies to manage the impact foreign currency risk can have on your portfolio from Jonathan Shead, Head of Retirement Solutions at State Street Global Advisors.

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Investing globally: Key benefits and considerations

  1. 1. Investing globally: Key benefits & considerations Presented by Jonathan Shead Head of Retirement Solutions State Street Global Advisors 17 October 2018
  2. 2. | netwealth This webinar is being recorded. • Slides will be sent to you after the webinar Enter your questions in the chat. • We will get to them at the end of the webinar Posting to social? • Make sure to use #netwealthinvest or tweet @netwealthInvest 2 Housekeeping Webinar Series
  3. 3. | netwealth3 This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Disclaimer Webinar Series
  4. 4. | netwealth Webinar Series4 Jonathan Shead Head of Retirement Solutions State Street Global Advisors Meet today’s speaker
  5. 5. Investing Globally Agenda 5 Source SSGA 1. The benefits of investing globally 2. Key considerations when looking offshore 3. Different methods and strategies for managing currency fluctuations 4. Why active currency management can be advantageous for investors Questions 2274736.1.1.ANZ.RTL
  6. 6. Investing Globally The benefits of investing globally … in a word 6 Source: Cambridge English Dictionary, retrieved 4 October 2018 from dictionary.cambridge.org Diversification does not ensure a profit or guarantee against loss. Diversify (verb) • To start to include more different types or things • If a business diversifies, it starts making new products or offering new services Spreading your risks in 3 ways 2274736.1.1.ANZ.RTL
  7. 7. Investing Globally Diversification 1: Economies 7 Source: World Bank to 31 Dec 2017. Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2010 U.S. dollars. Diversification does not ensure a profit or guarantee against loss. -10 -5 0 5 10 15 1961 1971 1981 1991 2001 2011 Yearly Economic Growth (%) Australia Japan US Other countries experience economic growth at different rates and in different cycles to Australia 2274736.1.1.ANZ.RTL
  8. 8. Investing Globally Diversification 2: Industries 8 Financials Materials Communication Services Consumer Discretionary I.T. Source: GICs Sector Weights as at 28 September 2018. Results shown reflect S&P ASX 300 Index and S&P Development Large Mid Cap Index The information contained above is for illustrative purposes only. Diversification does not ensure a profit or guarantee against loss. Australian Sharemarket Global Sharemarkets Dominated by banks and miners Wider spread of industries including I.T., Consumer products and Communications services 2274736.1.1.ANZ.RTL
  9. 9. Investing Globally Diversification 3: Companies 9 Source: Largest Australian companies: S&P 300 Index as at 28 September 2018. Largest Global Companies: MSCI World ex Australia as at 28 September 2018 Diversification does not ensure a profit or guarantee against loss. 277,110 288,394 363,136 370,727 389,915 404,981 735,771 830,239 835,083 1,105,660 Berkshire Hath. Bank of America Exxon Mobil Johnson & J. JPMorgan Chase Facebook Alphabet Amazon Microsoft Apple Largest Global Companies (US $M) 26,586 27,391 29,188 40,683 53,849 58,068 65,994 68,466 79,886 89,038 Woolworths Telstra Macquarie Group Wesfarmers National Australia… ANZ Bank CSL Westpac Bank BHP Billiton Comm. Bank Largest Australian Companies (US$ M) Top 10: 44% of market Top 10: 13% of market Australia vs World Larger companies More choice Less concentration (Did you know? CBA and BHP are the only Australian companies big enough to make the top 100 in the developed world)
  10. 10. Investing Globally Key Considerations 10 Source: MSCI World Index and MSCI Emerging Markets Index as at 28 September 2018. Includes “Large” and “Mid” cap companies but not “Small” cap companies 41.8 5.2 Market size (US$ Trillion) Global Equity Market Risk Like the Australian sharemarket, global equity can experience large rises and falls in value What Country or Region? Nearly 50 countries to choose from “Developed” or “Emerging” Markets Currency Risk Intrinsic to global investing Emerging: • 24 countries • Over 1,100 companies • Includes China, South Korea, Taiwan, Brazil, India, South Africa • Often more volatile • Long term economic growth potential Developed: • 23 countries • Over 1,600 companies • Includes US, Japan, UK, Germany, France, Italy, Canada, Switzerland • Typically (but not always) more stable 2274736.1.1.ANZ.RTL
  11. 11. Investing Globally Source: MSCI, Factset. Country results show returns for MSCI USA Index, MSCI EMU Index, MSCI UK Index, MSCI Japan Index and MSCI Canada Index in local currency terms with net dividends reinvested. Individual company returns are derived from total returns in local currency terms of corresponding country index constituents. Past performance is not a reliable guide to future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect capital gains and losses, income, and the reinvestment of dividends. 63% 38% 53% 56% 52% -22% -27% -22% -19% -15% 14.5% 4.1% 8.3% 9.3% 11.3% US Europe UK Japan Canada Sharemarket Returns over 12 months to 30 June 2018 Market Average Global Equity Opportunities Average returns in each country hide a range of individual company returns 11 Worst 5% of individual company returns Best 5% of individual company returns 2274736.1.1.ANZ.RTL
  12. 12. State Street Active Equities State Street Active Equities Approach Maximising Returns & Managing Risk at the Source 12 Source: SSGA AQE Team Australia * Based on our stock selection model Investor Objectives: Philosophy & Approach: Linking equity portfolio construction with investor objectives Don’t link the portfolio construction to benchmarks. Benchmark Unaware. Hold only the most favoured stocks* Focus on our best investment ideas* • High quality • Reasonable value • Sustainable earnings • Ability to generate internal growth • Positive outlook Be explicit in managing total portfolio risk Risk is total volatility and capital lost. Minimise RiskMaximise Returns 2274736.1.1.ANZ.RTL
  13. 13. Investing Globally Source: SSGA The information contained above is for illustrative purposes only. Currency Risk A hypothetical example: Cisco Systems (American Technology Company) 13 1 29 December 2017 • Share price US$ 38.30 • Buy 10,000 shares • Cost US$ 383,000 • Exchange Rate 78.21c • Sell AU$ 489,707 and buy US$ 383,000 to pay for the shares 2 31 August 2018 • Share price US$ 47.77 • Sell 10,000 shares • Proceeds US$ 477,700 • Exchange Rate 72.32c • Sell US$ 477,700 and receive AU$ 660,537 3 Your return (ignoring dividends) • Share Price Change: +24.7% US$ 38.30 to 47.77 • Exchange Rate Change: -7.5% 78.21c to 72.32c • Total Return: 34.9% AU$ 489,707 to 660,537 2274736.1.1.ANZ.RTL
  14. 14. Investing Globally Source: SSGA Currency Risk 14 Movements in exchange rates can change a profitable share investment into a loss making one (or a loss making investment into a profitable one) Total return on global equity investment = Share price movement + Dividends + Movements in exchange rate 2274736.1.1.ANZ.RTL
  15. 15. Investing Globally Recent market history Source: MSCI, S&P, SSGA. Indices used: MSCI World ex Australia for Global Equities. AUD Hedged return has been estimated by SSGA. Foreign currency is the “in AUD” return less the “100% AUD Hedged” return. Past performance is not a reliable guide to future performance. Index returns reflect capital gains and losses, income, and the reinvestment of dividends. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. 15 Period Global Sharemarket Performance (% Total return) Impact of Foreign Currency (% Total Return) Combined Return for Australian Investors (% Total Return) 28 February 2009 to 30 April 2013 123.3 -92.2 31.2 30 April 2013 to 31 October 2015 37.4 +41.7 79.1 31 October 2015 to 30 June 2018 32.1 -14.9 17.3 2274736.1.1.ANZ.RTL
  16. 16. Investing Globally Source: SSGA Managing Currency Risk 16 • When the AUD weakens, exposure to foreign currencies adds to your returns • When the AUD strengthens, exposure to foreign currencies detracts from your returns • “Currency Hedge”: A strategy to remove the impact of exchange rates from returns 2274736.1.1.ANZ.RTL
  17. 17. Investing Globally Source: SSGA Hedging Currency Risk 17 Total return on global equity investment = Share price movement + Dividends + Movements in exchange rate + Return of “Currency Hedge” These two parts offset each other 2274736.1.1.ANZ.RTL
  18. 18. Investing Globally Source: SSGA Active Currency Hedging 18 Passive currency hedging • Protects returns when exchange rates move “the wrong way” • Removes the chance to profit when exchange rates move “the right way” Active currency hedging seeks to protect the portfolio against adverse currency movements while still profiting from positive movements 2274736.1.1.ANZ.RTL
  19. 19. Equity valuations Some investors compare market valuations with book values Source: SSGA, Factset 19 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 S&P 500 Index Stoxx Europe 600 Index Nikkei 225 Index S&P ASX 300 Index MSCI World Index MSCI Emerging Markets Index Global Equity Market Price to Book Ratios (P/B) 15 years to 30 June 2018 15 yr Max 15 yr Min 15 year Average Jun-18 Investing Globally Value of company’s underlying assets Sharemarket valuation Increasing sharemarket valuations compared to underlying assets 2274736.1.1.ANZ.RTL
  20. 20. Investing Globally Currency Valuations Currencies can also move from “cheap” to “expensive” Source: SSGA, Factset As at 30 Sep 2018 20 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 AUD / USD Exchange Rate Australian dollar looks “cheap” compared to US dollar? Australian dollar looks “expensive” compared to US dollar? 2274736.1.1.ANZ.RTL
  21. 21. Investing Globally Actively managing currency exposure Source: SSGA 21 Very long term economic value considerations include: • Inflation (How much does a hamburger cost?) • Terms of Trade (Prices of exports vs prices of imports) • Productivity Other considerations include • Interest Rate • Every currency is different • US dollar might be “expensive” while Japanese yen is “cheap” compared to Australian dollar • Avoiding large transaction costs 2274736.1.1.ANZ.RTL
  22. 22. Investing Globally Some examples State Street Global Equity Fund Currency Hedges 22 0% 50% 100% Dec-14 Dec-15 Dec-16 Dec-17 US Dollar Hedge Source: SSGA to31 August 2018 Hedge ratios are as of the date indicated, subject to change, and should not be relied upon as current thereafter. 0% 50% 100% Dec-14 Dec-15 Dec-16 Dec-17 UK Pound Hedge 0% 50% 100% Dec-14 Dec-15 Dec-16 Dec-17 Euro Hedge 0% 50% 100% Dec-14 Dec-15 Dec-16 Dec-17 Japanese Yen Hedge 0% 50% 100% Dec-14 Dec-15 Dec-16 Dec-17 Swiss Franc Hedge 0% 50% 100% Dec-14 Dec-15 Dec-16 Dec-17 Average/Actual Hedge Actual Hedge Ratio for State Street Global Equity Fund Aug 2018 30.63% 2274736.1.1.ANZ.RTL
  23. 23. State Street Active Equities Risk/Return (Net of Fees) Inception^ to 31 August 2018 23 Source: Morningstar Direct Past performance is not an indication of future results. The performance figures contained herein are provided on a net of fees basis and do reflect the deduction of advisory or other fees. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in AUD. The index returns are unmanaged and do not reflect the deduction of any fees or expenses. The index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. ^Inception date: 31 January 2014 MSCI Benchmarks “MSCI World ex AU” refers to “MSCI World Ex Australia Index (AUD)” “MSCI World Ex AU (Hedged)” refers to “MSCI World Ex Australia Hedged Index (AUD)” AMP Capital Altrinsic DimensionalStrategic Dimensional (Gl Value) Dimensional (Gl Large Company) Aberdeen T. Rowe Price MFS (Conctrd) Fidelity Templeton Franklin Acadian Generation Realindex Grant Samuel Invesco Hunter Hall Hunter Hall (Value Gr) Antipodes Optimix IFPWalter Scott Arrowstreet Analytic Magellan Ironbark GTP MFS MLC AMP Capital (Eq Value)Platinum Platinum (Int Brands) BT (Core) Russell (Int Shr) Russell (Gl Opp) UBS (Int Shr)Schroder (Gl Value) Zurich (Glb Them) Zurich (Glb Them Uhg) Zurich (Growth) K2 International AR State Street Global Equity MSCI World ex AU MSCI World ex AU (hedged) 6 8 10 12 14 16 18 20 7 8 9 10 11 12 TotalReturnSinceInception^(%pa) Standard Deviation Since Inception^ 2274736.1.1.ANZ.RTL
  24. 24. A portfolio that is structurally underweight the mega-caps*. Portfolio positions change to reflect the prevailing environment. 0.98% Capped No Performance Fee The Top 100 stocks account for 43% of the MSCI World ex Australia Index. The same 100 holdings in this fund represent only 25%**. Return 13.91% (net of fees) since Inception** versus the MSCI World ex Australia Index (13.06%). MARKET CAP 13.91% LOWER VOLATILITY -17% Less volatility than the Index^, as assessed by Standard Deviation. Volatility since inception to 31 July 2018 (8.00% Fund vs 9.58% benchmark). PERFORMANCE SINCE INCEPTION BEYOND THE BRANDS COMPETITIVE FEES Fees matter in a low return environment. Lower fee also compensates for higher cost, alternative managers. Source: SSGA. Since Inception 31 January 2014. As at 31 July 2018* Megacaps=MC. Quintile 1 is the top fifth of companies in the screening universe, while Quintile 5 is the lowest fifth of companies in the screening universe. As at 31 July 2018, there are currently 1,577 companies in this universe. Source: Factset. ** As at 31 July 2018 2018. #Index = MSCI World ex Australia. #1/10: The Fund holds 1 stocks in the Top 10 of MSCI World Ex Australia. 19/100: The Fund holds 19 stocks in the Top 100 of MSCI World Ex Australia. Past performance is not a reliable indicator of future performance. The performance figures contained herein are provided on a net of fees basis, before taxes but after management and transaction costs. Returns have been calculated assuming reinvestment of all distributions and is calculated in AUD. The index returns are unmanaged and do not reflect the deduction of any fees or expenses. Recommended products are deemed strong investments within their respective asset class, typically rating first quartile on most criteria. Characteristics are as of the date indicated, subject to change, and should not be relied upon as current thereafter. CURRENCY HEDGING** Hedge Ratio. SSGA’s Dynamic Strategic Hedging, each currency in the portfolio is adjusted according to our medium to long term assessment of its economic value relative to the AUD. UPSIDE PARTICIPATION DOWNSIDE REDUCTION Participated in only 61% of the market decline, while maintaining 87% market upside since inception to 31 July 2018. 1/10# 25/100# 87% 61% KEY FACTS OBJECTIVE: The State Street Global Equity Fund seeks to outperform the MSCI World ex Australia Index over a full market cycle of approximately 5-7 years, with lower volatility than the benchmark. It also seeks to mitigate currency risk associated with the benchmark. INCEPTION DATE: 31 January 2014 FUND FUM: AUD $263m APIR CODE: SST0050AU FEE: 0.98% p.a (Capped) as at 31 July 2018 25% State Street Global Equity Fund at a Glance Quintile 1 (Largest 20%) Quintile 2 Quintile 3 Quintile 4 Quintile 5 (Bottom 20%) 242274736.1.1.ANZ.RTL
  25. 25. Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia Telephone: 612 9240-7600 Web: www.ssga.com. State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) ("SSGA Australia") is the Investment Manager. References to the State Street Australian Equity Fund and the State Street Global Equity Fund ("the Funds") in this communication are references to the managed investment schemes domiciled in Australia, promoted by SSGA Australia, in respect of which SSGA, ASL is the Responsible Entity. This general information has been prepared without taking into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com, before deciding whether to acquire or continue to hold units in the Funds. This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by SSGA in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances, many of which are detailed herein. Such statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond SSGA's control. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Investing involves risk including the risk of loss of principal. Risk associated with equity investing includes stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions. Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Currency Hedging involves taking offsetting positions intended to substantially offset currency losses on the hedged instrument. If the hedging position behaves differently than expected, the volatility of the strategy as a whole may increase and even exceed the volatility of the asset being hedged. There can be no assurance that the Fund's hedging strategies will be effective. Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged Standard deviation is a historical measure of the degree to which a fund's returns varied over a certain period of time. It is normally shown over a time period of 36 months, but the illustrations noted in this material reflect a shorter time frame. This may not depict a true historical measure, and shouldn't be relied upon as an accurate assessment of volatility. The higher the standard deviation, the greater the likelihood (and risk) that a fund's performance will fluctuate and have greater potential for volatility; a lower standard deviation indicates past returns have been less volatile. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC ("S&P") and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones") and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed by SSGA. The S&P indices are a product of S&P Dow Jones Indices LLC, and have been licensed by SSGA. State Street Australian Equity Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates, and none of S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in such product(s). MSCI indices are the exclusive property of MSCI Inc. ("MSCI"). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by State Street Global Advisors ("SSGA"). The financial securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such financial securities. No purchaser, seller or holder of this product, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this product without first contacting MSCI to determine whether MSCI's permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI. This material should not be considered a solicitation to apply for interests in the Funds and investors should obtain independent financial and other professional advice before making investment decisions. There is no representation or warranty as to the currency or accuracy of, nor liability for, decisions based on such information. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA Australia's express written consent. State Street Active Equities 25 2274736.1.1.ANZ.RTL
  26. 26. © 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Equity Australia Large Blend Category Definition: Equity Australian Large Blend funds invest primarily in large Australian companies. Stocks in the top 70% of the capitalisation of the Australian equities market are defined as large-cap. The blend style is assigned to portfolios where neither growth- nor value-characterised stocks dominate. Equity World Large Blend Category Definition: Equity World Large Blend funds invest primarily in large companies listed around the globe. Stocks in the top 70% of the capitalisation of an equities market are defined as large-cap. The portfolio is not defined by an exposure to a single sector or region. The blend style is assigned to portfolios where neither growth- nor value-characterised stocks predominate. © 2018 State Street Corporation - All Rights Reserved Expiry Date: 31 December 2018 Tracking Code: 2274736.1.1.ANZ.RTL . State Street Active Equities 26
  27. 27. Questions and answers
  28. 28. | netwealth28 This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Disclaimer Thank you Webinar Series

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