Investment strategy: where is your real global equities exposure?
Over the past couple of years, Australian investors have increased investment in overseas assets, particularly equities. Global equities exposure isn’t always what it seems as classifications and labels may not reflect the full picture.
Global equities exposure is not always what it seems as classifications and labels may not reflect the full picture concerning where revenue and profits of companies are actually generated.
Some investors seek indirect global exposure through Australian-listed companies with overseas operations such as Twenty First Century FOX, CSL, James Hardie, Henderson Group, Westfield, Computershare, QBE and Resmed, among others. These carry some leverage to improving macro conditions offshore and/or a weaker Australian Dollar.
In making their first global equities investment, many investors target specific country or regional investments, or large global brands/companies. However, given the sheer depth of global markets, the underlying economic exposures (that is, where profits are actually generated) typically extends far beyond local borders.
Let’s take the United States and Europe as an example, the two strongest performing regions over the last couple of years for unhedged Australian investors. Those investors may be surprised where companies listed in those markets actually generate their revenues. Investors buying a passive European exposure through the STOXX 600 index may be surprised that nearly half of the revenue generated by some of the largest companies listed in Europe, actually lies outside of the region itself! The same story could be applied to the US – the locally listed Exchange Traded Fund (ETF) which tracks the performance of the S&P 500 Index (ticker: IVV) has been a popular investment, but again, just over half the revenue generated by businesses listed there actually comes from within the country itself. The exposure is further skewed within the energy, material, technology and industrial sectors.
Investors in global managed funds should also be aware of this when reviewing their portfolio positioning. The Magellan Global Fund, managed by Hamish Douglass and his team in Sydney, has generated a lot of interest from local and global investors due, not just to its robust performance over the last 5 years, but also the fact it carries a very large exposure to U.S equities (73%).
In the short term, investors may well gloss over some of the finer details of an investment in an attempt to chase price momentum and generate quick profits. Over the long term, investment performance is far more likely to be linked to stock selection, based on fundamental investment building blocks such as profitability, solvency, valuation and cash flow generation. A thorough assessment on the underlying economic drivers of any investment is crucial in this regard.
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