Opportunities In Global Equities For Australian Investors

 | Oct 07, 2016 12:02

There’s a popular myth that individual investors, especially trustees of their own self-managed super funds (SMSFs), do not invest much in global equities. While it’s true SMSFs are less diversied than large institutional funds, global equities are readily available and eagerly sought by trustees and personal investors.

The myth is conveniently perpetuated by managers of global funds, who often claim the SMSF allocation is less than 1%. They argue investors should correct the asset allocation and lack of diversication by placing more money into their funds.

At a recent global fund launch, a high-prole manager even talked about how his product lled a ‘gap’ in the market. Let’s see if he was right.

h2 How does the ATO collect the SMSF data?/h2

The major reason for this mistake is the way the Australian Taxation Office (ATO) collects statistics on SMSFs. The ATO’s SMSF Statistical Report for March 2016 shows ‘overseas shares’ and ‘overseas managed investments’ worth only $2.4 billion, while total assets were $590 billion. That’s a paltry 0.4%. Unfortunately, the data is misleading and counterproductive.

The ATO collects data via annual tax returns. In the recent report, the ATO says its ‘estimates’ are extrapolated from 2013-2014 data, and it guesses some allocations. Crucially, a wide range of global equity investments held by SMSFs which are reported as listed trusts, unlisted trusts, other managed investments and even listed ETFs are assumed to be Australian equity investments. The vast majority of global investments is lost in the data collection.

On enquiry, the ATO confirmed to me that the small amount listed under ‘overseas shares’ is only the direct share investments held on overseas exchanges. The ATO looks at the first point of domicile of the investment vehicle, and the vast majority of global shares are held in domestic vehicles.

h2 How much should be invested in global equities?/h2

Professional asset allocators handling billions of dollars of client money in multi-asset funds spread their exposure to reduce risk and take advantage of diverse opportunities. A typical balanced fund suitable for most investors will hold about 60% in ‘growth’ assets (mainly equities and property) or 40% in ‘defensive’ assets (such as cash and fixed interest).

The Australian Prudential (LON:PRU) Regulation Authority’s (APRA) Quarterly Superannuation Statistics for June 2016 (http://www.apra.gov.au/Super/Publications/Documents/2016QSP201606.pdf) reports asset allocation by large super funds as shown in the following table.