Australian retail investors are over-exposed to banks and other companies involved in financial services, according to Tim Mackay, principal, Quantum Financial Planning
This belief has been reflected in the adjustments Mackay has made to his clients’ investment portfolios, which over the last 12 months have gradually increased their exposure to US equities.
“The two key reasons are that we think the US economy is in a better place, and if there is a risk to the Australian economy, it’s the property market, and that is also immediately going to impact on the banks.
“So by shifting that equity exposure…from our view, we’re thinking ahead that if there is a fall in the financials, the overseas markets can be used to pull that back,” Mackay says.
He emphasises the point that the US equity market is by no means devoid of exposure to the financial sector. “It still has significant exposure to financial services, but nowhere near the concentration we have here – it’s massively out of whack, the percentage they hold [in financial companies] here.
In addition to the risk posed by the potentially overheating property market, Mackay refers to the potential affect of increasing capital adequacy requirements when the Basel III regulatory framework. “The market was surprised by its need to do this, but they do need to shore up their capital for these changes coming in.”
Banks aren’t infallible
“History over the last 25 years has shown we haven’t had a recession, and people believe that mortgages are infallible, from the bad debt provisions, and we just don’t buy it,” says Warryn Robertson, portfolio manager, Lazard Asset Management (pictured).
“I don’t have a perfect lens on where SMSFs are, but traditionally…most people’s portfolios will have those big banks. There probably are very few SMSFs that don’t own Commonwealth Bank, for instance, and most would be massively allocated [to banks].
“In terms of the risks on the domestic front – we haven’t had a recession in Australia for 25 years…that is frightening, because you don’t know what it’s like. You travel to Europe, Spain et cetera and you see what an economic downturn is like, it is a very different world. That has influenced people’s decision-making processes incorrectly,” Robertson says.
Referencing the FSI’s recommendation that banks increase their home loan provisioning, he says this is “code for APRA, the RBA and everyone else that ‘we’re really worried about housing, we need you guys to build a fortress to protect the country.’”
Lazard launches equity franchise fund
Lazard’s global equity franchise fund, which currently has $1.9 million in assets under management. These are invested across 25 stocks, the top five being International Game Technology, Microsoft, Computershare, Google and Express Scripts.
The total portfolio has an emphasis on North American franchises, but also includes a number in Europe and Asia, spanning a wide range of asset classes including consumer staples, healthcare, industrials, technology and utilities.
Robertson says Lazard has recently dropped the minimum investment amount to $20,000 from $100,000 in an effort to appeal to more retail investors.
“We’re trying to make it easy as we possibly can, with a minimum investment of $20,000 for the fund. We’re also hopeful of getting it on as many platforms as we can.
“It’s really important to have a broad focus for local investment management. There is way too much local focus here,” he says.
“If you think about that bias, particularly for self-managed super funds, they think they’re diversified by investing in the four big banks, the two miners and the telco, but there’s a bigger world out there…there are around 230 stocks outside Australia that we think are economic franchises.”