The growing trend towards so-called “objective-based” investing is encouraging financial planners to rethink allocations to global equities as a way of achieving a better risk-reward trade-off.
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“The first thing is to define an investor’s objective,” says Don Ezra, the co-chair of global consulting for Russell Investments worldwide.
“I’m a retiree myself. My objective is that I have a lifestyle that I would like to live for the rest of my life. And for that, I need a stream of money for the rest of my life. I don’t need just a lump sum. I need a stream of money, whenever I want to spend it.
“And so the first thing to think about is that the objective is phrased in terms of a stream of income rather than a lump sum of money on a given date. That’s one thing.
“The other aspect is [that] the amount of money I am prepared to save or have been prepared to save throughout my career may or may not match the lifestyle that I wish to live now. In order to bridge that gap, I need to take a certain amount of investment risk.
“A whole bunch of things are connected with that risk – a whole bunch of financial services, potentially, not just the kind of alpha-generation that we’ve been so careful to measure and identify so very carefully.
“One of the things someone needs to plan for me – or plan for my kids now, because I’m already in the retirement phase – is, this is the amount you’re going to be saving routinely for the next however many years [so] how much risk should you be taking?
“So, for example, how much in equities, in particular? Global equities would be the obvious base, I would think, if one is looking for an equity exposure, because the more diversification you can get, the lower the aggregate risk while hoping to capture that equity premium.”
REALLY DIVERSIFIED?
Peter Wilmshurst, a research analyst and portfolio manager at Franklin Templeton Investments, says investors often make the mistake of thinking they have diversified equity exposure if they are exposed to different companies or sectors in the Australian market alone.
“The Australian equity market is closely correlated with people’s jobs; it’s closely correlated with the asset that many people wouldn’t put into their spreadsheets but is probably the biggest financial asset they own – their home.
“At the end of the day you’ve got Australian equity markets – largely dominated by the banks – Australian housing, and Australian employment.
“Whether you want to call all of that ‘a play on China’, or acknowledge that it’s probably a little bit broader than that, either way, it’s a very narrow set of exposures, by industry, by company and just the correlation between them.
“Contrast that with global equities. Australia is 2, 3 or 4 per cent of the world, not a big part; then you’ve got the fact that there’s a range of companies and a range of sectors and a range of economies that you get exposure [to] through global equities.”
