Research house Lonsec has released its annual Global Equities Sector Review, revealing continued strong returns from the sector are driving a continued strength in interest surrounding global equities investments and a surge in the choice of products offered by fund managers.
Lonsec’s review of the global equities sector covered both actively managed and passive or index strategies. The report found that there were a number of new ‘value’ strategies significantly boosting the choice for investors. Further, ‘smart beta’ products, which straddle the active/passive divide, have grown in prominence.
Rui Fernandes, Senior Investment Analyst at Lonsec, said the strong returns from the global equities have appealed to an increasing number of investors, especially self-directed investors.
“As measured by MSCI AC World ex Australia Index, the global equities sector returned an impressive 23.63% p.a. for the three years to March 2015 and 13.89% p.a. for the five years,” Mr Fernandes said. “Although the pace of these returns is expected to moderate as the Fed raises interest rates in the US, a global equities exposure continues to retain its place as a core component of any diversified and well-constructed portfolio.”
Notwithstanding, valuations across a range of markets when compared to historical averages appeared less appealing seven years into a US bull-market as the Federal Reserve ponders lifting rates and investors are advised to regularly review Lonsec’s Quarterly Outlook for updated views.
Mr Fernandes noted investors now had more direct access – through structures such as ETFs, Listed Investment Companies and Managed Accounts – driven by rising demand for direct ownership by self-directed investors, more specifically SMSFs.
“Australian SMSFs are now holding nearly one-third of all superannuation money in Australia,” Mr Fernandes said. “Although the product structure in the global equities sector remains dominated by unlisted managed funds, SMSFs now have a number of choices to have access to global equities.”
“mFund, growth in ETF options, listed investment companies and separately managed accounts are providing an increasing number of direct access points for SMSFs.”
“There has also been an increase in the use of feeder-fund product structures in the global equities sector in recent years. This is an easier and quicker route for manufacturers/distributors that have a limited footprint in the Australian market to offer ‘ready-made’ strategies, an approach which will likely see continued growth. However, it is less costly for providers to retreat from products that have not met their business objectives.”
While Lonsec welcomes the arrival of more new product choices and greater access in this market, it also brings more challenges for financial advisers.
“The more choices you have the more complicated things become,” said Mr Fernandes. “As each choice has its benefits and drawbacks, the challenge for financial planners is to find the right way that aligns with their clients’ needs.”
Mr Fernandes also suggested planners and investors to have a plan for dealing with currency exposures as currency movements can add another layer of complexity in the global equities sector.
“In terms of currencies, global equity investors should remain focused on the AUD/USD cross-rate, particularly as US equities constitute the lion’s share of global equity benchmarks,” Mr Fernandes said.
Other key findings of the report include:
Valuations, relative to history, across key regional markets assessed appeared to have less headroom for expansion than in previous years.
Quantitative strategies have delivered strong results post the Financial Crisis, outperforming the ACWI ex Australia but not their traditional World ex Australia benchmark.
Judging simply by the respective indices, small caps have outperformed larger cap stocks by at least 2% p.a. over the three, five and seven years.
Magellan Financial Group (A$37.19 billion FUM as at May 2015) and Platinum Asset Management (A$29.42 billion FUM as at May 2015) are dominant players and have carved out a special place in the sector with their respective products being, anecdotally, are somewhat the ‘go to’ strategies for advisers.
Source: Lonsec
