In response to questions from a number of SMSF trustees, the team at Morphic has put together a short video on why we think it is incredibly importantly for SMSFs to look offshore to protect their future retirement plans. Here are a few charts to illustrate the points in the video.
SMSFs generally have little exposure to offshore assets. Australian tax office data shows the average SMSF has only about 3 to 5% of its money invested off-shore. By contrast, the Future Fund, which is widely regarded as employing world’s best practice, has about 50 to 60% of its members’ money invested outside Australia. See Figure 1 below for the comparison to our European peers.
Source: Bloomberg, Team Analysis
At Morphic Asset Management, we believe we detect the beginning of a multi-decade trend of Global equities outperforming the Australian stock market (see Figure 2 below). There are many reasons for this, including:
I. Overseas stock markets have more of the fast growing technology stocks that are changing the world
II. Australia has a lot of mining and resource stocks, which are affected as China’s rapid rate of growth slows
III. Australia has a lot of banking stocks, which are affected by increasing global regulations and a slowing local economy.
Source: Bloomberg, Team Analysis
Morphic and international shares offer SMSF’s an opportunity to take some of their money and put it offshore. And why does that matter for them? If things go wrong in Australia, and their house price may fall, the Australian dollar will fall as well, they have an asset that’s a natural hedge against them losing money in Australia.
A good asset in a portfolio is one that lowers your risk, but doesn’t lower your return. Someone giving you free car insurance is an example of this – your risks are lower (you don’t have to pay if you have an accident), but it doesn’t cost you.
We select the ten worst performing months for the Australian stock market since we launched in 2012 and draw the comparison with the performance of our fund, the Morphic Global Opportunities Fund.
As you can see below, over the worst ten months, the average performance of the Australian market was about -5% versus +1% for the MGOF.
Source: Bloomberg, Team Analysis
Past performance is not indicative of future performance.
This provides a “shock absorber” effect to your share portfolio, at no cost to performance.
A more diversified portfolio including offshore equities should also outperform an all-Australia portfolio on lower volatility, as you can see on Figure 4 below.
We selected two indices, the MSCI All Country World (which includes all major stocks in the world and the ASX 200 Index here in Australia) and simulated the volatility of a portfolio constituted by those two indices.
Figure 4 illustrates the volatility of a portfolio when the allocation to Australian shares varies over the last 10 years. The left axis shows the amount of risk in a portfolio with varying amount of international shares. As you can see, the risk falls as you cut the Australian share exposure, all the way down to 40%.
It is this type of data that explains the Future Fund’s decision to put so much of their investments outside Australia.
Source: Bloomberg, Team Analysis
Hopefully the charts and video help you understand why having some international shares in your SMSF is so important from both a risk perspective and a potentially higher return perspective.
If you would like to learn more about how Morphic can be a good investment for you, please contact Irene Kardasis ikardasis@morphicasset.com or call us on 02 9194 6707.
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