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20.03.2015

Global investors focused on costs too

The most significant change to self-managed investment portfolios in 2014 was the embrace of global equities. While the impetus might have come from the fall in the Australian dollar, investors recognise the breadth of global corporations compared with the relatively narrow set available on the ASX.

Given these assets might be a new experience for many, the key risk is that decisions have been made without a full appreciation of the possible products on offer, or with regard to the portfolio implications. The latter is a subject in its own right, where any investment decision should be made in context of the entire portfolio and not as a stand-alone idea, because risks can become concentrated if the basis for the investment is repeated throughout.

As ever, one should be conscious of fees - what is one paying for and how does any fee compare with other options? A suggestion is to manage to an average fee level, setting a limit of, say, 1 per cent in fees and working out the mix accordingly. This implies using low-cost exchange traded funds for about 25 per cent of the global allocation and a mix of active managers with an average expense ratio of about 1.25 per cent.

What about direct equities bought on global exchanges? This strategy is not for the faint-hearted and requires a focus on regulations and tax consequences that might be inherent in each market. Stock selection is complex and time-consuming.

In Australia we are out of the time zone for the big exchanges; information flow tends to come through when we are tucked up in bed and our capacity to react to any significant changes is therefore somewhat limited.

A separately managed account of global stocks might be a better solution, relying on a fund manager to direct the holdings in the portfolio but retaining beneficial ownership. There are relatively few of these available in Australia and access is typically made through an investment advisory group. Currency hedging will have to be done independent of the strategy. For most investors a combination of funds makes most sense. The word "combination" is critical, because it is almost inconceivable a single product, or even a couple, will be the best outcome. The decision between active funds and ETFs should be interactive.

Let's say one starts with an active manager. Does this portfolio have any strong regional skews? Is it a concentrated or contrarian fund that might deviate significantly from the index? In both these circumstances an ETF might cover a regional weight that is then more balanced to the investor's expectations, or might reduce the risk of substantial variation from the index.

The ETF component of the portfolio can be split into a number of holdings, allowing the investor to make discrete decisions on regions, sectors and even hedging. But be careful - the more directional the ETF, the more likely the fees will be higher and the strategy less passive.

Actively managed funds have their own personality. In general, it pays to be aware of the marketing behind funds and not to be led by user-friendly reports or even by recent performance.

A few key pointers before you invest: Make some effort to understand why the performance is what it is. Be careful with the presentation of data, looking at annual rather than annualised returns, for example. How does it perform in weak markets? Is the investment team stable and well resourced? Then be prepared to stay on board for at least a few years, assuming the fund continues to invest in the way you understood it would in the first instance.

Source: Financial Review, Smart Investor - April 2015

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