When is global, not so global?

By Templeton Global Growth Fund Ltd (ASX: TGG)

November 15 2018
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Promoted by Templeton Global Growth Fund Ltd (ASX: TGG).

With plenty of discussion in the media around Labor’s proposed changes to franking credits and the potential impacts on self-funded retirees invested in Aussie stocks, SMSF investors may be looking to global equities as an alternative. But, are all global equity strategies truly global?

There is considerable ongoing debate over Labor’s proposed franking credit policy and the possible impacts on pension phase SMSFs. Should Labor form government next year and legislate to abolish cash refunds for franking credits, it is likely to take some sheen off Australian equities as a stable source of retirement income for Australian SMSFs.

An ASX Investor Study¹ also indicates that diversification is still not well understood by Australian investors, with 75% of share owners holding only Australian shares, implying a huge scope to diversify.

Investing in global equities via a listed investment company (LIC) or managed fund could offer the right balance between growth and income as well as helping with portfolio diversification, allowing Australians to own some of the world’s best companies at attractive valuations.

But investors need to be mindful that not all global equity strategies are truly global. In fact, two of the market’s leading global equity portfolios have 95% exposure to US-domiciled companies, so Aussie SMSFs wanting to access the growing opportunity set in Asia and Europe should actively seek out strategies with less emphasis on the US.

Default is no longer an option

The US, as the world’s biggest equity market, represented a little over 40% of the MSCI World Index around the time of the Global Financial Crisis in 2009. A decade on, boosted by aggressive and unprecedented stimulus including record low-interest rates, it now represents 60% of the index.

By default, investors, particularly those who access global equities via index funds and ETFs could be overweight to the US relative to other markets, exposing them to any potential US-based risks.

Sir John Templeton, one of the world’s greatest investors, had many sayings, and one of our favourites was, “To beat the index, you have to be positioned differently than the index.”

This was confirmed recently when value stocks outperformed growth outside the US for the first time in seven quarters^[2] - indicating that a combination of active management and value investing outside the US might be where investors can find the next opportunities.

But, what’s wrong with Uncle Sam?

The US market is trading at record-high levels (even after the recent pullback) and stretched valuations at a time when peak earnings have begun to roll over. When you look at the period since June 2009 to recent months, the US market is up 200%, while the rest of the world has appreciated less than 50% in US dollar terms.

US corporate margins and earnings per share are well above the levels reached in the 2007 cyclical peak, even though US political uncertainty and risks of trade wars continue to dominate headlines and cause concern for investors.

Moreover, tightening US monetary policy conditions may represent a headwind for a maturing US bull market. Company valuations in the US should reflect this tightening monetary policy and a more mature profit cycle. Instead,they are at a premium to most other global markets.

Worldly-wise investing

A classic example of a stock that provides comprehensive global exposure is Templeton Global Growth Fund Ltd (ASX: TGG), one of the oldest global equity LICs available on the ASX and managed by Franklin Templeton Investments

To give an example, TGG’s exposure to US equities during the GFC period was 26% (vs 40% MSCI World Index), andit currently stands at 35% in 2018 – in stark contrast to the index (around 60%) - and many other global equity managers. TGG continues to find good value opportunities outside of the US across a range of countries, industries and sectors as diverse as European financials and Chinese telcos, that have plenty of room to grow.

So, with major changes potentially on the horizon for Australian equity investors, this may be a catalyst for SMSFs and other equity investors to consider investing overseas. Global equities offer a time-tested means of diversification, and despite a US equity market that appears stretched, there are currently many good value opportunities to be found in other overseas markets. However, investors need to exercise some worldly-wisdom to make sure they’re gaining the right type of exposure when considering adding global equities in a well-diversified portfolio.

¹ASX Australian Investor Study by Deloitte Access Economics

²Notes on Global Equity Markets – Perspective from the Templeton Global Equity Group dated 17 October 2018

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