Learn about the advantages of investing offshore as well as some strategies to manage the impact foreign currency risk can have on your portfolio from Jonathan Shead, Head of Retirement Solutions at State Street Global Advisors.
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Investing globally: Key benefits and considerations
1. Investing globally:
Key benefits & considerations
Presented by
Jonathan Shead
Head of Retirement Solutions
State Street Global Advisors
17 October 2018
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This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109,
AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into
account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for
professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular
circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to
acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.
Disclaimer
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Jonathan Shead
Head of Retirement Solutions
State Street Global Advisors
Meet today’s speaker
5. Investing Globally
Agenda
5
Source SSGA
1. The benefits of investing globally
2. Key considerations when looking offshore
3. Different methods and strategies for managing currency fluctuations
4. Why active currency management can be advantageous for investors
Questions
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6. Investing Globally
The benefits of investing globally
… in a word
6
Source: Cambridge English Dictionary, retrieved 4 October 2018 from dictionary.cambridge.org
Diversification does not ensure a profit or guarantee against loss.
Diversify (verb)
• To start to include more different types or things
• If a business diversifies, it starts making new
products or offering new services
Spreading your risks in 3 ways
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7. Investing Globally
Diversification 1: Economies
7
Source: World Bank to 31 Dec 2017. Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2010 U.S. dollars.
Diversification does not ensure a profit or guarantee against loss.
-10
-5
0
5
10
15
1961 1971 1981 1991 2001 2011
Yearly Economic Growth (%)
Australia
Japan
US
Other countries experience economic growth at different rates and
in different cycles to Australia
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8. Investing Globally
Diversification 2: Industries
8
Financials
Materials
Communication
Services
Consumer
Discretionary
I.T.
Source: GICs Sector Weights as at 28 September 2018. Results shown reflect S&P ASX 300 Index and S&P Development Large Mid Cap Index
The information contained above is for illustrative purposes only. Diversification does not ensure a profit or guarantee against loss.
Australian Sharemarket Global Sharemarkets
Dominated by banks and miners
Wider spread of industries including
I.T., Consumer products and
Communications services
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9. Investing Globally
Diversification 3: Companies
9
Source: Largest Australian companies: S&P 300 Index as at 28 September 2018. Largest Global Companies: MSCI World ex Australia as at 28 September 2018
Diversification does not ensure a profit or guarantee against loss.
277,110
288,394
363,136
370,727
389,915
404,981
735,771
830,239
835,083
1,105,660
Berkshire Hath.
Bank of America
Exxon Mobil
Johnson & J.
JPMorgan Chase
Facebook
Alphabet
Amazon
Microsoft
Apple
Largest Global Companies (US $M)
26,586
27,391
29,188
40,683
53,849
58,068
65,994
68,466
79,886
89,038
Woolworths
Telstra
Macquarie Group
Wesfarmers
National Australia…
ANZ Bank
CSL
Westpac Bank
BHP Billiton
Comm. Bank
Largest Australian Companies (US$ M)
Top 10:
44% of market
Top 10:
13% of market
Australia vs World
Larger companies
More choice
Less concentration
(Did you know? CBA and BHP are the only
Australian companies big enough to make
the top 100 in the developed world)
10. Investing Globally
Key Considerations
10
Source: MSCI World Index and MSCI Emerging Markets Index as at 28 September 2018. Includes “Large” and “Mid” cap companies but not “Small” cap companies
41.8
5.2
Market size
(US$ Trillion)
Global Equity Market Risk
Like the Australian sharemarket, global equity can
experience large rises and falls in value
What Country or Region?
Nearly 50 countries to choose from
“Developed” or “Emerging” Markets
Currency Risk
Intrinsic to global investing
Emerging:
• 24 countries
• Over 1,100 companies
• Includes China, South
Korea, Taiwan, Brazil,
India, South Africa
• Often more volatile
• Long term economic
growth potential
Developed:
• 23 countries
• Over 1,600 companies
• Includes US, Japan, UK,
Germany, France, Italy,
Canada, Switzerland
• Typically (but not
always) more stable
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11. Investing Globally
Source: MSCI, Factset. Country results show returns for MSCI USA Index, MSCI EMU Index, MSCI UK Index, MSCI Japan Index and MSCI Canada Index in local currency terms with net
dividends reinvested. Individual company returns are derived from total returns in local currency terms of corresponding country index constituents. Past performance is not a reliable
guide to future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect capital gains and losses, income, and the
reinvestment of dividends.
63%
38%
53% 56% 52%
-22%
-27%
-22% -19% -15%
14.5%
4.1% 8.3% 9.3% 11.3%
US Europe UK Japan Canada
Sharemarket Returns over 12 months to 30 June 2018
Market Average
Global Equity Opportunities
Average returns in each country hide a range of individual company returns
11
Worst 5% of
individual
company returns
Best 5% of
individual
company returns
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12. State Street Active Equities
State Street Active Equities Approach
Maximising Returns & Managing Risk at the Source
12
Source: SSGA AQE Team Australia * Based on our stock selection model
Investor Objectives:
Philosophy & Approach: Linking equity portfolio
construction with
investor objectives
Don’t link the portfolio
construction to
benchmarks.
Benchmark Unaware.
Hold only the most
favoured stocks*
Focus on our best
investment ideas*
• High quality
• Reasonable value
• Sustainable earnings
• Ability to generate
internal growth
• Positive outlook
Be explicit in managing
total portfolio risk
Risk is total volatility and
capital lost.
Minimise RiskMaximise Returns
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13. Investing Globally
Source: SSGA
The information contained above is for illustrative purposes only.
Currency Risk
A hypothetical example: Cisco Systems (American Technology Company)
13
1 29 December 2017
• Share price US$ 38.30
• Buy 10,000 shares
• Cost US$ 383,000
• Exchange Rate 78.21c
• Sell AU$ 489,707 and buy US$
383,000 to pay for the shares
2 31 August 2018
• Share price US$ 47.77
• Sell 10,000 shares
• Proceeds US$ 477,700
• Exchange Rate 72.32c
• Sell US$ 477,700 and receive
AU$ 660,537
3 Your return (ignoring dividends)
• Share Price Change: +24.7%
US$ 38.30 to 47.77
• Exchange Rate Change: -7.5%
78.21c to 72.32c
• Total Return: 34.9%
AU$ 489,707 to 660,537
2274736.1.1.ANZ.RTL
14. Investing Globally
Source: SSGA
Currency Risk
14
Movements in exchange rates can change a
profitable share investment into a loss making one
(or a loss making investment into a profitable one)
Total return on global equity investment =
Share price movement +
Dividends +
Movements in exchange rate
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15. Investing Globally
Recent market history
Source: MSCI, S&P, SSGA. Indices used: MSCI World ex Australia for Global Equities. AUD Hedged return has been estimated by SSGA. Foreign currency is the “in AUD” return less the
“100% AUD Hedged” return. Past performance is not a reliable guide to future performance. Index returns reflect capital gains and losses, income, and the reinvestment of dividends.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
15
Period
Global Sharemarket
Performance
(% Total return)
Impact of Foreign
Currency
(% Total Return)
Combined Return for
Australian Investors
(% Total Return)
28 February 2009
to 30 April 2013
123.3 -92.2 31.2
30 April 2013
to 31 October 2015
37.4 +41.7 79.1
31 October 2015
to 30 June 2018
32.1 -14.9 17.3
2274736.1.1.ANZ.RTL
16. Investing Globally
Source: SSGA
Managing Currency Risk
16
• When the AUD weakens, exposure to foreign
currencies adds to your returns
• When the AUD strengthens, exposure to foreign
currencies detracts from your returns
• “Currency Hedge”: A strategy to remove the
impact of exchange rates from returns
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17. Investing Globally
Source: SSGA
Hedging Currency Risk
17
Total return on global equity investment =
Share price movement +
Dividends +
Movements in exchange rate +
Return of “Currency Hedge”
These two
parts offset
each other
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18. Investing Globally
Source: SSGA
Active Currency Hedging
18
Passive currency hedging
• Protects returns when exchange rates move “the
wrong way”
• Removes the chance to profit when exchange
rates move “the right way”
Active currency hedging seeks to protect the
portfolio against adverse currency movements
while still profiting from positive movements
2274736.1.1.ANZ.RTL
19. Equity valuations
Some investors compare market valuations with book values
Source: SSGA, Factset
19
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
S&P 500 Index Stoxx Europe
600 Index
Nikkei 225 Index S&P ASX 300
Index
MSCI World
Index
MSCI Emerging
Markets Index
Global Equity Market Price to Book Ratios (P/B)
15 years to 30 June 2018
15 yr Max 15 yr Min 15 year Average Jun-18
Investing Globally
Value of company’s
underlying assets
Sharemarket valuation
Increasing
sharemarket
valuations
compared to
underlying
assets
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20. Investing Globally
Currency Valuations
Currencies can also move from “cheap” to “expensive”
Source: SSGA, Factset As at 30 Sep 2018
20
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16
AUD / USD Exchange Rate
Australian dollar looks “cheap”
compared to US dollar?
Australian dollar looks “expensive”
compared to US dollar?
2274736.1.1.ANZ.RTL
21. Investing Globally
Actively managing currency exposure
Source: SSGA
21
Very long term economic value considerations include:
• Inflation (How much does a hamburger cost?)
• Terms of Trade (Prices of exports vs prices of imports)
• Productivity
Other considerations include
• Interest Rate
• Every currency is different
• US dollar might be “expensive” while Japanese yen is “cheap” compared to Australian dollar
• Avoiding large transaction costs
2274736.1.1.ANZ.RTL
22. Investing Globally
Some examples
State Street Global Equity Fund Currency Hedges
22
0%
50%
100%
Dec-14 Dec-15 Dec-16 Dec-17
US Dollar Hedge
Source: SSGA to31 August 2018
Hedge ratios are as of the date indicated, subject to change, and should not be relied upon as current thereafter.
0%
50%
100%
Dec-14 Dec-15 Dec-16 Dec-17
UK Pound Hedge
0%
50%
100%
Dec-14 Dec-15 Dec-16 Dec-17
Euro Hedge
0%
50%
100%
Dec-14 Dec-15 Dec-16 Dec-17
Japanese Yen Hedge
0%
50%
100%
Dec-14 Dec-15 Dec-16 Dec-17
Swiss Franc Hedge
0%
50%
100%
Dec-14 Dec-15 Dec-16 Dec-17
Average/Actual Hedge
Actual Hedge Ratio for State
Street Global Equity Fund
Aug 2018 30.63%
2274736.1.1.ANZ.RTL
23. State Street Active Equities
Risk/Return (Net of Fees) Inception^ to 31 August 2018
23
Source: Morningstar Direct
Past performance is not an indication of future results. The performance figures contained herein are provided on a net of fees basis and do reflect the deduction of advisory or other fees. The performance includes the reinvestment of dividends and
other corporate earnings and is calculated in AUD. The index returns are unmanaged and do not reflect the deduction of any fees or expenses. The index returns reflect all items of income, gain and loss and the reinvestment of dividends and other
income. ^Inception date: 31 January 2014
MSCI Benchmarks “MSCI World ex AU” refers to “MSCI World Ex Australia Index (AUD)” “MSCI World Ex AU (Hedged)” refers to “MSCI World Ex Australia Hedged Index (AUD)”
AMP Capital
Altrinsic
DimensionalStrategic
Dimensional (Gl Value)
Dimensional (Gl Large Company)
Aberdeen
T. Rowe Price
MFS (Conctrd)
Fidelity
Templeton
Franklin
Acadian
Generation
Realindex
Grant Samuel
Invesco
Hunter Hall
Hunter Hall (Value Gr)
Antipodes
Optimix
IFPWalter Scott
Arrowstreet
Analytic
Magellan
Ironbark GTP
MFS
MLC
AMP Capital (Eq Value)Platinum
Platinum (Int Brands)
BT (Core)
Russell (Int Shr)
Russell (Gl Opp)
UBS (Int Shr)Schroder (Gl Value)
Zurich (Glb Them)
Zurich (Glb Them Uhg)
Zurich (Growth)
K2 International AR
State Street Global Equity MSCI World ex AU
MSCI World ex AU (hedged)
6
8
10
12
14
16
18
20
7 8 9 10 11 12
TotalReturnSinceInception^(%pa)
Standard Deviation Since Inception^
2274736.1.1.ANZ.RTL
24. A portfolio that is structurally
underweight the mega-caps*. Portfolio
positions change to reflect the
prevailing environment.
0.98% Capped
No Performance Fee
The Top 100 stocks account
for 43% of the MSCI World
ex Australia Index. The
same 100 holdings in this
fund represent only 25%**.
Return 13.91% (net of fees) since
Inception** versus the MSCI World
ex Australia Index (13.06%).
MARKET CAP
13.91%
LOWER VOLATILITY
-17%
Less volatility than the Index^, as
assessed by Standard Deviation.
Volatility since inception to 31 July 2018
(8.00% Fund vs 9.58% benchmark).
PERFORMANCE
SINCE INCEPTION
BEYOND
THE BRANDS
COMPETITIVE
FEES
Fees matter in a low return
environment. Lower fee also
compensates for higher cost,
alternative managers.
Source: SSGA. Since Inception 31 January 2014. As at 31 July 2018* Megacaps=MC. Quintile 1 is the top fifth of companies in the screening universe, while Quintile 5 is the lowest fifth of companies in the screening universe. As at 31 July 2018, there are
currently 1,577 companies in this universe. Source: Factset. ** As at 31 July 2018 2018. #Index = MSCI World ex Australia. #1/10: The Fund holds 1 stocks in the Top 10 of MSCI World Ex Australia. 19/100: The Fund holds 19 stocks in the Top 100 of MSCI
World Ex Australia. Past performance is not a reliable indicator of future performance. The performance figures contained herein are provided on a net of fees basis, before taxes but after management and transaction costs. Returns have been calculated
assuming reinvestment of all distributions and is calculated in AUD. The index returns are unmanaged and do not reflect the deduction of any fees or expenses. Recommended products are deemed strong investments within their respective asset class,
typically rating first quartile on most criteria.
Characteristics are as of the date indicated, subject to change, and should not be relied upon as current thereafter.
CURRENCY
HEDGING**
Hedge Ratio. SSGA’s
Dynamic Strategic Hedging,
each currency in the
portfolio is adjusted
according to our medium to
long term assessment of its
economic value relative to
the AUD.
UPSIDE PARTICIPATION
DOWNSIDE REDUCTION
Participated in only 61% of the market decline,
while maintaining 87% market upside since
inception to 31 July 2018.
1/10#
25/100#
87% 61%
KEY FACTS
OBJECTIVE: The State Street Global Equity Fund
seeks to outperform the MSCI World ex
Australia Index over a full market cycle of
approximately 5-7 years, with lower
volatility than the benchmark. It also
seeks to mitigate currency risk associated
with the benchmark.
INCEPTION DATE: 31 January 2014
FUND FUM: AUD $263m
APIR CODE: SST0050AU
FEE: 0.98% p.a (Capped)
as at 31 July 2018
25%
State Street Global Equity Fund at a Glance
Quintile 1 (Largest 20%) Quintile 2
Quintile 3 Quintile 4
Quintile 5 (Bottom 20%)
242274736.1.1.ANZ.RTL
25. Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108
671 441) ("SSGA, ASL"). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia
Telephone: 612 9240-7600 Web: www.ssga.com. State Street Global Advisors, Australia, Limited (AFSL
Number 238276, ABN 42 003 914 225) ("SSGA Australia") is the Investment Manager.
References to the State Street Australian Equity Fund and the State Street Global Equity Fund ("the
Funds") in this communication are references to the managed investment schemes domiciled in
Australia, promoted by SSGA Australia, in respect of which SSGA, ASL is the Responsible Entity.
This general information has been prepared without taking into account your individual objectives,
financial situation or needs and you should consider whether it is appropriate for you. You should seek
professional advice and consider the product disclosure document, available at www.ssga.com, before
deciding whether to acquire or continue to hold units in the Funds.
This document may contain certain statements deemed to be forward-looking statements. All statements,
other than historical facts, contained within this document that address activities, events or developments
that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements.
These statements are based on certain assumptions and analyses made by SSGA in light of its
experience and perception of historical trends, current conditions, expected future developments and
other factors it believes are appropriate in the circumstances, many of which are detailed herein. Such
statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond
SSGA's control. Please note that any such statements are not guarantees of any future performance and
that actual results or developments may differ materially from those projected in the forward-looking
statements.
Investing involves risk including the risk of loss of principal. Risk associated with equity investing includes
stock values which may fluctuate in response to the activities of individual companies and general market
and economic conditions. Investing in foreign domiciled securities may involve risk of capital loss from
unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted
accounting principles or from economic or political instability in other nations.
Currency Hedging involves taking offsetting positions intended to substantially offset currency losses on
the hedged instrument. If the hedging position behaves differently than expected, the volatility of the
strategy as a whole may increase and even exceed the volatility of the asset being hedged. There can be
no assurance that the Fund's hedging strategies will be effective.
Currency Risk is a form of risk that arises from the change in price of one currency against another.
Whenever investors or companies have assets or business operations across national borders, they face
currency risk if their positions are not hedged
Standard deviation is a historical measure of the degree to which a fund's returns varied over a certain
period of time. It is normally shown over a time period of 36 months, but the illustrations noted in this
material reflect a shorter time frame. This may not depict a true historical measure, and shouldn't be
relied upon as an accurate assessment of volatility. The higher the standard deviation, the greater the
likelihood (and risk) that a fund's performance will fluctuate and have greater potential for volatility; a
lower standard deviation indicates past returns have been less volatile.
Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC
("S&P") and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones")
and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed by SSGA. The S&P
indices are a product of S&P Dow Jones Indices LLC, and have been licensed by SSGA. State Street
Australian Equity Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC,
Dow Jones, S&P, their respective affiliates, and none of S&P Dow Jones Indices LLC, Dow Jones, S&P,
nor their respective affiliates make any representation regarding the advisability of investing in such
product(s).
MSCI indices are the exclusive property of MSCI Inc. ("MSCI"). MSCI and the MSCI index names are
service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by State
Street Global Advisors ("SSGA"). The financial securities referred to herein are not sponsored, endorsed,
or promoted by MSCI, and MSCI bears no liability with respect to any such financial securities. No
purchaser, seller or holder of this product, or any other person or entity, should use or refer to any MSCI
trade name, trademark or service mark to sponsor, endorse, market or promote this product without first
contacting MSCI to determine whether MSCI's permission is required. Under no circumstances may any
person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
This material should not be considered a solicitation to apply for interests in the Funds and investors
should obtain independent financial and other professional advice before making investment decisions.
There is no representation or warranty as to the currency or accuracy of, nor liability for, decisions based
on such information.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents
disclosed to third parties without SSGA Australia's express written consent.
State Street Active Equities
25
2274736.1.1.ANZ.RTL
28. | netwealth28
This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109,
AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into
account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for
professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular
circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to
acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.
Disclaimer
Thank you
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