SMSFs look for global opportunities

Blogger: Jack Lowenstein, joint chief investment officer and managing director of Morphic Asset Management

You open the papers daily to hear about the rise of a new superpower and the collapse of old empires. Your colleagues talk about the opening of new markets globally and of free trade and travel. Your country is perfect positioned to provide the food to fuel this growing demand with ample room to expand for cattle and crops.

Your fellow citizens are amongst the richest in the world: five times richer than the nearest large neighbour (regarded as more of a holiday destination than a serious competitor) and 50% higher than the country from which many of your citizens originated. In short – your country is on the cusp of great things.

You could read the above and think of Australia. Indeed you’d be forgiven for thinking that: expecting the neighbour to be Indonesia and the UK to be the country of origin.

In fact the story above refers to Argentina in 1909, with Brazil and Italy being the neighbour and source country respectively.

Argentina is a sad story and a tale of blown opportunities. A country endowed with both natural resources and new population that has been stuck in the slow lane for 100 years, racked with recurrent inflation and instability.

So why is this relevant to financial advisers and SMSFs? Because when it comes to protecting wealth over the long term, there are many things that can go wrong in a manner that wasn’t anticipated, such as a collapse in one’s home country’s terms of trade coupled with a succession of poor governments. The hidden dangers in an Argentine pension portfolio in 1909 might have come from too narrow a dependency on local assets compounded by currency risk. And this assumes the assets were equities rather than regularly defaulted on bonds or bank deposits!

Perhaps the most startling thing about SMSFs’ currency allocation strategies is that they don’t seem to have one! ATO figures put average international equity holdings at just 0.3% of SMSF asset allocations. To say that the SMSF sector is taking a large bet on Australia and the continuation of the current trends in China, would be an understatement.

Part of successful portfolio construction is to diversify risks. Most investors see this in terms of having some equities along with cash, bonds and property. Yet it would seem that the SMSF community hasn’t taken the next step of looking at currency risks.

By adding some international funds to an SMSF, it can both gain exposure to sectors which are under-represented in Australia (the Australian market being 65% banks and resources) and to other currencies.

Consider for example, fast growing Asian infrastructure company Manila Water, a stock that has been in the Morphic Global Opportunity Fund portfolio since it launched in early August 2012. It as classic example of what SMSFs limited to Australian equities simply can’t access: a utility offering above average growth with exceptional management in a country that is difficult for private investors to trade.

Manila Water is one of two water and sewage operators to the Filipino capital. The company provides water and sanitation to 6m customers each day in the eastern part of the city. It’s success both in making money from this enterprise and satisfying its customers is in stark contrast to the track record of the company that gained the concession for the western part of the city, privatised at the same time, which has not garnered the financial rewards of its rival, or met the key performance indicators set by the regulator. Manila Water’s reward for its efforts has been to win mandates to repeat the exercise in Indonesia and Vietnam.

Apart from helping save children’s lives, this has resulted in great returns for investors. Manila Water has risen over 450%, since floating in in 2005, delivering an annual return to investors of over 25% including dividends.

By looking offshore, if SMSF investors one day find the outlook at home less rosy, they will be safe in the knowledge that their global purchasing power for those overseas trips they always planned in their retirement hasn’t ended in tears!

About Jack Lowenstein
Jack was the deputy chief investment officer at Hunter Hall, responsible for risk management and portfolio construction, from 1998-2011 before joining Morphic.

He joined Hunter Hall when it had just $13 million in funds under management (FUM) and played a key role in building it to a peak of just under $3 billion in FUM.

He is also a non-executive director of Calliden Group Limited, a general insurance company listed on the Australian Securities Exchange.

He is non-executive chairman of Kontiki Capital Limited, an investment bank based in Suva, Fiji.

Prior to joining Hunter Hall, Jack had careers in corporate finance and as an international financial journalist. He earned a BA and MA from Oxford University.