Investing in International Equities with Capital 19

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1 Investing in International Equities with Capital 19 At Capital 19 our focus is on global investment opportunities. We believe as an investor you should invest your capital into the best possible companies. We make this achievable for our clients by offering a gateway to investment opportunities in global companies and global markets. Our goal is simple, to provide investors with the best service, the best advice and the best trading software, and do so at the lowest cost. Why you should invest in International Shares? Millions of Australian use products made by global companies every day. Take a few moments now to look around your office or living room to see just how many global products you have at your disposal and you soon appreciate how global our lives have become. Australia makes up less than 3% of the total International equity market. We have some great global companies, BHP and RIO in the resource sector, Newcrest Mining is one of the world s largest gold companies and News Corporation is a global giant in the media space but after that we Top 10 Banks in the world by market cap Industrial and Commercial Bank of China 2 China Construction Bank 3 HSBC UK 4 Wells Fargo USA 5 JP Morgan Chase 6 Bank of China 7 Citigroup Inc. USA 8 Agricultural Bank of China 9 Bank of America USA 10 Itaú Unibanco Brazil struggle. None of our Big Four banks make it into the world s top 10 financial institutions and we fail to register any significant global companies in the fastest growing sector in the world today, the technology sector. In our opinion the Australian market is too concentrated across too few sectors and seriously limits your investment opportunities. If you only ever buy shares in Australian-listed companies you miss out on more than 97% of the global share market opportunities out there. Proportion of International Equity Market by Capitalisation Rest of the world, 20.15% North America, 33.34% Australia, 2.70% Europe ex-uk, 16.90% UK, 6.43% Japan, 7.73% China/ Hong Kong, 12.75% Investing in International Shares Page

2 Why do so few Australians invest globally? According the Australian Stock Exchange (ASX) 2010 study only 4% of the population own shares on overseas exchanges, and that figure has fallen from 19% in Why is it then, in such a global society, do so many Australian investors only invest in Australian stocks? Or if they do invest overseas it tends to be a Direct and Indirect Share Ownership tiny percentage of their portfolio and usually via a managed fund. Direct Share Ownership In 2010, 39% (6.59 million) of Australian adults owned shares directly. While the proportion of share owners also having shares listed on an overseas exchange grew from 7% in 2002 to 19% by 2006 and showed signs of stabilising in 2008, it fell quite dramatically in 2010 to only 10% of share owners (or 4% of the population). The vast majority of those owning shares on ASX (90%) don t hold shares on overseas exchanges. ASX Australian Direct Share Ownership Study 2011 One reason might be because Investors think it is too hard or too costly. Let s face it; traditional brokers here in Australia haven t really made it easier for you, offering a poor service whilst charging high fees. Another reason might be a lack of knowledge of how to do it or understanding of how currency movements can affect your returns and how to minimise this risk. Maybe the Global Financial Crisis (GFC) scared investors away from International shares? The general lack of knowledge on International share investing within the Financial Planning and Investment Advisor industry in Australia hasn t helped either. By not investing in international stocks we believe investors are depriving themselves from owning the best companies, the best sectors and ultimately not getting the best possible long term performance from their portfolio. We think it makes perfect sense to always look to invest in the best companies and the fastest growing sectors in the world wherever they are. Through the products and services we provide, Capital 19 clients enjoy the benefits of being able to invest directly in the world s leading companies easily and effortlessly. The US Stock Market The US stock market is the world s biggest making up almost 50% of the total global market. Traditionally the US has always been one of the biggest however it dominance as the world s financial centre grew immensely after the 2 nd World War Today not only US companies list on US exchanges, but companies from all over the world list on US exchanges to gain exposure in the global arena. For most investors the US market offers everything that you want. American depositary receipt (ADR) An ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation Leading Australian ADRs are; ANZ Bank BHP News Corporation Rio Tinto Telstra Westpac Investing in International Shares Page 2

3 World Stock Market Make Up in 1899 Europe ex-uk, 36% North America, 21% Rest of the World, 9% Japan, 4% UK, 30% Performance S&P v XJO The biggest index in the US is the S&P 500 and is the best gauge of the long term performance of US shares. If you had invested in Australian stocks at the 1987 lows and you were still holding today, your return (excluding dividends) would be 267%. The same investment in the US market would be 560% (excluding dividends and exchange rate movements). Let s look at more recent times Investing in International Shares Page 3

4 Major Stock Market Cycles since 1994 Period S&P500 XJO One of biggest bull markets in history 233% 89% Bear market correction -46% -20% Bull market lead by commodity boom 90% 139% Global Financial Crisis (GFC) -52% -50% Bull market recovery from GFC 85% 37% The only time the Australian market has outperformed on the upside was the 2002 to 2007 resources lead bull market rally. At other times the US stock market has outperformed its Australian counterpart. Investing in International Shares Page 4

5 Diversification One of the biggest benefits is the diversification it will bring to your portfolio. The US market will open up a whole new level of diversification for you. We recommend you diversify to reduce the risk within your portfolio. Over the years there have been countless studies supporting the benefits of diversification. By only diversifying with Australian shares we believe your portfolio s risk is significantly higher than a portfolio which is diversified globally. Spreading your investments in the world s most profitable growth companies and fastest growing sectors makes more sense to us. And don t just diversify for the sake of it, diversify in the best there is, why not own Apple, IBM, Exxon Mobil and McDonalds. Diversification The relationship between portfolio performance and the number of stocks held in the portfolio has long been of interest to many financial economists ever since Markowitz (1952 and 1959) proposed his modern portfolio theory. Markowitz describes how portfolio risk can be effectively reduced by infinitely increasing the number of assets held in the portfolio. We have found that the optimal portfolio size in terms of the number of stock holdings is be between 21 and 25 with portfolio returns maximized and volatility minimized Exchange Traded Funds Exchange Traded Funds (ETFs) are one most exciting areas for investors today. They have exploded in popularity in the last few years due to their flexibility, diversification, and ease of trading and the US ETF market is the biggest and most mature in the world. What is an ETF? An ETF is a security that tracks and mirrors the performance of an index, commodity, or sector and trades in shares (like a stock) on an exchange. With the rising fame of ETF s there are now ETF s that track baskets of other ETF s as well as leveraged and inverse ETF s. If you want an investment in precious metals, commodities, indices or specialised sectors like emerging markets then ETFs can offer the best solution. The chart below tracks the recent performance of two popular ETF, the Gold ETF GLD (in gold) and the Nasdaq ETF QQQ (in blue) versus the XJO (in black). Liquidity Investing in International Shares Page 5

6 The quality of an investment can be best judged when it is sold, liquidity measures the degree to which an asset can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. In other words, when you want to sell your shares you want someone on the other side buying them, if there isn t you will either have to drop your price or wait for someone to take your offer. In Dec 2010 the market capitalisation of companies listed in the US was US$13.4 trillion compared with US$1.4 trillion in Australia. We often find when you start to look outside the top 200 stocks in Australia liquidity can become a problem for investors. This makes the Australian small cap sector a higher risk and less attractive which is a negative because the small cap sector is often an area of high growth potential for your portfolio. By investing in the US small cap sector, liquidity is rarely a problem. Options The US options market is the biggest and most liquid in the world. If you are familiar with trading options you will appreciate how important liquidity is to the option market. Option strategies can be tremendously beneficial for investors when used correctly. At Capital 19 we utilise options in many different ways to help manage our client s portfolios. Directional Moves, Invest both long and short Most investors are familiar with how to make money when a market is going up, but very few realise you can make money when a markets falls. Through our trading platform short selling a stock is just as easy, and the same price too, as going long (buying a stock). For all the reason mentioned above, liquidity, diversification, ETFs and options, makes the US market by far the easiest to make money from a falling market. Now successfully trading in a bear market takes skill and involves a higher level of risk than normal investing but trying to mirror this approach in the Australian market is much harder and in our opinion, due to the lack of liquidity, carries more risk. Contra ETFs Did you know on the US market you can buy a contra ETF that goes up when the market falls? A popular one for Investors is ProShares Short S&P500 ETF, ticker SH. This ETF has an inverse relationship to the S&P 500, you would buy this ETF if you thought the S&P might fall or to hedge your portfolio. This sort of ETF is very appealing to SMSF which cannot short sell equities. Buying a contra is just the same as buying any other share. What about the currency effects? Movements in currencies will always impact an international share portfolio. This impact could be positive or negative on your returns. In simple terms, when the value of the Australian dollar falls, this can often be good as the value of international assets, measured in Australian dollars, rises. However, if the value of the Australian dollar rises, your returns would not seem so positive. This is the risk with currency any losses or gains must be converted back into Australian dollars. How currencies will actually affect a portfolio will depend largely on timing and your timeframe for the investment. The chart below compares the AUD$ (in Red) versus the S&P 500 (in Black) since Investing in International Shares Page 6

7 Understanding currency movements can be confusing and this lack of knowledge can scare investors away. At Capital 19 we recognise this and will take the time to explain the possible impacts and suggest simple strategies than can mitigate the impact from currency movements and also show you how you can benefit from these movements. Risks Risk is a relative term; it means different things to different investors. Investing in shares carries risk, these risks can be summarised as, volatility in returns, systematic risk, market risk, company specific risk and market liquidity and are common across all stock markets. International share investing has the added dimensions of exchange rate risk and country specific risk. Understanding and managing risk is the most important component of share investing. In our experience the US Stock market, due to its liquidity, diversification, options market and relative long term performance, can offer less risk than investing in Australian shares only. This is contrary to what a lot of financial advisors may say and we are not suggesting all your funds should be in overseas stocks, there are important after tax benefits like franking credits to be gained from Australian shares, it is our belief though that your biggest long term risk is being underweight global shares. Investing in International Shares Page 7

8 Why Choose Capital 19? At Capital 19 we specialise in direct share in investing on global markets. Whether you are an investor looking to do it yourself or you wish to utilise our expertise share advisory service, we think once you discover all we have to offer you'll know we are the right partner for you. There are many reasons to open an account with Capital 19. Here are just a few reasons why Price At Capital 19 your money will go a lot further, we offer the most competitive pricing available in Australia when it comes to dealing in global shares. You can buy and sell shares across 19 different countries and over 80 global exchanges. You pay just $12 to trade US stocks and $15 for Australian stocks and there are no extra fees for contingent orders. Margin loans from as low as 2.6%. How does that compare to what you are currently paying? Service It seems service has become a thing of the past these days. Companies are all trying to pass you off to a call centre in some other part of the world. But not at Capital 19. Every client is given their own personal advisor who is based in Australia. Your advisor is there to help you with any part of your account from how to open an account to using the platform to place trades. Whatever you need from us, we'll make it easy to get Free Trade Assist Online trading has become very popular but we recognise that many people would prefer to speak with someone rather than place the trade themselves. But you usually have to pay more for that level of service. That's where our free trade assist service comes in. It costs no more to speak with your advisor to place trades than it does to place them yourself using our platform. Using a Capital 19 Regular T Margin account is the most effective way to hedge your currency risk Convenience The Capital 19 universal account is all you will ever need. Giving you access to stocks, options, futures, forex and bonds all within the same account. Hold funds in any one of 11 different currencies and make investments in 19 different countries. Experience The advisory team at Capital 19 possess a wealth of knowledge, experience and expertise investing in global markets. Each advisor has a specific area of expertise covering online Investing in International Shares Page 8

9 trading technology, currency hedging, investment strategies and stock analysis and much more. Superior Trading Technology You can access our trading platform as a standalone desktop application, a website or even via your iphone or ipad. The platform gives you access to a wide variety of advanced trading tools that support more than 50 order types and algorithms to accommodate the needs of every trader from the most sophisticated hedge fund to the first time investor. Features include Order Types - Market, Limit, Stop, Trail and more Real Time Charting with the ability to trade direct from the chart One click trading for fast executions Portfolio Tracking and Performance Analysis Stock and Portfolio Advisory Service We recognise that doing it yourself is not for everyone, at Capital 19 you have the opportunity to have your portfolio run by a professional. A Capital 19 Global Share Portfolio is a managed investment run by Capital 19. Under the guidance of our Head Investment manager Matthew Sharratt, the portfolio invests in the world s leading and fastest growing companies and sectors. The portfolio combines growth and income strategies across a multi sector, diversified investment account for you. ETF Strategy Recommendation In June 2010 we were concerned that the strength of the Aussie $ would have a negative impact on Australian shares and our Head Strategies recommended to our clients to be overweight US$ denominated assets We recommended the following ETFs Gold GLD ETF, now up 19% Agriculture DBA ETF, now up 30% Access to over 1000 global Exchange Traded Funds Technology Nasdaq QQQ, now up 27% (ETFs) ETFs are one of the most exciting developments in S&P Mid Cap Sector- MDY, now up 22% the investment market today. Sadly in Australia (As at June 2011) there are only 1 or 2 quality ETFs, in the US however there are over 900 ETFs offering a rich diversity and liquidity. At Capital 19 our advisors are at the forefront of bringing global ETFs to the Australian market. Ask our advisors for a guide on getting started with ETFs Options Trading Expertise. The US options market offers a wealth of opportunity, however for the inexperienced it can seem an intimidating market to trade; our experience team of advisors are here to assist you navigating the terrain and with our US options pricing at $2 per contract (min $12 per trade) you will have quality service and a low cost price. Passion for what we do At Capital 19 we are very passionate about what we do. We believe in our product and we will bring that to you with the highest quality of service. As stated right at the start, our goal is simple, to provide you with the best service, the best advice and the best trading software, and do so at the lowest cost. There is one other goal we have as a company that we would like to share with you, to be the best in our field. The only people who can judge us on reaching this goal are our clients, our number one commodity. Investing in International Shares Page 9

10 How to get started To start investing with Capital 19 contact one of the advisory team today. When you become a client of Capital 19 you will be assigned an account manager who will personally assist with every aspect of your account. For more details on Private Wealth products and services or Portfolio Management contact Capital 19 Investment Manager on or him directly at m.sharratt@capital19.com For online products and services contact Head Trader Greg Rynehart on or him directly at g.rynehart@capital19.com We look forward to hearing from you Important information This document is intended only for the person whom it is addressed. If you are not an intended recipient, please notify the sender, delete it and do not read, act upon, print, disclose, copy, retain or redistribute it. This information contained is considered general advice only and is given without taking into consideration the investment objectives, financial situation and particular needs of any particular person. Before making an investment or trading decision based on the advice, the recipient should consider carefully the appropriateness of the advice in light of his or her financial circumstances. This brochure has been prepared to the best of the knowledge and belief of the Investment Manager. In preparing this document, the Investment Manager may have used data and opinions sourced from third parties. Investing in International Shares Page 10