The real value of investing internationally 2011

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1 The real value of investing internationally 2011 Investing in international shares can provide greater diversification and more interesting investment opportunities.

2 Contact us Please contact us for further information or a copy of any brochure or product disclosure statement. Reply Paid 4171 Perpetual Investments GPO Box 4171 Sydney NSW 2001 Australia No stamp required if posted in Australia Phone (for calls in Australia, during business hours, Sydney time) Investor Services Australia Investor Services New Zealand Adviser Services Australia Adviser Services New Zealand Web investments@perpetual.com.au This information has been prepared by Perpetual Investment Management Limited (PIML) ABN , AFSL It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group guarantees the performance of any fund or the return of an investor s capital (Perpetual Group means Perpetual Limited ABN and its subsidiaries). The relevant PDSs, issued by PIML, should be considered before deciding whether to acquire or hold units in the funds.

3 Contents Investing in international shares 3 You can invest in global household brands 3 A world of investment opportunity 4 Investing internationally the other 98% 4 More investment opportunities overseas 4 International sharemarkets offer diversification 7 Diversification across industry sectors 7 Diversification across stocks 8 Diversification across countries 8 Follow the leader rarely pays off 9 Diversification is the key to growth and income 9 Investing internationally can reduce risk 11 International investing can smooth volatility 11 Exchange rates and foreign exchange 12 Exchange rates can affect your returns 13 Hedging can affect your returns 13 About Perpetual 15 Investing for generations 15 More about our investment business 15 Investing with Perpetual to reach your goals 16 About Perpetual s international share funds 16 Learn more 17

4 2 There are many big-name companies available for investment around the world.

5 Investing in international shares You can invest in global household brands You may be familiar with the benefits of investing in Australian shares, but did you know that there are great benefits through investing in international shares too? For a start, many international companies have brand names that are recognisable around the world. Chances are that most of the computer equipment you use, take-away food you eat, and medicines you consume were made by companies overseas or their Australian subsidiaries. For example, Microsoft, McDonald s and Johnson & Johnson are all based overseas. Many of these companies are world leaders and can charge significantly more for their products because of their strong brands. You could share in the future profitability of these and other companies by investing in international shares. As these companies are not listed in Australia, the easiest way to access them is through an international managed share fund. Figure 1 Common global brands around the home Example Well-known global brands available for investment There are many big-name companies available for investment around the world. Figure 2 Well-known brands in Perpetual s International Share Fund Company name Johnson & Johnson Country of origin United States Examples of product lines Johnsons Baby Care, BAND-AID, Listerine Nestlé Switzerland Purina, Kit Kat, Nescafé Total SA France Oil, gas and exploration Wal-Mart Stores United States Various apparel, pharmaceuticals, electronics, grocery Novartis Switzerland Voltaren Emulgel, No Doz, FreshLook Color Contact Lenses Canon Japan Calculators, copiers, printers, scanners, cameras BATHROOM BEDROOM STUDY Microsoft USA Windows and Office software LIVING/DINING Tesco UK Groceries, wine, entertainment and digital Toyota Japan Cars KITCHEN Source: Perpetual. As at 31 December

6 A world of investment opportunity Investing internationally the other 98% There are many opportunities to invest in global household brands outside of the Australian sharemarket. With close to 2,000 companies listed on the Australian Securities Exchange (ASX), the Australian sharemarket might seem large. But when you compare its size by market capitalisation (ie the value of the sharemarket) to other countries, it only represents 2% of the value of the world s total sharemarkets (Figure 3). This is small compared to the US (50%), Japan (12%) and the UK (10%). In fact, the Australian sharemarket is not much larger than some international companies. The combined size of the five biggest US stocks (Exxon Mobil, Apple, Microsoft, Berkshire Hathaway and Google) is almost the same size as the entire Australian sharemarket (Figure 4). More investment opportunities overseas There are over 13,000 listed companies to choose from on major overseas stock exchanges outside of Australia (Figure 5). So by investing only in Australian listed companies, you may be missing out on great investment opportunities that the other 98% of the world s sharemarkets have to offer. Also, some of the world s fastest growing industries, such as healthcare and biotechnology, are not well represented on the Australian sharemarket. With the world s ageing population, and biotechnology extending beyond just the field of medicine, many market analysts believe these sectors will continue to grow over the long term. So if you want to tap into some of this growth, you may need to look overseas by investing in an international managed share fund. Key point Market capitalisation Market capitalisation is used to measure the value of a sharemarket. This is calculated by multiplying the number of stocks listed on the market exchange by the price per share. Figure 3 Australia represents 2% of the world s total sharemarkets Market capitalisation of Australia compared to the rest of the world Australia 2% Rest of the world 98% Source: Morgan Stanley Capital International. As at 31 December

7 Figure 4 The Australian sharemarket versus the five largest US stocks Sharemarket capitalisation $1,266 billion $1,338 billion Google Berkshire Hathaway Microsoft Corp Apple Exxon Mobil Top 5 US stocks All Australian listed companies Source: UBS and ASX. As at 31 December Figure 5 Major stock exchanges around the world Exchange No. of companies Country Sector London Stock Exchange 2,966 UK Broad market Nasdaq 2,778 USA Technology New York Stock Exchange 2,317 USA Broad market Tokyo Stock Exchange 2,292 Japan Broad market Australian Securities Exchange 1,999 Australia Broad market National Stock Exchange India 1,552 India Broad market Hong Kong Exchanges 1,413 Hong Kong Broad market Source: World Federation of Exchanges. As at 31 December

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9 International sharemarkets offer diversification With so many investment opportunities overseas, international shares can offer diversification benefits in several ways. Diversification across industry sectors The largest sector in international markets is financials, which represents 19.2% of international sharemarkets (as measured by the MSCI World ex Australia Index). In contrast, Australia s largest sector, also financials, represents 36.5% of the Australian sharemarket (as measured by S&P/ASX 300 Accumulation Index). In fact, the top three sectors in the market (financials, materials and consumer staples) make up over 70% of the total Australian market. Key point Diversification It s a good investment strategy to spread your investments around, or diversify, not only between asset classes but also across countries. This can reduce risk and enhance returns because it s unlikely that all investments will perform the same way at the same time. See our guide to Why diversification is important booklet for more on the benefits of diversification. As Figure 6 shows, international markets provide greater diversity. Figure 6 Sector breakdown of Australian and international market sectors International sharemarkets (MSCI World ex Australia) Australian sharemarket (S&P/ASX 300) 7.4% 4.1% 4.3% 19.2% 1.3% 3.1% Financials Information technology Industrials 9.5% 12.2% 28.9% 36.5% Energy Consumer discretionary Consumer staples 9.8% Healthcare 10.8% 11.1% 11.6% 3.4% 8.1% 7.6% 6.4% 0.7% 3.9% Materials Telecommunication services Utilities Source: UBS and IRESS. As at 31 December

10 By diversifying your investment portfolio across sectors, you can reduce the risk that the underperformance of any one sector will skew the performance of your portfolio. Example Weighting can skew performance In 2005, 2006 and 2007, the Australian sharemarket was heavily weighted towards the resource sector. Over this period resources, measured by the S&P/ASX 300 Resources Accumulation Index, delivered strong returns of 39.0% pa. As a result the Australian sharemarket also experienced strong gains (of 21.1% pa). In this example, being overweight to one sector positively affected performance but it can also work the other way. Diversification across countries Strong economic growth is not always a sign of how a country s sharemarket is performing. For instance, Figure 8 shows economic growth (GDP) and the sharemarket returns of nine countries over 20 years. You can see that: Japan had positive economic growth, yet a negative sharemarket return. Mexico s economic performance was mediocre, yet it had the highest sharemarket return. Korea had the highest economic growth over the period, but only mid-range sharemarket returns. This is why diversification across countries is important a well-diversified portfolio will not be over-exposed to any one economy or sharemarket return. Diversification across stocks The top 10 international stocks represent 8.1% of the international market as at 31 December In fact, the top 50 stocks represent 25.7%. This means that your investment is unlikely to be dominated by a few key stocks (Figure 7). In contrast, Australia s top 10 companies represent more than 50% of the market, and the top 50 companies represent more than 80% (Figure 7). This concentration means that if one particular company underperforms, it can have a significant effect on the market s return. Figure 7 International sharemarkets are highly diversified across stocks The top ten companies represent more than 50% of the Australian market Key point Sectors Companies around the world are categorised by sector according to the type of business operation they perform. This is called the Global Industry Classification Standard (GICS). The sector categories are: Consumer discretionary (eg Nike) Consumer staples (eg Nestlé) Energy (eg Total) Industrials (eg Siemens) Information technology (eg Microsoft) Materials (eg Xstrata) Percentage of international sharemarket (MSCI World ex Aus) Percentage of Australian sharemarket (S&P/ASX 300) Top 10 stocks 8.1% 50.3% Top 50 stocks 25.7% 80.1% Source: IRESS and UBS. As at 31 December Financials including property trusts (eg HSBC) Healthcare (eg Johnson & Johnson) Telecommunications (eg Vodafone) Utilities (eg Hong Kong Electric) 8

11 Figure 8 Strong economic growth not always linked to strong sharemarket returns Economic growth and sharemarket returns from December 1989 December % 20% 15% GDP growth pa Sharemarket returns pa 2 10% 5% 1 3 0% -5% -10% Japan France UK Canada USA Mexico Spain Australia Korea Source: IMF and Factset as at 31 December Data for 2010 IMF estimate only. Follow the leader rarely pays off International shares experience periods of outperformance and periods of underperformance relative to Australian shares (Figure 9). Importantly, international shares can potentially capture higher returns than those available in not only the Australian sharemarket, but also the local bond, property and cash markets. Figure 9 Australian market is not always the top performer Performance of world sharemarkets (in Australian dollar terms, unhedged) UK Hong Kong Germany USA Japan Australia MSCI World (ex Aus) % 29.4% 10.8% 15.2% -21.8% 14.5% 6.7% % 0.3% 53.2% 62.6% -12.3% 12.2% 42.2% % 3.4% 35.9% 36.6% 14.4% 11.6% 32.8% % 62.9% 11.2% 13.5% 65.0% 16.1% 17.6% % 6.7% 2.0% 7.0% -20.8% 4.8% 2.5% % -15.8% -17.4% -4.4% -23.3% 10.5% -9.6% % -23.3% -39.9% -29.2% -17.2% -8.6% -27.1% % 6.0% 23.1% -3.8% 3.6% 15.0% -0.3% % 12.5% 11.2% 6.6% 11.9% 27.9% 10.4% % 16.1% 17.9% 12.1% 34.7% 22.5% 17.4% % 28.9% 26.9% 7.8% -5.0% 24.5% 12.0% % 28.4% 21.7% -5.3% -14.9% 16.2% -2.1% % -32.1% -28.6% -20.7% -7.8% -38.9% -24.5% % 21.4% -0.9% -2.0% -18.8% 37.6% 0.3% % -5.0% -4.8% 1.0% 1.6% 1.9% -1.5% Diversification is the key to growth and income Australian companies tend to pay out a high proportion of profit as income and our dividend imputation system allows you to receive a tax credit if the company has already paid full company tax. By diversifying your portfolio across Australian and international investments, your Australian shares can provide regular income as well as capital growth, while your international shares can provide long-term capital growth particularly to industries not well represented in the Australian market. Source: Datastream. Shares indices used in this table are all accumulation indices and are the FTSE100 Index (UK), Hang Seng (Hong Kong), DAX30 Index (Germany), S&P500 Index (US), TOPIX Index (Japan) and the S&P/ASX 300 Accumulation Index (Australia). Past performance is not indicative of future performance. 9

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13 Investing internationally can reduce risk International investing can smooth volatility If you combine Australian shares with international shares in your investment portfolio, you can lower your investment risk and potentially smooth out volatility (see example). By investing in an international managed share fund, your money is spread across a far greater mix of countries, currencies, industries and companies than it would be if you invested entirely in the Australian sharemarket. This means you have greater protection from wide swings in any one market or industry sector. Key point Risk and return Different investments carry different levels of risk and return. Typically, higher risk investments (like shares and property) return more than low risk investments (like some fixed income securities and cash), to compensate for the risk of owning them. Example Risk is reduced when you combine international and Australian shares Tony s investment portfolio is made up entirely of Australian shares. Laurel s investment portfolio is made up of 50% Australian shares and 50% international shares. While their returns are similar over a 25 year period, Laurel s portfolio has been significantly less volatile because it is diversified across Australian and international shares. Figure 10 Combining international and Australian shares Tony s portfolio Laurel s portfolio Australian shares 100% International shares 50% Australian shares 50% Tony 100% Australian shares Laurel 50/50 Australian shares and international shares Return % pa 10.9 Return % pa 9.4 Volatility % pa 16.7 Volatility % pa 13.2 Worst one year return % Worst one year return % Worst cumulative three year return % Worst cumulative five year return % Worst cumulative three year return % Worst cumulative five year return % Source: Datastream and Perpetual. Annualised average risk versus returns Dec 1985 Dec

14 Exchange rates and foreign exchange An exchange rate shows how much one country s currency is worth in terms of another. Figure 11 shows how the Australian dollar has moved relative to the US dollar over the last 15 years, to 31 December The average of the Australian dollar to the US dollar over the period was Example Foreign exchange Sam is about to take a European holiday and has $10,000 Australian dollars ($A) to take with him. Before he leaves he considers how much foreign currency he will receive for his Australian dollars. If, for example, the exchange rate is one Australian dollar to 0.55 euros, Sam will have 5,500 spending money for his trip. Figure 11 Australian dollar versus the US dollar 1.05 $A/$US Average December Source: Datastream. As at 31 December

15 Exchange rates can affect your returns When you buy international shares, you buy them in the currency of their home country. And if you invest in an international managed share fund you are effectively holding overseas assets. The value of these assets (in Australian dollar terms) is affected by changes in the overseas currency relative to the Australian dollar. For example, a rise in a country s currency relative to the Australian dollar translates into a rise in the value of your investment (Figure 12). A decline in that country s currency relative to the Australian dollar translates into a decline in the value of your investment. Figure 12 The effect of currency on your investment Assuming no change in share prices Foreign currency Foreign currency $A $A Your international share fund investment value Your international share fund investment value Hedging can affect your returns It is possible to exclude the impact of currency by hedging, ie a fund manager can hedge away their currency risk as part of their investment strategy. However, hedging can either benefit or detract from returns. Over the long term the impact of currency tends to smooth out, but over the short term fully hedged returns still vary compared to unhedged returns. The decision to invest in hedged or unhedged funds will depend on your individual circumstances. Your financial adviser can advise you on what s appropriate for you. Example The effect of hedging Lynne is invested in an international managed share fund which does not hedge. Figure 13 shows how hedging can either benefit or detract from returns. Column A shows the annual returns of Lynne s unhedged portfolio, and column B shows the annual returns of a hedged portfolio. In 1997 and 1998, the Australian dollar fell relative to the US dollar (see Figure 11), positively impacting Lynne s unhedged investment returns. However, in 2009 and 2010 the rise in the Australian dollar (see Figure 11) negatively impacted Lynne s unhedged portfolio. If Lynne s fund manager had the ability to hedge, her investment may have been protected. Figure 13 Hedging can either help or detract from returns Investment returns of hedged and unhedged portfolios, December 1995 December 2010 Year to 31 December Lynne s unhedged portfolio 1 A A hedged portfolio 2 B Source: Datastream. 1 Unhedged returns shown are the MSCI World (ex Australia) $US Price Index (in $A). 2 Hedged returns shown are the MSCI World (ex Australia) Hedged $A Price Index. 13

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17 About Perpetual Investing for generations Perpetual is one of Australia s most experienced investment and trustee groups, with an enduring passion for protecting and growing our clients wealth. Founded in Sydney in 1886 as Perpetual Trustees, we have managed and invested our clients money with integrity and expertise for 125 years. Today we are one of the Top 100 companies listed on the Australian Securities Exchange, manage investment funds exceeding $27 billion, administer client funds of over $209 billion and advise clients on over $8 billion of investments (as at 31 December 2010). More about our investment business Investment products. We offer a broad range of investment, superannuation and retirement income products. Our choice of investment funds includes all major asset classes, managed by Perpetual or other leading fund managers, as well as diversified and multi-manager funds. Investment management. Our investment teams manage investments across all major asset classes including shares, fixed interest and property. We make active investment decisions based on our intensive analysis of an investment s intrinsic quality, value and risk. We provide quality investment products, financial advice and corporate services to individuals, families, financial advisers and corporates. 15

18 Investing with Perpetual to reach your goals About Perpetual s international share funds If you re looking for a global investment that can offer long-term capital growth and income, our international share funds may suit you. Our international shares investment philosophy is to invest in quality global companies at attractive prices. We focus our attention on those companies that exhibit characteristics including: a track record of earnings and cashflow strong interest cover a strong balance sheet and sound capital structure a conservative level of debt a history of dividends a sound management team with a strong shareholder focus. We believe that our disciplined approach of focusing on quality companies at attractive prices gives our investors the best chance of achieving consistent returns and dividends over the long term, and peace of mind that these companies will survive even in the most difficult of times. Our broadly-diversified international share fund is: Perpetual International Share Fund. A diversified portfolio of quality international shares with the potential for long-term capital growth. Investment decisions are based on fundamental quality and value characteristics rather than benchmark weightings. The Fund is managed by our international equities team. We also offer a specialist international share fund: Perpetual Global Resources Fund. Offers investors access to international resource shares, diversified by geographic region and commodity sector. The Fund is managed by our specialist resources team. For current returns, visit To learn more about Perpetual s international share funds, please contact your financial adviser or phone Perpetual Investor Services on

19 Learn more We have a range of educational tools to help you understand various investment concepts and to give you an overview of our products. The real value of investing in shares Guide to investing flyers Fund profiles Sharemarket charts Glossary of investment terms You can find them and additional educational material at 17

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