Helping clients protect assets and build wealth

‘Time to Expand our Horizons’ Jonathan Bayes, Chief Investment Officer

Disclaimer

The  informa,on  contained  in  this  presenta,on  is  for  informa,onal  purposes  only  and  is  not  intended  to  be  exhaus,ve  or  complete.  This  informa,on  does  NOT  cons,tute  financial  advice  and  should  NOT  serve  as  the  basis  for  any  decision  by  you.  The  informa,on  does  not  take  into  account  the  objec,ves  and  circumstances  of  the  individual  investor  and  we  recommend  that  you  consult  a  financial  adviser  should  you  have  ques,ons  regarding  the  informa,on  contained  in  this  presenta,on.  

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Introduction – Key Points

Introduction – Key Points

§  Acknowledge this is as much a discussion about diversity as it is about international investment opportunities … means to an end.

§  Geographic diversity is no different to asset-class diversity – aim being to optimize returns, minimize risks and balance correlation.

§  Establish the merit for foreign investment – both opportunity for return and mitigation of domestic risks.

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Diversity – Why Do We Diversify?

Diversity – Why Do We Diversify?

§  To create a portfolio that delivers an appropriate risk/return profile across a broad base of economic & investment market outcomes.

§  Different asset classes and different geographies have different profiles by risk, return, volatility & etc.

§  Similarly, different regions have different attributes and shortcomings in terms of growth, liquidity corporate governance, regulation and respect for shareholder and property rights

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Australia – An Anchor

Australia – An Anchor §  ‘Home bias’ carries sway – matching future liabilities & simple investor ‘comfort’.

§  Australian investor ‘home bias’ is & has been even more powerful due to the superannuation system and tax-treatment of investment funds & franking credit rebates

BUT §  Australia’s economy & share-market is concentrated & narrow.

§  Commonwealth Bank is 9.2% of the ASX200, ‘Big-4 Banks’ are 28% §  Indirectly Australia’s share-market is hence very closely correlated to residential housing

§  Australia is a small, under-inhabited island nation. It is hard to build scale here.

AND §  Australia is the 4th largest global pool of superannuation funds, but only the 2.3% of World

GDP and 1.6% of World stock-market value. §  Superannuation is a genuine Australian ‘natural resource’ . §  “We don’t sell all the iron ore we make here, and nor should we invest all the

savings we have here”.

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International Assets

International Assets Why International? §  Access to global themes and global best practice. §  Narrow concentration of Australian share-market and economy creates a bottle-neck for

growth and adds unnecessary portfolio risk. §  Equity is the GROWTH asset. As the lowest end of the capital structure, the attraction in

holding equity invariably is the GROWTH aspect. This compensates us for the risk born in owning equity.

§  Slowing Australian growth & falling cash rates mean investors should cast a wider ne.t

Why Now? §  Globalisation is unending, markets and economies and societies are becoming ever more

interconnected so themes are becoming truly global in nature. §  To gain access to these themes and the growth associated, invariably requires a willingness

to invest offshore. §  So much of investing is a reflection of one’s psyche – that investors now know the global

brands, themes and social movements, they are increasingly comfortable in investing along these lines.

The World Is Your Oyster – Global Themes

Investing overseas provides access to global themes and

global best-practice.

§  Big-data – Amazon ($230bn), Google ($420bn)

§  Smartphones – Apple ($620bn), Samsung ($140bn)

§  Social-Media – Facebook ($250bn) §  Biotechnology – Gilead Sciences

($150bn), Amgen $117bn) §  New energy – Tesla ($32bn) §  Internet of Things – TSMC

($104bn) §  China – Tencent ($160bn), Nestle

($230bn)

The World Is Your Oyster – Australia in a Global Context

§  US share-market value of US$23tln compares to Australia at US$1tln.

§  Apple is the worlds most valuable

company at US$640bn. §  Apple’s corporate value is 90% of the

Australian share-market value. §  Apple is only 1% of the total value of

the US share-market – a 1% weight in the ASX200 would equate to Brambles (BXB), with A$15bn value & 21st ranking in the ASX200.

§  Korea’s stock-market value is 10%

larger than Australia

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International Assets – Why Prime?

International – Why PRIME?

§  Evolutionary move – needs & wants aligned. §  Client base increasingly ‘aware’ of the shortfalls of

domestic equity market and of the opportunity set available offshore.

§  PRIME’s ability to cater to this need is now fully aligned & operational in terms of internal skill-set and functional abilities

§  Significant personnel change adds a skill-set and know-how in international assets

§  Platform technology that will allow PRIME clients to gain reporting capabilities on international assets

International – Where to Invest & Why?

§  Three major regions – North America, Europe & Asia – the first two are predominantly seen as Developed Markets, the latter a combination of developing and emerging markets.

§  Developed markets – greater size of assets because of corporate governance, history of earnings, regulatory oversight, and by virtue of these things, liquidity.

§  Emerging markets – less liquid, often faster growing, but lower GDP/capita, developing infrastructure and regulation. Shorter proven track record of results.

International – How Do We Do It? §  Two questions – where do we invest, and in what structure? §  How do we split our international allocation by region? –

considerations here include risk profile, income needs, currency exposure and outlook, valuation and potential for growth

§  Is the investment vehicle a passive or active one? §  PRIME advocate for active funds management groups with

similar investment philosophy, demonstrable track-record & a willingness to hold a view OR blue-chip, low-cost, highly liquid Exchange Traded vehicles (ETF).

International – How Much to Invest? §  The good news – there is no right or wrong number! It is

highly subjective. §  But…that doesn’t diminish the importance nor relevance

of this presentation! §  All investors are individual, so one size does not fit all –

risk appetite, return aspirations & etc all play a role. IT IS VITAL TO GET THIS CORRECT.

§  Empirical evidence suggests a figure of 10-40% in

international growth assets. PRIME ‘Balanced’ portfolio’s suggest 17.5% of assets (range 10-27.5%).

The Future Fund – A Real World Example

§  Not comparing apples with apples… but… §  Future Fund is far heavier on alternative asset classes such as

hedge funds, infrastructure & private equity at the expense of Australian equity notably.

Jonathan Bayes, Chief Investment Officer Email: jonathanb@primefinancial.com.au

Prime Financial Group Ltd ACN: 009 487 674 Head Office Level 17, Como Office Tower 644 Chapel Street PO Box 6105 South Yarra VIC 3141 Tel 03 9827 6999 Fax 03 9827 9100 Client Services 1800 064 959 clientservices@primefinancial.com.au www.primefinancial.com.au LinkedIn: Prime Financial Group Ltd