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Diversification an element to add advice value

Andrew Alcock argues portfolio diversification enhancement through increased allocation to global equities can assist advisers to add real value for SMSF clients.

Until just a few years ago, it was still challenging for financial advisers to add international opportunities and diversification to their clients’ SMSF portfolios. It’s not that they didn’t have any choices; the problem was directly accessing international assets was difficult for a number of reasons.

Some of the challenges experienced in the past included difficulty in setting up accounts in different markets, which is something that can still take weeks if done outside of a platform, high trading and currency conversion costs, tax complexity and lack of reporting. And until not so long ago, there were also limited options for international equity ownership available through the existing platforms used by SMSF advisers.

Today, in contrast, several wealth management platforms offer advisers an extensive range of international investment products, including exchange-traded funds (ETF), direct shares and managed portfolios. These platforms can also manage tax on behalf of SMSF clients so holding international shares is not much more complex than holding any other investment in the local market.

The availability of managed portfolios through platforms such as Hub24 has been another leap forward. Managed portfolios provide professional investment management with the added benefits of consolidated reporting, transparency and direct share ownership, facilitating the delivery of dividends in a timely manner to the individual asset owners: your SMSF clients.

These factors combined with a comprehensive platform offer can provide broader opportunities for SMSFs and their advisers and have supported the growing trend towards international diversification.

A growing interest in international exposures

In a white paper Hub24 published in June 2016, we highlighted a big difference in the allocation to international assets between SMSFs and the large retail super funds. However, we noted with the availability of international managed portfolios SMSF allocations would likely increase going forward.

According to our white paper, ATO data at December 2015 showed SMSF allocation to overseas assets was less than 1 per cent, however, it also noted this did not take into account exposure within ETFs, listed investment companies and managed funds, which we estimated would take the asset allocation proportion to about 4 per cent. These statistics represent ownership by all SMSFs regardless of whether they have an adviser. However, we noted SMSF allocation to international assets on Hub24 was around 20 per cent for advised clients.

"Managed portfolios provide professional investment management with the added benefits of consolidated reporting, transparency and direct share ownership, facilitating the delivery of dividends in a timely manner to the individual asset owners: your SMSF clients."

Andrew Alcock

Since then there has been increasing interest in gaining international exposure from advisers and their clients, and though allocations have not moved considerably, the trend is towards increasing international exposure. ATO data from December 2017 shows the SMSF allocation to international assets has increased to 1.3 per cent. An additional report from SuperConcepts notes a 1.1 per cent increase in allocation to global equities.

The trend is even more apparent at Hub24, with the allocation to international assets growing to 28 per cent for SMSF clients. While this may be for a number of reasons, including dynamic asset allocation strategies and market movement, it is consistent with our hypothesis that advised SMSF clients are more likely to have a higher allocation to international assets, which raises the question: why do non-advised SMSFs trustees have such a low allocation to overseas stocks and does this indicate a greater need for advice?

The continued case for diversification

SMSF advisers know trustees have traditionally had a strong local bias. Besides the past difficulties in accessing offshore securities, there has also been a preference for local shares because of the associated franking credits.

However, there is still a strong argument for increasing diversification seeing as, according to the International Monetary Fund, our country still represents less than 1 per cent of the entire global gross domestic product output.

The Australian share market is also overexposed to banks and miners and underexposed to the global technology and health sectors, which represent some of the world’s largest companies – think Apple, Amazon, Alphabet, Tesla and more.

As an example of the potential differences in returns across geographies, let’s look at market performance in 2017. Last year was a solid year for the Australian market with the S&P/ ASX 200 Index finishing the year with a 7.1 per cent gain. However, the rise in the local market was dwarfed by that of the United States, which experienced a ride into record territory. By year end, the Dow Jones industrial average was up 25 per cent, the S&P 500 up 19 per cent and the tech-heavy Nasdaq index outshone them all with a stunning 28 per cent gain.

A Class report from March 2017 showed that for SMSFs with allocations to direct international shares, tech stocks made up 57 per cent of their top 20 international stock holdings – again pointing to a lack of diversification. Is this because these companies are global well-known brands? And are these clients then missing out on diversification?

International managed portfolios a good option for overseas exposure

Managed portfolios are a revolution in financial services and we believe further technological developments will further transform managed portfolio functionality allowing mass customisation and delivering even more value to clients.

From a fee perspective, managed portfolios can also be cheaper than their managed fund equivalents. For instance, management fees for global managed portfolios on the Hub24 platform range from 0.66 per cent to 1.21 per cent, which compares to leading unlisted managed funds which are priced around 1.5 per cent.

A final feature that completes the case for SMSF advisers to use managed portfolios is the comparatively low fees they offer and the cost savings for clients. Additionally, with the right platform, trades can be netted within the account, which can reduce transaction fees, and enhanced tax optimisation enables advisers to model and execute the most appropriate buy/sell to manage a client’s capital gains tax (CGT) implications.

Thanks to the way these instruments are structured, advisers can, for example, change from one managed portfolio to another without having to liquidate the entire holdings in the strategy. Instead they can retain part of the holdings that are also included in the new managed portfolio so that clients may not have to incur CGT for a change of provider or a slight strategy adjustment. Over time, this functionality can enhance outcomes for clients by reducing transaction fees and minimising CGT.

Accessing a range of investment expertise

Managed portfolios have provided a path for quality overseas investment managers to enter Australia. These managers have long track records and have chosen to release their strategies only as managed portfolios, rather than going to the expense of setting up local unlisted managed funds. They don’t see the need to set up the compliance and infrastructure requirements to run a managed fund, preferring to leverage the platform managed portfolio capability to deliver their intellectual property in the most efficient manner.

Many of the available strategies offered by investment managers in Australia cannot be accessed by retail investors in any other way than through a managed portfolio. On the Hub24 platform, for example, we have several international equity fund managers that fit this description, including portfolios from Alliance Bernstein, Geneva Capital, GuardCap and South Eastern.

Platforms use their scale and technology efficiencies to hide the underlying complexity of trading and holding stocks in many global markets and deliver low-cost trading outcomes.

More opportunities for advisers to attract new clients

Financial advisers today are facing more pressure to deliver value and to act in their clients’ best interests. The good news is comprehensive platforms, coupled with managed portfolios, offer solutions to provide great-quality advice, reducing barriers to entry in international markets and diminishing the administrative burden for advisers. For advisers with experience in diversification, and the ability to access a broad range of international assets, there is a clear opportunity to provide real value in the unadvised SMSF segment.

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