Advisers thinking about abandoning international shares

Advisers are increasingly considering abandoning international shares when trying to develop portfolio construction strategies for their clients, according to Assyat David, director of financial planning strategy provider, Strategy Steps.

David said Australian shares have substantially outperformed international shares over both short and long-term periods, prompting advisers to think again about the right mix between the domestic and global share allocation.

According to figures put together by Strategy Steps, Australian shares gave returns of 0.6 per cent over the year to September 2010, compared to -2.7 per cent returns of unhedged international shares.

In terms of long-term outcomes, the figures show unhedged international shares gave average returns of almost -5 per cent, while Australian shares gave 7.2 per cent in returns over a 10 year period.

“Advisers and their clients are looking at [those figures] saying ‘if you can get better returns out of Australian shares and you get the franking credits, as well as taxation benefits, why would you invest in international shares’,” David said.

However, she warned that advisers need to carefully consider the ramifications of such decisions on their clients’ investment portfolios.

“When you look at the Australian market, you realise it’s very concentrated. Something like financials and materials make up around 60 per cent of the index and a handful of stocks make up more than 50 per cent of the index,” David said.

“If you have a client that’s got a majority of their money sitting in Australian shares, while running a small business, you need to recognise the potential impact that the downturn of the Australian economy might have on not just their investment portfolio, but on their total life,” she added.

Because the majority of asset allocation decisions are based on the state of the Australian currency, both advisers and their clients need to consider if further appreciation of the Australian dollar is realistic, David said.