Weighty issue: getting the sector balance right

Any adviser who does not recommend some international exposure in a client’s portfolio should not be advising.”

That strong view is from AXA national research manager Rob Thomas, who points out international equities account for 98 per cent of the global opportunities in the sector.

“Just recommending a client sticks to Australian equities is bad advice, as people should always be looking at diversification,” he said.

“But advisers should be looking at the currency issues with international funds due to the strong dollar.”

Thomas suggests a 50/50 approach with half the fund hedged.

He also suggests advisers look at some emerging markets exposure in portfolios to take advantage of growing economies.

“We are not saying an adviser should drastically change a client’s asset allocation, but they should make sure there is some international exposure,” Thomas said.

“But a review of currency exposure and a 20 per cent tilt towards regional or emerging markets should be considered.”

However, while the bad news filters through on international funds, not all dealer groups have undertaken a review of the sector.

St Andrews head of product and technical John Mallon said the group has not received any revised ratings for the sector.

“We use the Aviva platform and research and there has not been any re-weighting of portfolios at this stage,” he said.

“We do have our own product for strategic asset allocations and, again, there have been no real alterations to portfolios.”

However, Mallon said some advisers have looked at international shares in line with a review of clients with growth assets in their portfolios.

“It has been a review of all growth assets, listed property trusts, Australian and international equities rather than looking at one particular asset class,” he said.

“Some of the more experienced clients who have seen these market conditions before have made some changes to portfolios.”

Mallon said it was about looking at risk and adjusting portfolios to match the client’s profile, but said there has not been a widespread review across the dealer group.

“It is a watching brief at the moment on international shares,” he said.

Centric Wealth chief investment strategist Robert Keavney confirmed the dealer group was not reviewing international equity funds at this stage.

“Apart from any specifics in an individual’s circumstances, we are not undertaking a general scaling back,” he said.

“It makes little sense to invest more when prices are high and reduce exposure after they have fallen.”

Keavney said the structure of a client’s portfolio would also affect whether there was any move to alter the asset allocation.

“Some portfolios would have a long-term asset allocation approach and these would continue with stable holdings,” he said.

“Where portfolios are changed to reflect market conditions, holdings would be increasing to reflect better value available.”

Macquarie Private Wealth associate director Doug Webber said longer exposure to international equities also affects a client’s willingness to stay in the asset class.

“The clients that have been in the sector for some time have felt some pressure with the falling returns, but their assumption is there will be a rebound at some point,” he said.

“If the client has made a long-term decision about international equities, then why unwind the position?”

Webber said clients need to take a view on the Australian dollar and if it dropped, a decision would have to be made about hedging the fund, but at this stage there is no need to move out of this position of hedging the currency.

“Most of our clients have been through downturns, so they see international equities as a core investment,” he added.

“With certain clients, there has been an increase in the appetite for risk and rebalancing of portfolios upwards in certain circumstances.”

Webber said clients were still interested in the China story as they believe growth will continue despite other markets falling.

“Asia is not the place for the faint-hearted, but the story is compelling,” he said.

“The most difficult part is identifying the fund managers with the right skills to manage this area.”

He said as long as the client understands the risks, the corporatisation of China can still deliver more growth, which is attractive for some investors.

Another argument for keeping international equities in a portfolio is the strength of the Australian dollar.

Lionel Werbeloff, a Melbourne adviser from Financial Services Partners, believes it is a hard argument to ignore.

“I see the strength of our currency as a good [reason] to invest offshore,” he said.

“But the big global picture doesn’t offer all the opportunity.

“The Asian funds are much more appropriate.

“However, we still need diversification, but we are reticent on Russia and Brazil because we don’t know enough about their markets.”

Werbeloff, who sits on Financial Services Partners’ investment committee, said the real action globally is in India and China and that is why they favour clients putting some of their portfolios in these markets.