Many commentators are urging investors to lift their portfolio allocation to international equities. An easing Australian dollar, diversification benefits, and the ability to access opportunities not available in this market are strong arguments.
The counter-arguments have had less airplay: that international equities, and nearly all asset classes for that matter, are overvalued; and that the Australian dollar may have had the bulk of its fall already, meaning slower gains for investors who buy offshore in unhedged terms.
I prefer international equities over domestic ones at current valuations. With resource stocks under pressure and big banks at nose-bleeding valuations, it is hard to see Australian equities outperform other stgeloped markets over three years.
This column has outlined a bullish view on US equities for The Bull over the past two years and earlier this year downgraded that view, instead becoming more bullish on European equities. Favoured investment products were the iShares Core S&P 500 ETF and the iShares Europe ETF.
I’m leaning more towards active funds over index funds now for international equities exposure. Exchange-traded funds have their place, but as the risk of a global financial shock rises, investors should use active fund managers who can preserve capital in a severe correction.
Most investors choose unlisted managed funds for international equities exposure, either through investment platforms or more recently ASX’s new mFund service. Another avenue for offshore exposure, Listed Investment Companies, gets less consideration.
That is no surprise. Only 17 international shares LICs traded on ASX at February 2015. About half traded at a discount to pre-tax Net Tangible Assets (NTA), ASX data shows, and there have been several perennial underperformers in international shares in the LIC space.
The good news is that the LIC structure provides occasional opportunities to buy high-quality LICs when trading below NTA. That means buying the underlying assets for less than they are worth. LICs can trade at discounts for long periods, frustrating shareholders, if the market has concerns about the manager, dividend history, or the liquidity and value of the underlying portfolio.
Two LICs that stand out at current prices are PM Capital Asian Opportunities Fund and the PM Capital Global Opportunities Fund. PM Asian listed on ASX via an Initial Public Offering, raising $55 million through the issue of $1 shares. The PM Global Opportunities LIC raised $160 million and listed in late 2013 in a strong market for LIC IPOs.
Both LICs are managed by PM Capital, one the market’s better-regarded international equities managers over the past 16 years. It has about $1.9 billion in assets under management and is known for a long-term thematic approach based on bottom-up stock picking.
PM Global traded at a discount to pre-tax NTA of 8.1 per cent in February 2015, ASX data shows. PM Asia traded at a 10 per cent discount. The first LIC traded at a slight premium a year ago and the second at a small discount for much of 2014.
Chart 1: PM Capital Global Opportunities Fund
Chart 2: PM Capital Asian Opportunities LIC
It is hard to understand why those discounts have widened so far. PM Global had solid growth in NTA in February thanks to its position in European banks. Five of the LIC’s top holdings in February were in European financial-services companies, principally because PM Capital believes some offshore banks are much better value than their similar-quality Australian peers.
The PM Asian Capital Opportunities Fund had strong underlying performance in its portfolio in February. Six of its top 10 stock holdings are Chinese companies and there is a good spread of internet, gaming, healthcare, infrastructure and consumer stocks. The fund’s invested position rose to 82 per cent from 72 per cent a month earlier.
This column, bullish on the potential growth of Asian middle-class consumers, has identified several stocks well placed to benefit from this powerful trend. PM Asian’s underlying portfolio, with its internet and gaming stocks, must see similar opportunities.
As with any LIC, investors need to assess the manager’s long-term record, the underlying assets it invests in, and aim to buy when the listed fund trades at a discount to NTA. Both LICs ticks these boxes at current prices, making than a consideration for investors seeking greater international equities exposure in their portfolios.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at April 2, 2015