International Asset allocation: Australian vs International

From news feed

Why you shouldn’t ignore the dividend opportunities of global stocks

On June 16 this year, the quest for income became even more desperate. The Australian 10-year Government bond yield slumped below 2 per cent for the first time ever.

The record lows highlight just how difficult it is for an investor to find good income generating assets.

So it’s no surprise, and understandable, that most investors favour Australian equities given the benefits of fully franked dividends. Particularly, Australian retirees living off pension phase superannuation. Indeed, according to ATO SMSF Statistics June 2015 nearly one third of all self-managed super fund (SMSF) assets were in listed Australian shares.

 

Agree with investing overseas for numerous reasons. However Plato are doing their best in this article to promote their International funds. So read with this is mind.

Biggest problem with unhedged overseas dividends is that currency makes cashflow hard to plan for in retirement and hedging completely stuffs up dividend reliability (ie no distributions in some years).

I still look to International diversification for "insurance" more so than dividends but certainly don't completely ignore the prospect of greater dividend growth overseas at times.

And I certainly won't be investing in Plato's funds for International exposure. I'll take the Index approach rather than their funds anyway. The stats aren't on their side.

 

I am also a fan of International diversification, typically around 33% of my portfolio. I like this unhedged, and because of the correlation between the AUD and stock markets, when markets tank the blow is softened somewhat by a falling AUD, not sure if this point has been mentioned yet. I am sure that at some point this correlation will break down, but it is a nice thing to have, I call it my feel good factor....
Portfolio benefits from a falling dollar - Morningstar.com.au

 

Yep, I agree as posted here the other day:
Asset allocation: Australian vs International

International diversification is more than a feel good factor for me, it's contributes to my sleep at night factor!

 

Feel good factor, sleep at night factor, i like them all!!

 

Can you clarify this. I am in the midst of setting up an (international shares DGI) retirement portfolio for myself, as I plan on retiring overseas. Is the constantly fluctuating multi-currentcy income stream fairly self-explanatory, can you shed any more light on your experiences?

 

Has anyone @Redwing @austing ever seen any studies on this? Where is an economist when you need one?

 

Like the Big Mac Index

Purchasing Power Parity (PPP) is used to adjust the data to exchange rate differences and ensure a like-for-like comparison when purchasing the equivalent quantity of goods or services across countries

Australia the most expensive country in the G20

 

He he. Not only does the head hurt but home brew consumption increases as well.

I saw this comment ages ago on SuperGuide site and have often thought about looking into it further. I think it ties in with what @Il Falco is researching as the writer was arguing that because of the following in part it's best to hold unhedged international equities:

A bit off topic but here's the complete comments which I thought were a good brief summary of the advantages of unhedged equities:

Ok now to investigate further.

 

Yes @austing you are on to it. When I have time I'll write something up for us to think about. It's not just imported inflation, but having assets in the same currency as input costs...although we pay in AUD, how much of the inputs are foreign currency? Was thinking about this while getting stitched up at the bowser to the tune of $1.60/l for 95RON last night !!

 

Well you could just buy currency ETFs.

 

And how can one pull all this together whilst trying to keep things simple and manageable?

 

It just figures in to the asset allocation decision when balancing currency, tax, diversification etc. may lead to a higher unhedged weighting.

 

Lol

 

@Il Falco not exactly what you're looking for but I found ths interesting:
CPI will not rise as most economists expect – Imported inflation is history

 

Cheers, thanks for that. hadn't really been thinking about imported inflation, just matching assets and expenditure in same currency, thinking beyond the fact that we spend AUD here, to the foreign input costs that go in to those transactions..if that makes sense. It may change how one views currency risk a little, and therefore portfolio construction.

 

Yep sorry, was a bit off target but for retirees living off their savings and dealing with inflation I thought that article had a few interesting points.

I think that how one views currency will also depend on your stage of life. For an accumulator further away from retirement currency isn't much of an issue. A retiree may be more concerned about cashflow reliability as opposed to currency composition of expenditure on imported goods / services.

 

What are the turn around times on foreign currency to material changes on the ground for the consumer and are they proportionally represented? Using pump prices, they seem to lag advantageous currency fluctuations and some gouging occurs (although articles I have read are perhaps bias). An (unhedged) investor gets 100% bang for their currency buck for better or worse.

Managing currency fluctuations is something I have been thinking about in terms of increasing international contributions when the AUD is strong and increasing home bias on weakness. This is probably a mute point as currency fluctuations are likely to lead to requiring the same behavior to maintain weightings.

 

Yeah, I'm not thinking about short term movements at all, rather appropriate long term unhedged portfolio weighting. Portfolio would be rebalanced in AUD.

 

Some data on Imports and Invoice Currency. Doesn't break it down to household level but it's clear which currencies get the lion's share for invoicing. For International diversification US is looking good from this perspective. But I await my esteemed colleage Professor @Il Falco's thoughts:



5368.0 - International Trade in Goods and Services, Australia, Oct 2016