International Some Considerations For Investing Globally

Discussion in 'Shares & Funds' started by Nodrog, 6th Jul, 2018.

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  1. dunno

    dunno Well-Known Member

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    I just picked fictional numbers to make the point that total return focus if preferable to income only focus.

    Using your numbers.

    Do you see any difference between investing in Aus and consuming the 5% income component to meet 5% expenses, leaving 5% growth to maintain purchasing power?

    And investing in US, selling 3% of the capital growth to add to the 2% income to meet 5% expense requirement. Leaving 5% growth to maintain purchasing power.

    I see no difference other than tax consequences and inflation/currency risks in the respective markets. Do you? It seems you are reluctant to diversify because of the differing income components despite the overall return being roughly similar.
     
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  2. blob2004

    blob2004 Well-Known Member

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    True it makes no difference in the long term, probably just that capital growth appears to be more volatile than dividends, and makes me a bit uneasy to rely on part of it for retirement.

    I personally do also invest globally through VGS although haven't decided strictly on the allocation.
     
  3. Nodrog

    Nodrog Well-Known Member

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    Of course no one knows the future and for some time now it’s been suggested that Australia is suffering from lack of a growth. But maybe, just maybe reversion to the mean might play out as in the past.

    This from Star Capital is one of many possibilities over the next decade or so:

    82EF8C7D-D69E-4B40-90C6-9278B69F073E.jpeg
    StarCapital AG - Disclaimer
     
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  4. Nodrog

    Nodrog Well-Known Member

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    Great points as usual.

    This debate of dividend vs total return investing has been going on as long as I can remember. There is rarely a winner given it is often based on behavioural factors.

    For me income is income whether it’s from LICs or index ETFs local and global.

    That said there’s a dirty little secret when it comes to the dividend focused approach. That is, one generally needs a lot more capital compared to a total return approach to fund lifestyle in retirement.
     
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  5. Zenith Chaos

    Zenith Chaos Well-Known Member

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    This is Buffet's view and why Berkshire Hathaway pays a low dividend - he believes he can reinvest the income better than the investor.
     
  6. oracle

    oracle Well-Known Member

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    As far as I am aware Berkshire has only paid a dividend once in it's 60 odd year history since Buffett took over the company and he regrets paying that dividend. Buffett has no intention to pay or start paying dividends. The closest he will get to returning money back to shareholders is to do buybacks.

    Cheers,
    Oracle.
     
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  7. Snowball

    Snowball Well-Known Member

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    He even jokes “I must have been in the bathroom at the time” :D
     
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  8. blob2004

    blob2004 Well-Known Member

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    Hey @Nodrog just a question with regards to the comparison for dividend focused c.f. total return Boglehead.

    Let's say one needs 40k pa in retirement to fund lifestyle.
    If you went with the Boglehead method on indexing, using the 4% rule you would need a 1 million portfolio split in bonds and stocks. Selling down bonds during down markets, and selling stocks in good markets.

    With the dividend focused approach using mainly LIC's, if you had a 1 million portfolio in essence you would get 40K pa plus full franking credit refunds would net you 57k.

    Doesn't that essentially mean you would require less capital to retire with the dividend focused approach due to franking? Or am I on the wrong track here...
     
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  9. blob2004

    blob2004 Well-Known Member

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    GMS1-1024x510.png On a side note...AU actually hasn't been too bad for the last 100 years compared to the US.
     
    Last edited: 15th Aug, 2018
  10. SatayKing

    SatayKing Well-Known Member

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    @Nodrog will have a view on your post and will likely reply to you @blob2004 but I may as well muddy (the) waters - Champagne and Reefer great tune.

    I don't bother about the franking or really consider it as income from a personal perspective. You don't get it cash in hand at the time a dividend is paid and it's the cash from dividends which is more important to me. Sure, you do include it as income when the tax return is done and after the ATO does it's thaaang you could get a refund.

    However, franking changes. At one time it was 39%, then 36%, now mostly 30% and for some companies 27.5% and it could go to zero depending on the "We feel like doing it" factor of a possible future Government. Not too sure I would like to include or count upon franking as income in the light of that.

    Where I have received a refund due to franking credits, and as I survived darn well in the year without them, I treat the refund as a windfall and invest it straight away. That way there would be little impact on my continuing income if the franking is removed or reduced. Hope some strategist in Finance or Treasury ain't reading this!

    The above is in relation to personal income not superannuation pension streams which is a different beast and one I am starting to have less interest in for various reasons. Transfer Balance Cap? Expletive deleted.

    Addendum: Reference of franking possibly going to zero is the concept of some potential powers which could be treating it from an income tax perspective in the hands of an individual.
     
    Last edited: 15th Aug, 2018
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  11. Anthony Brew

    Anthony Brew Well-Known Member

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    Could people let me know how their allocation of Australian to International would change if there were no franking credits and dividends were the same as the rest of the world at around 2%?
    Would there be any point to overweighting Australian stocks at all in that case, which make up just 2% of the worlds markets and have a massive concentration risk of half the entire market in finance and mining?
     
  12. The Falcon

    The Falcon Well-Known Member

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    Yes I’d still overweight. Currency. Reliability income - no hedging issues (lumpy distributions). If I didn’t not intend to spend AUD in the future on the other hand, different story. My exposures are 45% AUD denominated, 7.5% hedged, 47.5% unhedged.
     
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  13. Anthony Brew

    Anthony Brew Well-Known Member

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    Seems like a lot of risk for just the need to keep a year of cash buffer to smooth the lumpy distributions from hedging, no?
     
  14. The Falcon

    The Falcon Well-Known Member

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    Bear in mind we are pondering a scenario that doesn’t exist, nor is likely to. I am happy with the risk/expected return of the portfolio. I gather you are now favouring a global cap weight portfolio?
     
  15. Anthony Brew

    Anthony Brew Well-Known Member

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    Yeah in my particular situation global cap weight is ideal, but still trying to learn more so I can have a deeper understanding of home bias.

    As I understand it -

    The arguments for home bias are
    • Currency hedging
    • Franking credits

    The arguments against are
    • Lack of diversification overweighting markets representing 2% of the worlds economy
    • Massive concentration risk within the ASX with 2 sectors making up half the entire index, one relying on property and one on mining, both of which have quite a bit of risk.

    Until now I've thought that when deciding on an allocation for an Australian, you would have to weigh up these two groups of arguments to determine the Australian vs International proportions. But I am wondering how correct the arguments are.

    Regarding currency hedging, do equities returns actually track the currency?
    Obviously fixed interest does and should be used for currency hedging, but how correct is this for equities?

    Regarding franking credits, it is a reason to increase your Australian allocation, but by how much? The benefit of franking is perhaps 1.5% p.a. - not nothing but if you were certain Belgian equities had a 1.5% expected return advantage over the long term but a bunch less diversification would you make a similar bet on Belgium equities?
     
  16. Nodrog

    Nodrog Well-Known Member

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    As a retiree living off our investment income the split between local vs International is an issue I continue to struggle with at times. As @The Falcon says currency is a concern especially for retirees. When currency goes against you it can do so for a bloody long time. No problem for an accumulator but time is an issue for retirees.

    Of course one can hedge but I loathe hedging international equities given it’s downsides. As mentioned there’s lumpy distributions, tax inefficiency (Super environment would negate some of this) and loss of the most valuable attribute being “insurance” against Home country risk. If **** hits the fan here then the currency will likely go down with it. So as Insurance unhedged International is powerful protection.

    So despite being irritated with Labor’s proposed policies in general I doubt I will make any major increases to our international equities allocation. I will however be more mindful of which tax environment I hold different asset classes. Eg mostly franked dividends in personal names but more unhedged international equities / cash in the SMSF. I’m also favouring ETFs over LICs especially for international equities.

    Speaking of active international equities keeping good people comes at a cost:
    Platinum Asset Management showers investment team with rewards

    Just one silly old fart’s view of course.
     
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  17. Anthony Brew

    Anthony Brew Well-Known Member

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    @Nodrog, @The Falcon

    Thank you both for your thoughts.
    What I am hearing is that, if there was no franking credits and if dividends were the same proportion of total return as that of international, then the proportion of home country assets (above world market cap weight) would come down to currency hedging, and that the decision is between Aussie stocks which trade in AUD or hedged international stocks, for that portion of your portfolio, and you are both choosing Aussie stocks due to the downsides of hedging.
    Correct me if I've misunderstood.
     
  18. The Falcon

    The Falcon Well-Known Member

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    Not in my case. I have 6 distinct asset classes in the portfolio. I am mildly bullish about ASX long term, it is a lower correlated, higher risk / expected return developed market that also provides an indirect commodities exposure. If I was a Canuck I might have a similar view. But, then again, Franking is a thing and this might color that view unintentionally. It’s not possible to have much conviction with hypotheticals I don’t think. Fwiw I think franking is worth about half what you suggest, but it’s still material. And yes, I’d overweight those Belgian equities if I was able to get a tax advantaged outcome.
     
  19. Nodrog

    Nodrog Well-Known Member

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    Not quite.

    Personally I’d prefer not to own any International equities at all. I also have a very positive long term view on Australia but just in case I’m wrong I own the minimum amount of unhedged global equities to protect my ar#e and provide decent sleep at night factor.

    In other words “unhedged” global equities is an insurance policy against major Home country risk. Hedging wouldn’t give me that.
     
  20. Zenith Chaos

    Zenith Chaos Well-Known Member

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    The ASX200 is close to 40% international exposure https://seekingalpha.com/article/4162529-revenue-exposure-s-and-p-asx-200 Is this factored into everyone's allocation?

    I'm currently happy unhedged given my risk profile but currency hedging with equities is a way to reduce volatility but as I approach retirement where a lower risk and therefore volatility is required I will hedge more of my international allocation.

    What is the selling strategy once retired and liquidating equities for income? Do you sell the best recent performers / overvalued or maintain asset allocation?