Key findings of the Investment Trends August 2013 adviser product and marketing needs report:
- Growing investor and planner confidence has seen money start to flow from cash into growth assets
- Advised clients are allocating more of their capital to international investments than at any time since the GFC, with US assets especially popular
- A growing proportion are using ETFs to gain international exposure
Planners are turning offshore for growth
Planners looking overseas to grow business.
The level of new client investments directed to international assets by financial planners has surged to its highest level since the GFC, according to a recently released report from leading wealth researcher Investment Trends.
The August 2013 Adviser Product and Marketing Needs Report is a comprehensive study of asset allocation trends among Australia’s financial planners, together with their views on fund managers, investment products and researchers. Based on a survey of 734 financial planners nationwide between July and August 2013, the report reveals a growing trend away from cash and towards growth assets.
“Our research confirms that improved investor confidence and low interest rates have prompted planners to cut allocations to cash and direct more capital towards listed investments and other growth assets,” said Investment Trends Senior Analyst Recep Peker. “Now an increasing proportion of that money is being invested offshore.”
Between 2012 and 2013, the allocation of new client investments to international assets jumped 5 percentage points to 31% of new client investments, the highest level since 2008. Much of that growth appears to have been driven by client demand, as well as planner recommendations.
“Our analysis shows that the proportion of sophisticated investors intending to increase versus decrease their exposure to international shares surged 15 percentage points between August 2012 and August 2013, from 3% to 18%,” says Peker. “This suggests that the improving performance of overseas markets has seen a spike in investor interest over the last year.”
US assets increasingly attractive
While multi-region funds remain the most sought option for gaining overseas exposure, US assets have become increasingly attractive to investors and planners as the North American economic recovery gains pace. Asked which regions they wold encourage clients to invest in over the next 12 months, 40% of planners nominated the US or North America, up from just 10% in 2009.
Meanwhile, interest in China has dwindled, with the proportion of planners planning to recommend single-region Chinese exposure falling from 35% in 2010 to around 12% in 2013.
“The last few months have seen a shift in global economic performance as the developed economies continue to recover while the pace of growth in emerging markets slows,” says Peker. “That’s encouraged a renewed investor focus on developed markets in general and the US in particular.”
ETFs gaining ground
International equity funds continue to be the dominant method of accessing international assets, accounting for 65% of offshore investments by planners in 2013. But ETFs are gaining ground, albeit from a relatively low base, with the proportion of offshore investments made through ETFs growing 40% over the last year, from 5% of all investments to 7%. ETFs look set to become even more popular in the future.
“When we asked planners which international investments they intended to use over the next 12 months, one in five nominated ETFs,” says Peker. “That’s consistent with the general growth we’ve observed in ETF usage by planners, with a third of planners now recommending ETFs to their clients.”
“ETFs are a particularly popular option for planners seeking exposure to the US, with 30% saying they would like to access the US through ETFs.”
Lack of franking credits holds investors back
Despite growing interest in international assets, a number of obstacles stand in the way of increased investments offshore.
“The lack of franking credits from overseas investments continues to be a key barrier, cited by 43% of financial planners,” says Peker. “Client preferences and risk profiles can also hold planners back, given the higher perceived risk of some international markets.”
“Interestingly, 39% of planners also nominated currency risk as an issue, even though many analysts predict that the Australian dollar will trend lower in the year ahead, potentially benefitting those who have already invested offshore.”
“But while the current high dollar continues to offer good value to Australian investors looking overseas, any significant fall in exchange rates could be expected to impact demand.”