International equities: a heavy weight(ing)?

It’s pretty common to hear the collective song of “fair suck of the sauce bottle”, (thanks Kevinator or was his version ‘shake’?) from some corners when the financial markets about faced and headed south when the bubble finally burst.

Someone with a long espoused view digs it out of the closet, the search starts for the like-minded and then we all get together, start finger pointing, pick holes and bagging things like the weighting our super funds and advisers have recommended toward international and domestic equities. Oh the ignominy and the agony!

A wrong call

Certain numbskull financial writers proclaim our general ‘weighting’ of asset allocations toward these classes is far too high that even ‘cash’ has outperformed them, international and Australian equities are too highly correlated and there is some sort of conspiracy going on with equity market participants that are getting their fair fat fees worth. Apart from some of the more slightly true parts of the message, overall what phooey nonsense! I suppose they still think the earth is flat. Be wary of their message.

True, yes Australia seems very flat and our super funds generally have a high weighting to international and domestic asset classes compared to the rest of the world’s comparative retirement pension systems. (Not by much though) and this has resulted in a worse than average performance.

The general rational behind the higher weighting goes something like this; the retirement and super system as we know it today was designed as such so that the people were individually responsible for their own retirement savings planning and management, an unofficial self assessment system.

Conventionally held wisdom is that in the long-term, shares have historically outperformed all other classes (yes my emphasis added there). The onus is on us to sort out our own laundry. (Yes, I know the old saying about conventional wisdom, long on convention and short on wisdom).

Backing up by pointing to OECD studies or what the Future Fund is doing will not help their case either, as I said earlier, even the professionals often get their stock in trade ‘price’ versus ‘value’ very wrong and a little of that follow-the-smart-money billionaire investor wisdom might hopefully rub off and go a long way to helping these over educated fools who write such rubbish as well.

An intelligent “suck of the bottle”

For a start and this is a big start, their timing in terms of the market cycle is all completely wrong. If those in control of the funds understood their basic investment principles 101, price and value better, then their weighting will be higher from early this year (when markets bottomed) and less so when things get to pricey like it as in 2007.
This simple strategic allocating will see you produce significantly better numbers.

Understanding value means you can see why Japan’s economy is such a basket case. Property and sharemarket prices rose so incredibly high in the late 80s to massive boom levels that disconnected so far from underlying value, that value nearly 20 years later is still taking time to catch up with those boom prices today.

The Japanese government thought in its infinite wisdom it would be a good idea to transfer the ridiculous levels of personal leverage created by the property boom from the banks to the government. Hmm… does this theme ring a familiar note? Add with a touch of, if we don’t fix up our own heavily distorted property market that same Japan style situation may happen here. It could become a nation changing event. It’s headed that way.

The upside to some downsides

Similarly, the US had a massive run in the market price of stocks compared to underlying value both in 2000 and 2007, ie. value has STILL yet to catch up hence why

Australian equities have outperformed.

When allocating your funds and diversifying your income it’s easy – stay clear of themes, countries and sectors that are over-hyped, had a great run and look a tad pricey.

The emerging markets may seem overdone but a well-timed correction has helped restore some value. Japan, however, while starting to show some very good short-term periods of performance is also starting to show periods of short-term jitters with deflation. For me that screams better value. Be patient, get in when everyone heads out the door, profit from their folly. Longer-term it will fix its problems and past mistakes will eventually erase with time. Ignore the noise.

Some final ‘intelligent’ thoughts

It might be hard to look at putting some in overseas investment markets, looking at the returns of the last 10 years, but you’re only looking at price aren’t you – stay well clear of the over-hyped or over-popular.

If using a manager (a much easier option for some) make sure it’s one that is proficient at finding value and doesn’t prattle on about being ‘benchmark unaware’ or ‘thematic’, or any of that twaddle and are simply just efficient at making you money. As Warren E. Buffett’s partner in investment crime Charlie Munger put it: “to me intelligent investing is value investing, that’s a very simple concept and I don’t see how anybody could argue with that.” Nothing gets past Warren until Charlie okay’s it.

If something has really taken a hammering and you have the patience and the time to wait for good returns, back yourself, go into a geared global fund or small cap manager with the right street-cred.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.