A larger global allocation vastly increases the flexibility available for investors to generate income and total return.
Australian investors, like many around the world, have a pronounced home bias when investing - this is particularly true when building retirement or income orientated portfolios.
While this is understandable given our familiarity with local companies and the attraction of franking credits, it may compromise a portfolio’s ability to achieve its long-term objectives.
Firstly, investors miss out on a world of potential opportunities. Australia represents only around 2% of the global share market capitalisation. A larger global allocation vastly increases the flexibility available for investors to generate appropriate levels of total return. It also increases opportunities for investors to meet their investment objectives over the long term and may reduce the risk of investors outliving their capital.
Secondly, a heavy reliance on Australian exposure to deliver income risks incurring a shortfall when investors can least afford it. The adage “don’t put all your eggs in one basket” comes to mind. When close to, or in, retirement, the ability to generate additional income in the event of an unexpected shortfall (such as a sharp drop in interest rates, a dividend cut or a change in tax policy) is more limited compared to the accumulation phase (where time is on the investor's side). Consequently, it is prudent for investors to construct a portfolio with as many differentiated sources of income as possible.
As demonstrated in the chart below, dividends fell sharply across Australian equities during the Global Financial Crisis with traditional sources of equity income such as Financials, Energy or A-REITs, significantly cutting their returns. Conversely, dividends from global listed infrastructure steadily rose. Infrastructure’s ability to generate income is determined by the regulation and contractual structures in place and is much more closely linked to the growth in the underlying assets than it is to the strength or weakness of the economy. For investors, this is what delivers stable cash flow and greater capital stability.
Sources: FactSet and RARE Infrastructure, as of 12/31/2018. DPS = Dividend Per Share. The S&P/ASX 200 A-REIT Index is used as a representative of Australian Real Estate Investment Trusts. All Ords = ASX All Ordinaries Index, Local, Bloomberg (Index Code – AS30 Index). Infrastructure – RARE Core Universe, Local, FactSet Research Systems (Portfolio Code – CLIENT: CORE_LIST). Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
The All Ordinaries (XAO) or "All Ords" is considered a total market barometer for the Australian stock market and contains the 500 largest ASX listed companies by way of market capitalisation.
ASX is an abbreviation for Australian Securities Exchange.
An Australian real estate investment trust (A-REIT) is a unitised portfolio of property assets, listed on a stock exchange, usually the Australian Securities Exchange (ASX). Such investment structures were known as listed property trusts (LPT) in Australia until February 2008, but were renamed to be more consistent with international terms. An A-REIT usually owns a portfolio of large properties, which, due to their size and value, cannot be bought by the average private investor. Thus, these large investments are broken up into units of smaller value that can be purchased by private investors, who become unit holders.
A franking credit is an entitlement to a reduction in personal income tax payable to the Australian Taxation Office. The entitlement is offered to individuals who own shares in a company (“shareholders”) in recognition of the tax on profits paid by that company.
The financial crisis of 2007–08, also known as the Great Financial Crisis, global financial crisis and the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.
Market capitalization is the total dollar market value of all of a company's outstanding shares; it is calculated by multiplying a company's shares outstanding by the current market price of one share.
The S&P/ASX 200 A-REIT Index is a sector subindex of the S&P/ASX 200, this index tracks the performance of Australian real estate investment trusts (A-REITs) and mortgage REITs.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia and New Zealand:
This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.