A STRAW HOUSE OR BRICK HOUSE?

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1 ssga.com spdrs.com.au A STRAW HOUSE OR BRICK HOUSE? How Smart Investors Can Build a Solid Foundation for an Aussie Shares Portfolio

2 Many Australian investors rely on Australian shares for the cornerstone of their portfolio. This paper examines how a broad-based Australian shares exposure can enhance an investor s ability to add value in this way. We Love Our Shares Around half of SMSF Australian shares allocation is in just companies. Many investors like the idea of owning companies directly. And why not? Most of Australia s largest companies have done well over the past years. The tax and cost benefits compared to other forms of investment make this even more appealing. Australian investors are among the highest owners of direct shares in the world. According to the ASX s 2012 Australian Shares Ownership Study, 34% of the adult population held shares directly, and an additional 4% held them indirectly via managed funds (and that excludes super funds). This study also identified that Self- Managed Superannuation Fund (SMSF) investors have an even higher ownership of shares: 52% of SMSFs. This has been consistent over the past 4 years. While there are over 2,000 companies on the ASX, the vast majority of SMSF investments have been in a handful of stocks. According to the Multiport June 2013 survey into SMSFs, they held around half of their Australian share allocation in just companies. That s a big part of retirement portfolios reliant on the success of a few companies.

3 Some Important Lessons An examination of some of the top Australian shares over the last years reveal two interesting points that all investors should be aware of: Yesterday s winners may 01 be tomorrow s losers. No one company has consistently outperformed others. In fact, often the best performing company can end up as one of the poorest performing. Fortescue saw exceptionally strong rewards for investors in the mid 2000 s, yet three of the last five years have seen substantial declines in company value 1. Telstra has been another investor favourite. While recent times have been good for Telstra investors, it has been a bumpy ride over the past years. The market return sits 02 between the best and worst performing companies. The ASX 200 has been a relatively more stable source of return when compared to the performance of the individual companies. Companies represented in the S&P /ASX 200 Index span a variety of sectors which are impacted differently by market events. Cyclical sectors such as consumer discretionary and materials typically do well with an improving economy, and defensive sectors such as consumer staples, healthcare and utilities generally do well in challenging economic times. By holding a portfolio with representation across companies and sectors, investors are less susceptible to a particular company or sector result. No one company has consistently outperformed others over the last years. In fact, often the best performing company can end up as one of the poorest performing. The S&P/ASX 200 Index also includes smaller capitalisation companies, such as M2 Communications and Sirtex Medical. Smaller capitalisation companies can often offer opportunities for more rapid growth than larger, better established ones. State Street Global Advisors 3

4 A Straw House Or Brick House? The Impact of a Concentrated Portfolio The table illustrates the top stocks held by SMSFs, according to the Multiport survey. To understand the impact of holding a concentrated portfolio of shares, we have broken down their annual returns over the past years. Figure 1: Annual Return of Top Stock Held by SMSFs Year Ending, 30 June (%) Stock CBA Westpac BHP ANZ Telstra NAB Fortescue Woolworths Wesfarmers Woodside STW SPDR S&P/ ASX 200 ETF Source: Factset, SSGA & Multiport Survey, as at March 2013, Bloomberg, as at April Returns based on closing prices and assumes dividends are reinvested when received. Past performance is not a guarantee of future results. Sitting with a small number of Australian stocks without making adjustments is a bit like building a house out of straw. 4

5 BUILDING A HOUSE OF BRICKS Key Considerations for a Portfolio So, how do smart investors build a healthy portfolio? Every investor is unique, so this depends on many different variables, that should be considered when reviewing an investment portfolio. TIMEFRAME How long can you keep your money invested? GOALS Are you investing for income, growth or security? RISK APPETITE How comfortable are you with losing money over short time periods? SELECTION PREFERENCES How much do you want to control or outsource you selections? Diversification Safeguarding Your Portfolio Against One-Time Events The more you spread your investments around, the less susceptible you are to one-time events that could result in substantial losses. Holding a portfolio of -20 shares certainly helps reduce this. Holding a core portfolio of Australia largest 200 companies supports this goal even further, providing a strong foundation from which to add your favourite companies around. As we can t all predict tomorrow s winners, spreading part of your investment over the Aussie share market is a great way to help you fill gaps in your portfolio. For example, investors who did not hold Westpac or Wesfarmers last financial year would have missed significant gains. We can t all predict tomorrow s winners; spreading part of your investment over the Aussie share market helps you fill gaps in your portfolio. State Street Global Advisors 5

6 A Straw House Or Brick House? Rebalancing How Asset Allocations Change Over Time When holding a portfolio of direct stocks, it is easy to simply buy and hold rather than actively review and adjust your allocation on an ongoing basis. To illustrate the impact of rebalancing, we have spread a $0,000 investment made on 30 June 2003 equally over some of the top companies held by the average SMSF. Over years, the portfolio would have grown to nearly $360,000. However, the asset allocation has changed dramatically over this period. The pie charts show that the investor was more exposed to the performance of the resources sector through BHP in 2008, and would now find a larger dependence on the banking sector. Figure 2: Changes in Asset Allocation of SMSF Stocks Allocation as at 30 June Allocation as at 30 June Allocation as at 30 June CBA WESTPAC BHP ANZ TELSTRA NAB WOOLWORTHS WESFARMERS WOODSIDE Source: Factset, SSGA. If the portfolio was rebalanced at the end of each year to bring each company back to an equal investment, it would be worth $31,000 more with a total value of around $390,000 (not including tax or transaction costs). Engagement How Active an Investor Are You? Understanding the type of investor you are and how active you are prepared to be in your investment decisions should have an impact on how you construct your portfolio. For those able to commit more time to managing their investments, holding a higher portion of direct shares can make sense. For those with less time or who are simply not interested in managing their investment portfolio, outsourcing a greater part of the investment decisions will be appealing. 6

7 STW SPDR S&P/ASX 200 Fund A Cornerstone Investment For Many Investors Once upon a time, researching and monitoring the companies in the ASX was very time consuming for investors wanting to maintain a broad-based and well-balanced portfolio. Then in 2001, State Street Global Advisors launched Australia s first exchange traded fund (ETF), STW SPDR S&P/ASX 200 Fund. It meant a well-tested approach to buying the ASX 200 was available in a simple trade. An investment in STW gives you an investment in the 200 companies in the S&P/ASX 200 Index as STW will buy each of these companies in the index. It also delivers any franking credits and dividends paid by the underlying companies. STW remains Australia s largest and longest running ETF. Diversification Being broadly based, STW gives investors a sound foundation. It also provides exposures to smaller capitalisation companies and sectors not well represented in most SMSF portfolios. Rebalancing STW automatically rebalances its holdings twice a year to ensure it appropriately represents the investable opportunity set. The result is that market events such as IPOs and existing company actions are automatically incorporated. Engagement For time-poor investors who do not have the time for active trading, STW offers a well-diversified set and forget option, for active traders it can be used to express a view on the overall Australian market. An Interim Tool STW can be used to manage any short term cash holdings, ensuring you don t miss out on potential gains from the ASX 200 while you consider your next investment decision. As it is Australia s largest and most liquid ETF 2, STW trades like any of Australia s largest companies, with small bid-ask spreads and good market depth. The Moral of The Story STW may not be as exciting as picking out individual stocks and continually monitoring them to rebalance your portfolio. In fact STW may just be the most boring trade you ever do. But it gives you the comfort of having some money invested across 200 of Australia s largest companies. You know you have a strong foundation from which to watch your retirement portfolio grow and to help create your happy ever after. To find out more about STW and the role it could play in your portfolio, talk to your financial adviser or visit stw-asx200-etf.com.au Over the year to 28 February 2015, STW has achieved 14.13% return. Since its inception in August 2001, it has delivered an 8.73% per annum return. It has also had a valuable role in providing income and is currently yielding over 4.93%, or approx. 6.5% with franking credits 3. Past performance is not indicative of future results 1 Factset, SSGA & Multiport Survey, as at March 2013 Bloomberg, as at April SSGA and ASX 3 SSGA, as at 28 February 2015 State Street Global Advisors 7

8 ssga.com spdrs.com.au For Public Use State Street Global Advisors Australia Services Limited Level 17, 420 George Street, Sydney, NSW T: F: Issued by State Street Global Advisors, Australia Services Limited (AFSL Number )(ABN ) ( SSGA, ASL ), the holder of Australian Financial Services Licence ( AFSL ) number Investors should read and consider the Product Disclosure Statement (PDS) for the relevant SPDR ETF carefully before making an investment decision. A copy of the PDS is available at The material is general information only and does not take into account your individual objectives, financial situation or needs. It should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF s net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Diversification does not ensure a profit or guarantee against loss. Sector ETFs products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. Brokerage commissions and ETF expenses will reduce returns and transaction costs will also be incurred when buying or selling units of an ETF on ASX markets. ETF units may only be redeemed directly by persons called Authorised Participants. SSGA ASL is the issuer of units in the SPDR funds and the Responsible Entity for the managed investment scheme Australian SPDR funds quoted on the ASX or AQUA Product Issuer for those Australian SPDR funds quoted on the AQUA market of the ASX. State Street Bank and Trust Company (ABN ) (AFSL number ) is the trustee of, and the issuer of interests in, the SPDR S&P 500 ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol SPY. SSGA ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or CDIs ) which have been created over units in SPY and are quoted on the AQUA market of the ASX. The rights of CDI investors are different to those of investors in an Australian registered managed investment scheme and investors should read the applicable PDS before investing to understand the additional risk factors associated with investing in CDIs. An investment in SPDR funds or SPY CDIs do not represent a deposit with or liability of any company in the State Street group of companies including State Street Bank and Trust Company and are subject to investment risk including possible delays in repayment and loss of income and principal invested. No company in the State Street group of companies guarantees the performance of SPDR funds or SPY CDIs, the repayment of capital or any particular rate of return. Standard & Poor s, S&P and SPDR are registered trademarks of Standard & Poor s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent State Street Corporation. All Rights Reserved. ID3769-AUSMKT Exp. Date: 31/03/2016