The K2 Chronical...

Compelling case for International equities

1 April 2015

 

Many investors, particularly those that are self-directed, tend to invest with a ‘home bias’. There are many and great reasons for this – dividend imputation, familiarity of companies and currency risks. Over the past 18-24 months however, investors are looking elsewhere for value, performance and diversification. The below outlines 5 reasons to look for offshore opportunities and why you should start to diversify your investment portfolio. Investing in offshore markets has never been as accessible.


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1. Greater Opportunity: Australian listed investment options are relatively limited

- Globally there are over 20,000 listed companies with a market capitalization over $100 million… In Australia there a less than 500

- Large areas of the global economy, such as technology andhealthcare are under-represented in the Australian Index

- Australia represents only around 2% of the total world sharemarket

 

 

 

 

2. Australian market is highly concentrated  

- Financial services and Resources represents a combined 45% of the Australian equity market

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- The market therefore is largely driven by the performance of these two sectors

- Over the last 12 - 18 months, weak performance in iron ore and other metals have constrained the performance of the broader market

3. Exposure to different industries

- Healthcare and Information Technology represent 12% and 13% respectively of the global sharemarket

- In Australia they represent just 6% and 1% respectively  

- It is possible to enhance returns in your portfolio by gaining exposure to industries that are under-represented in Australia

 

4. Diversification

- Investing in global shares provides geographical and industry diversification which can enhance the portfolio risk / return potential

- Country-specific drivers of sharemarket performance, such as the rounds of QE in the US or Mario Draghi’s European stimulus package, have the potential to create wider variations in sharemarket performance over time

- Active investors and those willing to diversify offshore are able to benefit directly from these trends

 

5. Exposure to Global Brands and familiar names

- The ability to invest in household names or global brands gives investors the ability to potentially capture growth from companies leveraged to emerging markets or specific regional opportunities

- As mentioned earlier, you can potentially discover / invest in the next big IT start-up or ‘wonder drug’ which isn’t as easy to find if just investing domestically 

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Internet and content plays continue to have a profound effect on the media industry. There has been a significant acceleration in total media consumption fuelled by explosive growth in tablets, smartphones and ‘smart TVs’, combined with relative low cost access. Coupled with the fact that TVs share of total consumption is falling, while online media (mobile, tablets) is rising, confirms that the way in which we are consuming media has changed.   Walt Disney is a big benefactor of this changing environment. It has morphed from a traditional media / entertainment business into a premium content provider, which has grown affiliate fees (fees paid by cable companies to content owners) at 11% p.a since 2003. 

Disney has grown into a content behemoth, and has seemingly become less reliant on cyclical factors such as advertising spending. Strong growth in affiliate fees has diluted advertising revenue from 24% to 16% of group revenues over the past 10 years.  

 

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The structural changes occurring in new media are likely to increase the pricing power and improve the revenue visibility of the large media content owners; and Disney is a primary beneficiary of this trend.   We believe that the market is only just beginning to appreciate this and consequently the PE multiple is likely to continue to re-rate further.  We also believe that this trend will continue, as more and more consumers ‘binge’ consume their favourite shows and content owners benefit from services such as Netflix, Stan and Presto. K2 International’s investment strategy is focused on identifying the mispricing of secular growth that is independent of cyclical factors. Walt Disney is currently held in the K2 Select International Fund.

 

If you would like further information about the K2 International Strategies, please contact a member of our distribution team on 03 9691 6111 or visit k2am.com 

 

DISCLAIMER: The information contained in this presentation is produced by K2 Asset Management Ltd (“K2”) in good faith, but does not constitute any representation or offer by K2. It is subject to change without notice, and is intended as general information only and is not complete or definitive. K2 does not accept any responsibility, and disclaims any liability whatsoever for loss caused to any party by reliance on the information in this presentation. Please note that past performance is not a guarantee of future performance. A product disclosure statement and additional information booklet or information memorandum or general information on the funds referred to in this presentation can be obtained at www.k2am.com or by contacting K2. You should consider the product disclosure statement before making a decision to acquire an interest in the fund.


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