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There’s nothing wrong with a few retro items when it comes to your wardrobe or house. I mean, is there anything groovier than a body shirt, flared jeans and a well-chosen pair of boots? Come to think of it, is there anything groovier than the word ‘groovy’? And it’s now far more desirable to own your favourite album on vinyl than as a CD (let alone streaming it), something the ‘technological progress is more important than anything’ crowd would not have believed possible a few years back.
However, while a 1995, 2005 or 2012 wardrobe might be the height of chic, the same does not apply to your investment portfolio.
If you were to walk your portfolio to the mirror and ask it to do a 360-degree spin finishing in a bevel, might it look itself in the eye and say: “You’re looking a bit 2012, you need to get with the times”?
What’s wrong with my ‘retro’ portfolio?
The problem with your retro portfolio is that it was built for another time.
As most investors know, the performance of Australia’s sharemarket historically has been driven largely by the big financial and resource stocks.
For many years, this worked very nicely for investors. Putting a significant chunk of your savings into one or two of the big four banks, and BHP or RIO, worked well.
The chart below shows the ten-year performance of the S&P/ASX 200 Financials excluding A-REIT Index (XXJ). XXJ contains all the companies in the Financials sector except those classified as A-REITs.
S&P/ASX 200 Financials excluding A-REIT Index, September 2010 – September 2020
Source: www.asx.com.au. Past performance is not an indicator of future performance. You cannot invest directly in an Index.
Admittedly, this chart shows the price index, rather than the total return index, so it does not take into account dividends, which historically have been a significant component of returns from bank shares.
Regardless, what is clear is that in the first half of the decade, investors in the financial sector were well rewarded, while the second half of the decade has been a different story – even before the coronavirus struck.
Now, let’s look at a chart of XXJ against the S&P/ASX All Technology Index (XTX) over the last five years (common base 100).
Source: www.spglobal.com. Past performance is not an indicator of future performance. You cannot invest directly in an Index.
What’s clear is that while the financial sector has flatlined over most of this period, technology stocks have performed very strongly.
With the benefit of hindsight it’s easy – but not particularly helpful – to say that in the middle of the last decade you should have sold your banking stocks and put the proceeds into technology.
But what are some more constructive thoughts for late 2020?
Perhaps the first question to ask is…
If I was starting from scratch, is this the portfolio I would build?
Whatever your portfolio is worth, imagine you had that much in cash, and no shares or managed funds. Is this the portfolio you would put together today?
If the answer is “No!”, here are three options to consider to give your portfolio a more 2020 look.
1. Exposure to international shares
Not so long ago, gaining exposure to international shares was not that simple. You had to open a separate account, pay for your investments in a foreign currency, and deal with tedious admin such as W-8BEN forms. As a result, many portfolios ended up being constructed entirely from Australian shares.
Fortunately for us all, with ETFs, investing in international shares has become a lot simpler. ETFs enable you to access a portfolio of international shares in a single trade on the ASX.
For a diversified portfolio of quality international shares, one option is the BetaShares Global Quality Leaders ETF (ASX: QLTY). To be eligible for inclusion in QLTY’s portfolio, a company must demonstrate:
- high return on equity
- low debt
- strong cashflow generation, and
- a stable earnings profile.
QLTY has returned 19.6% p.a. from inception in November 2018 to 30 September 20201. The ETF is also available in currency-hedged form, via BetaShares Global Quality Leaders ETF – Currency Hedged (ASX: HQLT).
The global technology sector has delivered outstanding returns in recent years, and has so far been a particularly strong performer throughout the pandemic, as the world moved more and more online.
While the prices of tech stocks have risen significantly, we believe there is the potential for further growth in this sector over the long term – both overseas and locally. Options for investment exposure include:
- the BetaShares Nasdaq 100 ETF (ASX: NDQ), and its currency hedged version, the BetaShares Nasdaq 100 ETF – Currency Hedged (ASX: HNDQ). These funds offer exposure to many of the world’s leading tech stocks, including Apple, Amazon, Facebook and Zoom, companies that have revolutionised the world we live in. NDQ has returned 21.4% p.a. from inception in May 2015 to 30 September 20201.
- the BetaShares Asia Technology Tigers ETF (ASX: ASIA) – Asia is the world’s largest e-commerce market, with China alone accounting for over 50% of global online transactions2. Asia’s favourable demographic trends also underpin the Asian tech sector’s growth potential. ASIA has returned 28.5% p.a. from inception in September 2018 to 30 September 20201.
- the BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC) – not to be outdone, Australia has its own dynamic tech sector, which is likely to increasingly drive our future economic growth. Entrepreneurial and innovative companies such as Afterpay, WiseTech Global and Appen are making their mark not just locally, but also on the world stage. ATEC was launched in March 2020. The technology index which ATEC aims to track has returned 20.6 % p.a. over the 5 years ending 30 September 20203.
3. The Australian ‘EX factor’
While the top 20 stocks on the ASX are heavily weighted to the large financials and resource companies, we believe there are potentially greater growth opportunities outside the top 20.
Rather than having to pick individual stocks, you can get exposure to a diversified portfolio of stocks 21-200 on the ASX via the BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20).
EX20 can help reduce exposure to the cyclical companies in the top 20 that many investors already hold, and at the same time, provide access to many of the companies experiencing structural growth which sit outside the top 20.
These are just a few options you can consider if your portfolio has a decidedly retro look about it. The investment landscape changes over time, and it’s wise to position your portfolio to make the most of the opportunities that present themselves today – which may be quite different from those that were available a few years ago.
Note: Investing involves risk, and the value of an investment can go down as well as up. Past performance is not indicative of future results. The funds described above should only be considered as a component of a broader portfolio. Before making any investment decision, investors should consider the relevant product disclosure statement and their particular circumstances, including their tolerance for risk, and obtain financial advice.
1. Past performance is not an indicator of future performance.
2. Godoy, Katelyn. “The Impact of E-Commerce: China versus the United States.” Cornell SC Johnson, 24 Feb. 2020, business.cornell.edu/hub/2020/02/18/impact-e-commerce-china-united-states.
3. Past performance is not an indicator of future performance of the index or ETF. Excludes impact of ETF fees and costs.