The World Cup has come to end and we have a new World Champion in France – sadly for England football did not “come home”. Rather than writing a piece that vainly attempts to justify why we did not successfully pick the winner (Germany and Spain were the resounding choices of the BetaShares office) we have instead chosen to highlight what the most successful teams in the tournament are able to teach us about investing. Further, we are going to look deeper into which of these qualities, in the correct formation, can be utilised through exchange traded products to provide the potential for a winning investment portfolio. Let’s get into it…Allez! Allez! Allez!
Looking through the World Cup’s most successful performers, three prominent themes come to light when quantifying their triumphs: agility, diversification and resilience.
Agility and Adaptation
The most agile teams this World Cup have been the most successful. They have reacted quickly to unexpected changes in circumstances, whether that be a large goal deficit, the loss of a key player or excessive playing time. France demonstrated such agility by nullifying the free-flowing attacking teams of Argentina and Uruguay, but adapted enough to out manoeuvre the impeccable defence of neighbouring Belgium.
Like football teams, investors are time and again called upon to demonstrate agility in the face of the unexpected. The last 10 years have seen an unprecedented amount of change in monetary policy. Bond yields have scraped new lows and equity markets have broken through to new highs. Now the tables are turning – the Fed’s rate hikes are in full swing and the ECB is looking to end its quantitative easing programs.
Amid highly correlated assets and increased volatility, investors should consider alternatives to traditional methods of investing and be more nimble in their asset allocation. In looking at a successful balance to a growth tilted portfolio, insight can be gained from examining a triumphant football team’s midfield. Belgium’s Hazard and De Bruyne provide opportunity and creativity while France’s Kante and Pogba provide assurance and strength. With that in mind, two BetaShares exposures investors may consider are:
- BetaShares FTSE RAFI Australia 200 ETF (ASX: QOZ) – Provides the benefits of passive investing while also seeking to provide outperformance, relative to the traditional market cap weighted approach to indexing, by systematically buying stocks when they are undervalued by the market and selling stocks when they are overvalued. The RAFI methodology measures the size of a company using four accounting measures, being sales, book value, cash flow and dividends. The result is an ETF comprised of the largest 200 stocks on the ASX based on their economic size, rather than their market price. Doing this avoids the emotion that price brings to the table; the fear-of-missing-out when a stock is hot, or the panic when a company falls out of favour.
- BetaShares Legg Mason Equity Income Fund (managed fund) (ASX: EINC) – This fund is comprised of an actively managed portfolio of income orientated Australian shares, based on a highly awarded and longstanding Legg Mason unlisted managed fund. EINC focuses on growing dividends, which, combined with expert active management, has historically enabled the unlisted version of EINC’s strategy to minimise income shocks, reduce volatility and protect a level of protection against drawdowns when compared to passive high yield ETF exposures.
Diversification is another important attribute in football. The strongest teams in history have had world renowned players in every position. Germany in 2014 held talent from every top global club team, yet their lack of adaptation cost them in Russia. By contrast, France at the 2018 World Cup had a diverse 11 that blended not only skill and youth but experienced veterans who possessed calmness and strength. The argument does persist that a few exceptional players (or stocks!) can decide a game single-handedly, yet one needs to only look at Uruguay with Suarez and Argentina with Messi to realise that a single star player does not guarantee a winning team.
When it comes to investments, holding a diversified portfolio of assets is critically important. Global business cycle dynamics as much as idiosyncratic events can trigger losses. The current occupant of the White House lends even more weight to this argument. The most successful portfolios are built around optimising the benefits of diversification. Two of BetaShares’ strongest performers this year, with an international tilt for added diversification, are the NASDAQ 100 ETF (ASX: NDQ) and the Global Cybersecurity ETF (ASX: HACK).
NDQ provides exposure to the performance of the 100 largest non-financial securities listed on the NASDAQ stock exchange – the traditional hub for major technology company listings in the United States. HACK has demonstrated, and still has the potential to benefit from, the demand for data security and technological advancements in face of the growing threat of cybercrime.
Both these funds have the potential for strong capital appreciation while adding that important element of diversification to an Australian investor’s portfolio. A lack of diversification can be illustrated starkly when examining the Australian sharemarket (here using the S&P/ASX 200 Index), where the technology sector is significantly underweight (2.1%) compared to the financial (34.8%) and material sectors (17.9%). In contrast, the NASDAQ 100 has a 60.9% weighting to technology.[i]
Of course, investors need to be aware that equities, like all classy strikers, can be prone to diving!
Resilience and Support
England and penalties. The two go hand in hand with despair. Staring down the barrel of yet another World Cup exit at the hand of penalties, England kept calm and carried on. In doing so they reached their first semi-final since 1990. The team that stays the course, controls their nerves and uses their experience is often the most successful. Looking through past World Cup finals, each team had a defence that carried the weight of arguably the best defenders/goalkeepers in the world at that time.
Germany in 2014 was captained by Phillip Lahm, who is recognised to this day as one of the best fullbacks of his generation, and Spain in 2010 was captained by Iker Casillas – one of the all-time great goalkeepers. And who could forget the evergreen goalkeeper, Gianluigi Buffon, of Italy’s World Cup winning team in 2006.
Investment decisions are similar. Today, investors are surrounded by the rising threats of a global trade war and increasing concerns about a sell-off in global equities. Being able to distinguish between failing fundamentals and slower growth on the one hand, and Trump’s daily inflammatory tweets on the other, is crucial. Having assets in position to counter such volatility and risk is pivotal in achieving a balanced portfolio, capable of resilience and growth. With that in mind, BetaShares has recently expanded the defensive side of the portfolio offering a complete suite of Fixed Income products.
The best defenders not only provide a sturdy defence but also the ability to push forward and provide opportunity. The final positions in the BetaShares Starting XI we will look at today, therefore, are the all-star defenders:
- BetaShares Australian Investment Grade Corporate Bond ETF (ASX code: CRED) – Looking at the Australian fixed rate corporate bond exposures in the ETF market, CRED is listed as the lowest cost, coming in at 0.25% p.a. Further, it currently provides the highest yield to maturity amongst Australian investment grade fixed income ETFs on the ASX at 4.07% p.a.[ii]
CRED tackles the traditional problem of combining diversification and strong yields in a single fixed income product. Government bonds do supply the diversification, but their yield has often been uninspiring. As a result CRED, as explained further by BetaShares’ Chief Economist, David Bassanese here, has been constructed to provide investors with strong diversification benefits and the potential for impressive long-run returns.
- BetaSharesActive Australian Hybrids Fund (managed fund) (ASX: HBRD) – Seeks to provide investors with a convenient way to access attractive income returns, including franking credits, from an actively managed, diversified portfolio of hybrid securities overseen by a professional investment manager. The Fund currently provides a gross yield of 5.42%.[iii]
Hybrid securities have been a popular choice with Australian investors over recent years. Until recently, investing in hybrids directly was the primary method available to investors. Now, however, investors are able to invest in an actively managed portfolio of hybrids via HBRD. By employing an active management approach, with the ability to invest up and down the corporate capital structure, the fund aims to reduce the volatility and downside risk that may otherwise be experienced by direct holders of hybrid securities.
HBRD can allow investors to simplify the management of what are often rather complex securities by outsourcing to a professional manager and increase their diversification via a fund that holds ~20-50 hybrid securities and bonds.
The World Cup has finished, and it did not disappoint. Outside of the fact that the World Cup is a huge sporting event watched by half the world’s population, it’s also a good place to find investing inspiration. It allows investors to recognise the importance of having a portfolio that is agile and capable of adapting to geo-political and economic events. It highlights the importance of having a diversified “team” of asset classes, and of utilising fixed income to provide a portfolio with resilience and support.
Here’s the BetaShares Starting XI, and associated subs.
[i] Source: Bloomberg. As at 31/03/2018
[ii] As at 12/07/2018
[iii] As at 12/07/2018