Perpetual answers your questions
Q. What is the new initiative that Perpetual is undertaking?
Q. Why is Perpetual broadening the investment universe?
Q. When is Perpetual implementing this new initiative?
Q. As an investor do I need to do anything?
Q. Will broadening the investment universe change the investment process?
Q. What will the additional investment universe be?
Q. Will the affected Australian share funds still be benchmarked to the S&P/ASX 300 Accumulation Index?
Q. Will the affected Australian share funds take on more risk as a result of the changes?
Q. Could the affected Australian share funds achieve higher returns as a result of broadening the investment universe?
Q. Will there be any impact on the level of income distributed by the funds?
Q. Why have you chosen to limit any exposure to offshore-listed stocks to 20%?
Q. How will the currency management work?
Q. Has the current risk profile of my fund changed?
Q. Why don’t you make a strategic allocation to offshore-listed stocks rather than just allowing the portfolio manager to pick offshore-listed stocks when he sees value?
Q. I only want to invest in Australian companies. Why are you making me invest in offshore-listed companies?
Q. Will this affect the strategic and/or tactical asset allocation for the diversified funds (eg Balanced Growth)?
Q. Will there be any impact on the franking levels of the affected funds?
Q. Will the tax implications on the offshore-listed stocks be any different from the tax implications on the domestic stocks?
Q. Will there be any impact on unit pricing?
Q. Will the names or product codes of any of the affected funds change?
Q. Will there be any impact on fees or transaction costs?
Q. Will there be any changes to the distribution frequencies?
Q. Where can I obtain more information about this initiative?
- Q. What is the new initiative that Perpetual is undertaking?
- A. We are broadening the investment universe for a number of our Australian share funds to enable us to invest in stocks listed on exchanges outside Australia (offshore-listed stocks).
Investment in offshore-listed stocks will be on an opportunistic basis. This means we will only invest in these companies if we have a high conviction that they will outperform the domestic equities market, as represented by the affected funds' benchmark, the S&P/ASX 300 Accumulation Index.
We will manage risk against the benchmark by limiting any exposure to offshore-listed stocks to 20%. This will ensure that the risk characteristics remain in line with typical Australian share funds.
As such it should be emphasised that any investment in an offshore-listed stock will be on an opportunistic basis only. We are not changing the risk guidelines for our funds nor are we making any strategic allocations away from Australian shares. Our default position remains the Australian sharemarket.
This will also apply to the diversified funds but to a lesser degree, as part of their investment is in the Australian share funds. - Q. Why is Perpetual broadening the investment universe?
- A. We are seeking to improve returns for investors by increasing the range of investment opportunities that we can invest in.
There may be times when we may find better opportunities offshore. In this case, if we are satisfied that an investment can be made in a higher quality company and it is trading at a better valuation, we believe that being able to take opportunity of these investments will help us remain fully invested and deliver the best value for our unitholders.
The hurdle rate for us to include a stock listed on an offshore exchange in the funds will be high – that is, we will need a high degree of conviction in the investment case for us to purchase the stock. At times, there may be no offshore-listed stocks in the affected funds. However, when we do have a high level of understanding and conviction in a good opportunity, we will take advantage of it.
We currently invest in many global companies which are listed in Australia. There are also many companies with Australian-based operations which have to compete with global best practice. In conducting research on this universe of stocks, we have had to increasingly analyse offshore operations and global competitors. Over the past few years, we have identified a number of opportunities in offshore markets that may have benefited the portfolio.
Since March 2005 we have had the added benefit of being able to access the research and resources of our global equities team. This has helped us identify other global investment opportunities that could help to improve returns on our Australian share funds. - Q. When is Perpetual implementing this new initiative?
- A. This initiative will be implemented from 1 May 2006 onwards.
- Q. As an investor do I need to do anything?
- A. No. Our Australian share funds will continue to be benchmarked against the S&P/ASX 300 Accumulation Index. As such we are not changing the risk guidelines for our funds nor are we making any strategic allocations away from Australian shares. Our investment process will also remain unchanged as we will continue to invest in companies that meet our ‘quality’ criteria at attractive prices.
- Q. Will broadening the investment universe change the investment process?
- A. No. As per normal, any stocks, whether listed domestically or overseas, must pass Perpetual’s four quality filters and valuation criteria before they can be considered for inclusion in our Australian share funds.
As per normal, our portfolio manager, John Sevior, will continue to have responsibility for stock selection and for portfolio construction.
We will add a risk constraint that will limit any exposure to companies listed offshore to 20%. This will ensure that the risk profile remains in line with typical Australian share funds.
- Q. What will the additional investment universe be?
- A. The investment universe will be expanded to include any company listed in overseas markets that passes our four quality filters. Generally though, we will look to source ideas from our global equities team based in Dublin and find opportunities from stocks held in our International Share Pool.
- Q. Will the affected Australian share funds still be benchmarked to the S&P/ASX 300 Accumulation Index?
- A. Yes.
- Q. Will the affected Australian share funds take on more risk as a result of the changes?
- A. Not according to a series of back testing we recently carried out on the Australian Share Fund.
Our analysis indicates that including offshore-listed companies in Perpetual's Australian Share Fund is estimated to have no material impact on the Fund's absolute volatility and tracking error. - Q. Could the affected Australian share funds achieve higher returns as a result of broadening the investment universe?
- A. We believe that having more stocks to choose from will increase our chances of a higher return for our investors. Of course it is important to note however that investment returns are not guaranteed.
- Q. Will there be any impact on the level of income distributed by the affected funds?
- A. There could be a slight reduction in the level of income but this will depend on the stocks chosen and the dividends they pay.
Offshore-listed stocks, like Australian-listed domestic stocks, pay dividends and the domestic equities team will consider the dividend yield of each potential holding as part of the investment decision.
Australian-listed stocks tend to pay slightly higher dividends in comparison to offshore-listed stocks. We believe however, that the potential upside for a higher capital return will outweigh a slightly lower income yield.
A series of back testing that we conducted found that both the pre- and post-tax yield (income return) were slightly lower with the random inclusion of offshore-listed stocks.
This test was executed however, without any portfolio management. In practice, the portfolio manager will give consideration to selecting stocks that demonstrate the best possible shareholder value, whether this be through paying dividends or other mechanisms.
Also it is important to note that we are choosing stocks only when opportunities arise and therefore at any point in time there may be no exposure to offshore-listed stocks. - Q. Why have you chosen to limit any exposure to offshore-listed stocks to 20%?
- A. It should be emphasised that investment in offshore-listed stocks will be made on an opportunistic basis. Whilst we are broadening the universe of stocks that we can invest in, we are not changing the risk guidelines for our funds. We feel that 20% ensures that the risk profile remains in line with what we have always delivered.
- Q. How will the currency management work?
- A. Our domestic equities team will be responsible for currency management.
It is our intention to fully hedge all currency exposure against the Australian dollar and obtain the best returns from pure stock picking. This means that there should be no impact from any currency movements.
There may be times of extreme currency valuation where fully hedging the currency is not the best strategy. During these times we reserve the right to try and protect returns.
- Q. Has the current risk profile of my fund changed?
- A. No, your fund will continue to be managed within the same risk guidelines and therefore its risk profile is not expected to change.
- Q. Why don’t you make a strategic allocation to offshore-listed stocks rather than just allowing the portfolio manager to pick offshore-listed stocks when he sees value?
- A. Broadening the investment universe allows the domestic equities team the flexibility to take advantage of good value opportunities in both domestic and offshore-listed stocks as and when they arise. If the team feels, for example, that the better value opportunities are all in the domestic-listed stocks, the affected funds will hold 100% in Australian-listed stocks.
A strategic allocation would change the nature of what we are trying to achieve by forcing the portfolio manager to hold an exposure to offshore-listed stocks. - Q. I only want to invest in Australian companies. Why are you making me invest in offshore-listed companies?
- A. What defines an Australian company? We believe that looking at factors such as where a company operates, where it derives its earnings, where its key markets are and where its competition lies is a more relevant way of assigning nationality to a company than which exchange it is listed on. Under these definitions, you are already investing in non-Australian companies.
If you were to analyse the domestic stocks currently reviewed by our domestic equities team you would find that over 55% of these stocks have varying degrees of overseas earnings. Some of the stocks in our funds that hold the larger weights (eg BHP, Rinker, Rio Tinto, News Corp, Orica) derive the majority of their earnings from overseas businesses. In many cases, it is the overseas operations that have driven the success and increased share price of these stocks.
So when you are investing into an Australian share fund, if you take a closer look at the underlying stocks, more than likely, you will find that you already have a significant exposure to overseas businesses. - Q. Will this affect the strategic and/or tactical asset allocation for the diversified funds (eg Balanced Growth)?
- A. No. The important thing to remember here is that the Australian share funds will still be managed within the same risk guidelines and therefore the risk profile of the affected funds is not expected to change.
Also it is important to note that we are picking stocks only when opportunities arise and therefore at any point in time there may be no exposure to offshore-listed stocks.
Broadening the investment universe in this way therefore, will not affect the strategic or tactical allocation of any diversified funds. - Q. Will there be any impact on the franking levels of the affected funds?
- A. Yes, there could be a slight reduction. A series of back testing that we conducted found the franking levels may be slightly lower. This is because domestic-listed stocks generally tend to distribute more tax credits than offshore-listed stocks.
We would not be broadening the investment universe however, if the potential upside for a higher total return did not outweigh the potential for investors to receive slightly lower franking levels.
It is also important to note that there are numerous Australian-listed stocks which we currently invest in from a total return perspective that do not pay large amounts of franking credits which we buy from a total return perspective eg. Rinker.
We recommend that investors obtain professional taxation advice which takes into account their particular circumstances. - Q. Will the tax implications on the offshore-listed stocks be any different from the tax implications on the domestic stocks?
- A. No, not for capital gains tax purposes.
Yes, for income tax purposes. Investors may receive foreign income due to the affected funds holding offshore-listed stocks. Like domestic income, foreign income distributed to investors by the affected funds (if any) is required to be included as part of their taxable income and will be taxed at their marginal tax rate.
Investors may be entitled to a foreign tax credit to offset foreign-sourced income tax payable. Unlike franking credits derived from Australian-listed stocks though, investors are not automatically entitled to foreign tax credits, and must satisfy certain criteria to obtain the benefit of these credits.
The various types of income received via a distribution during the financial year will, as per normal, be detailed in the Annual taxation statement provided to investors.
We recommend that investors obtain professional taxation advice which takes into account their particular circumstances. - Q. Will there be any impact on unit pricing?
- A. No. As per normal our unit prices will be available each day. The valuations for any offshore-listed stock will be included in the daily unit price.
- Q. Will the names or product codes of any of the affected funds change?
- A. No. Our Australian share funds will continue to be benchmarked against the S&P/ASX 300 Accumulation Index. As such we are not changing the risk guidelines for our funds nor are we making any strategic allocations away from Australian shares. Our default position remains the Australian market.
- Q. Will there be any impact on fees or transaction costs?
- A. The funds’ management costs and buy/sell spreads for our Australian share funds and affected diversified funds will not change.
- Q. Will there be any changes to the distribution frequencies?
- A. No.
- Q. Where can I obtain more information about this initiative?
- A. Please refer to the Changing Face of Australian Share Investing booklet also available on the Perpetual website for a more detailed explanation of the investment rationale for this initiative.