ICA Apresentation NSFPC210

Financial Planning Chapter SIG Presentation:
Portfolio Strategies using ASX Listed Securities
28 May 2010


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Agenda
•

ASX Market Developments
• AQUA Market
• ASX Trade

•

Exchange Traded Funds/Commodities
• Features, benefits & risks

•

Portfolio Construction using ETFs
• Generating Alpha with sector ETFs

•

ASX Instalment Warrants
• Features, benefits & risks

•

Instalment Strategies
• Off-setting income and expenses


ASX Trade
•

Introduction of new market services
- Trade Match – current ITS
- Pure Match – low latency execution facility
- Volume Match – order crossing mechanism

•

A number of new order types will also be introduced as
part of the initiatives

•

ASX Best will provide a smart order routing system to
ensure that clients obtain the best execution

•

Changes will begin to be implemented 3rd quarter 2010

ASX AQUA Market
• Flexible market service and rule framework to facilitate the
quotation of a wider range of products
• Tailored to fund managers, investment banks and product
structures
• Three broad categories of product that can be quoted:
- Managed Funds
- Exchange Traded Funds
- Structured Products
• Increased transparency, product distribution and price discovery


ASX AQUA Market
Companies
BHP

A-REITs
Westfield

LICs
AFIC/ARGO

ETFs
Spiders
iShares

Equity Listing
Rules

Derivative

Equity and Derivative

Equity

Hedge
Funds
Wallace
ARF

Long-Dated
Equity-linked
products
Equinox

New AQUA Listing
Rules for funds

ASX Trading system (ITS) &
ASX Settlement system (CHESS)

Capital
protected or
Structured
Investment
Products

Instalments

ALPS

Warrant Listing
Rules

Call/put
Warrants
BHP call


Features of ETF / ETCs
•
•

•

ETFs - invest in a basket of securities that make up
an index or sector
ETCs - track the physical price of a commodity and
provide direct exposure to the underlying asset
Characteristics in common:
•
•
•
•
•
•
•

Have transparent portfolio holdings
Have an open-ended structure
Can have on exchange market makers
Trade at or close to Net Tangible Asset (NTA) backing
Trade intra-day on an exchange like any other share
Covered by National Guarantee Fund (NGF)
Low MERs typically much less that 1%


How ETFs work
Secondary Market

Primary Market

ASX

Market Maker

Trades Like
Stock

Creation or
Redemption of
Units

Fund


ETF and LIC price movements

Benefits of using ETF / ETCs
•
•

Buy a market in one transaction or build a
diversified portfolio with a few transactions
Reduced portfolio administration costs
• Eg 200 stocks =
• One tax statement
• One CHESS statement

•

Grow portfolio value without sector/stock skew
• DRP distributes dividends across index in proportion
• Regular – annual/quarterly contributions distributed across
index in proportion

•

Reduced administration for SMSF Trustee
• Accounting costs
• Audit costs
• Advice costs


Risks of using ETF / ETCs
• Will not out perform a market it covers
• By definition an index is the weighted average performance of

its underlying constituents
• An ETC will always track the price of the commodity
– up and down

• Offshore ETFs and ETCs over commodities priced in
non - AU$ currency are not hedged
• Impact of market direction in concert with the relative
performance of AU$ needs to be considered eg. GOLD

• Income
• ETFs not fully franked
• ETCs do not provide income just the prospect of capital gain

• Sector focused ETFs may be disadvantaged by
negative sentiment towards the sector


ETFs – Whats Available?

Total US

EAFE
S&P
500
MIDCAP
400

EUR
350

R2000

SOUTH
KOREA

CHINA

SMLCAP
600

JAPAN

TAIWAN
HONG
KONG

EMERG
MKTS

Ex -US

SING

GLOBAL
100
S &P
S &P
S &P
ASX 200 ASX A-REIT ASX 50

-Domestic
- International

ASX 300

6 ASX
Sectors


Portfolio Construction Using ETFs


Core & Satellite Approach Using ETFs
Core & satellite
6 trades on ASX
+ low on-going MERs

International
(All World Ex US)
(VEU)

100 Global
Stocks
(IOO)

Core holding of
S&P /ASX 50
(SFY )

MER

28bps
*Exposure to 2373 shares

MER
25bps

Listed
Property
(SLF)
AYF
MER
85bps

Gold

MER
39bps

MER
40bps

MER
40bps


Portfolio Composition
Jan - 2008

Jan - 2010

Total returns: 2008 & 2009
– January 2008 – December 2008
• Capital value (capital invested $100,000):
– Portfolio - down 22%
S&P/ASX50
S&P/ASX200
MSCI world

down 39%
down 42%
down 42%

– Since January 2009
• Capital value (capital invested $100,000):
– Portfolio - up 21%
S&P/ASX50
S&P/ASX200
MSCI world

up 23%
up 24%
up 17%

• Income received (23 months after MER fees & before tax)
– $6,750 (grossed for franking)
6.7% ROI


Generating Alpha using Sector ETFs

Sector ETFs
• Sector ETFs allow you to generate Alpha in a clients portfolio
• You can minimise stock specific exposure
• You can Diversify away company risk and concentrate on
cyclical and structural forces that drive sector performance
• Gain exposure to companies you may not invest in
• Take advantage of cyclical movements across sectors
• Automatic reweighting of the index – So poor performing
stocks will be removed from the index/sector.


Why use Sector ETFs?
Many traditional managed funds can’t add stock picking alpha
% of Funds that Outperform the Index
%
50
45
40
35
30
25
20
15
10
5
0

3-yr

5-yr

Australian Equity

International Equity

Source: S&P

Australian Bonds


Key Drivers of Stock Prices
A major reason is that company fundamentals account
for only a small part of short to medium returns
Stock Drivers
% change in stock price explained by market, then sector and the residual

120%

Jan2003-Jan 2010

100%
80%

Stock
Sector
Market

60%
40%

20%

Av
er
ag
e

QA
N

LE
I

RI
O

M
GX

CV
N

OS
H

AN
Z

SU
N

NA
B

0%


Sector Rotation Model


Sector Performance


Creating a portfolio across sectors
S&P/ASX 300
(VAS)

MER 43bps

MER 27bps
S&P/ASX 200
Financial
x-A- REITS
(FIX)

S&P/ASX 200
Industrial
(IDD)

MER 43bps

Market Cycles
S&P Global
Consumer Staples
(IXI)

S&P/ASX 200
Energy
(ENY)

MER 48bps
S&P ASX 200
Resources
(RSR)

MER 43bps

MER 43bps


Sector ETFs Summary
• Provides instant, low cost portfolio diversification
• Receive all the benefits of owning the underlying shares
(opportunity for capital growth and income)
• Take a sector approach to investing; remove the need for
stock-specific research
• Standard & Poors does all the index analysis for you
• Opportunity to outperform the market benchmark by taking
advantage of market cycles using sector rotation