There is no reason for us to just focus our efforts to Australia in search of value. Whilst there are there are many good shares to buy on the ASX. We see the global equity markets as our oyster and invest in shares listed on the US. US shares forms a key plank of our investment portfolio. We prefer the US markets over other countries due to its depth, quality of listed companies and disclosure requirements which is not perfect is better than most.
International equity exposure provides diversification benefits and opportunities to invest in industries which are not available in Australia. For example in the ASX 20 company index. Financials and Material sectors make up a large portion market value.
No discussion on international shares is completed without addressing foreign exchange risks investing overseas. In our Australian dollar to US dollar forecast we see the Aussie dollar to appreciate over the medium and long term. This means that our US investment if unhedged will lose value overtime in AUD terms.
Even with the above, we still look to allocate a meaningful portion of the portfolio in US dollars. This is because the expect the aggregate equity return will outpace the long term headwind of the Australian dollar. We will look opportunistically to put on hedges time to time however currency risk is a concern but not a stumbling block.
US Stock Watchlist
Alphabet (GOOG): Alphabet is Google. Internet advertising is eating traditional advertising industry’s lunch. Google’s search engine business is a gigantic moat where no companies can come close to compete. Yahoo is a shadow of its former self. Microsoft threw billions at its own search engine, Bing. However it never is a true competitor against google.
The strength of the moat is reflected in the business earnings and cash flow. Alphabet has more than $80 billion US dollars on its balance sheet. As one of the largest technology stock listed, it is still able to grow at low double digits year on year.
Google also owns Youtube where the audience monetization is starting to ramp up. We expect Youtube to be a meaningful contributor of earnings going forward. It has inserted it self as a critical marketing and audience outreach for the music industry. There is a number of ways Alphabet can grow this segment from monetizing all the free user content uploads to expansion of paid movies and TV to compete directly with Netflix and Amazon.
CBRE (CBG): CBRE is a global real estate service provider. It provides a full suite of real estate services from property management, leasing, asset management and investment sales. The strength of the franchise it that it is one of the only real estate service provider with a global reach.
Culturally, CBRE operate as one firm across the globe which delivers a better product than competitors that are franchised and owned separately in each location. JLL, its largest competitor is moving in this direction also.
The range of global real estate capabilities gives the business the ability to service the likes of Fortune 500 companies as one provider across the globe. The disadvantage of its scale is that it cannot be the best in all local markets. However it is good enough across the key markets that it can still add value for clients.
One overlooked aspect of CBRE is the CBRE Global Investor business. It manages around $90 billion real estate assets on behalf of clients. Standalone, it is one of the largest real estate asset management firms in the world. CBRE GI provides a core real estate fund product as to the alternative pure Real Estate Private Equity like Blackstone’s BREP.
It is a business we are very excited about given the strength of the management and the unparalleled scale to grow.
Lincoln Financial Group (LNC): LNC is a US life insurance company with a strong annuity business. We like Challenger (ASX CGF) for its Australian annuity market position and eposure to the upcoming retirement demographic flood. The demographics of the US market is similar to Australia where the baby boomers are retiring in record numbers.
Retirees turn to annuities when they do not want equity market exposure in their portfolio. As there are no compulsory saving system in the US, the industry super fund system is not a prevalent relative the private, for profit industry. This means that for a large segment of Americans, investment decisions are directed individually where annuities are a key component of retirement portfolio.
In addition LNC is a play on US interest rates. The low US interest environment means fixed income returns are at record lows. This has placed pressure on LNC which was sold off in late 2015 and early 2016.
As rates rise, which it eventually will. LNC margin on annuities it manages will improve. This is one of our contrarian plays in our portfolio as increase in US interest rates is not currently the market consensus. From the valuation perspective, we initiated LNC significantly discount to book value. We get paid in the mean time to wait.