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Despite current market uncertainties and volatility, investors may find Australian equity funds worth considering for portfolio diversification. The country’s equity market has seen significant progress and development since the mid-2000s.
Since 2007, the combined worth of companies listed on the Australian Securities Exchange (ASX) has grown by 51%, as per an analysis by Ashley Owen, Director at Owen Analytics. He further asserts that over the past 16 years, aggregate profits for companies listed on the ASX have increased by 23%, and aggregate dividends have surged by 83%.
Adding to the appeal, numerous Australian companies boast a commendable history of dividend payouts, surpassing international standards, as highlighted by S&P Global. Analysts attribute this success, in part, to the implementation of a dividend imputation system (franking credits) initiated in July 1987.
Delving deeper, the analysis of historical data by the capital market company reveals three significant characteristics in the Australian dividend market. These characteristics encompass a resilient dividend pool with a stable growth rate. Financials and the materials sectors contribute the majority of dividends, accompanied by a high level of dividend yield and payout ratio.
However, the short-term outlook for Australian equities appears less optimistic. Candriam suggests that if FY23 could be characterised as a “growth pause” in earnings, FY24 is expected to be another year of flat earnings growth. “…we believe earnings growth will be harder to find, but we still expect there to be pockets of growth,” says the asset manager.
Notwithstanding this view, experts believe that Australia’s focus on attaining net-zero targets is set to open up new long-term investment opportunities in the country. The nation would require approximately A$625 bn ($420.01 bn) to achieve decarbonization of its industry and energy system by 2050, as per estimates by ClimateWorks.
The global philanthropic platform adds that this will require around A$400 bn ($268.81 bn) allocated for investment and an additional estimated A$225 bn ($151.20 bn) for transition capital expenditures.
How to invest in Australia equity funds?
According to the Australian Investor Study 2023 by the Australian Securities Exchange (ASX), there is a strong home bias among Australian investors with 58% holding Australian shares, making them the country’s most popular investment option. Furthermore, Australian equities make about 15% of investors’ portfolios (either directly, or via a fund).
Local investors are therefore banking on the potential to earn returns from capital growth and dividends. What are the options for international investors that are keen to explore the Australian equity market? We compiled two investment funds and one ETF.
Barings Australia Fund
The objective of the Barings Australia Fund is to attain long-term capital growth in asset value. The fund’s strategy involves maintaining a diversified portfolio of quoted or traded equity investments in Australian-incorporated companies. The share class we picked for this list (class A Inc USD) disburses any interest or dividend income to investors rather than reinvesting it.
Launched in 1981, the fund has total assets under management of $61.50 mn.* The Barings Australia Fund uses the MSCI Australia (Total Net Return) Index as a benchmark. The fund levies an initial fee of up to 5% and an annual management fee of 1.25%.
Year-to-date, the fund has shrunk by 7.82%, while the benchmark has fallen by 5.51%. Over the past year, the fund provided 0.39% returns, in contrast to the benchmark’s 3.85%. In the last five years, this Barings fund has demonstrated cumulative growth of 20.86%, while the benchmark has swelled by 27.61%.*
The fund’s top five major holdings include the mining company BHP Group (9.80%), the Australian biotechnology company CSL (7.21%), mining company Rio Tinto (6.22%), Macquarie Group, a financial services company (5.94%), and commercial and industrial property firm Goodman Group (5.51%).*
In terms of sectors, the fund has the biggest investments in materials (23.7%), financials (23.7%), industrials (12.8%), healthcare (11%) and communication Services (5.5%).*
Clive Burstow, Soohai Lim and Richard Holroyd are the managers of this fund. Between them, they have around 48 years of experience in financial markets.
Candriam Equities L Australia
Founded in 1997, the second fund on our roster, Candriam Equities L Australia (C Cap AUD), seeks capital growth through investments in shares of companies with registered offices and/or principal activities based in Australia.
The fund employs the All Ordinaries (Gross Return) Index as its benchmark. Unlike Barings, this Candriam fund reinvests any income from its investments back into the fund. The base currency used for this fund is the Australian dollar.
As of December 15, 2023, it has total assets under management of A$224.42 mn ($150.85 mn).The asset manager imposes a management fee of up to 1.50%, a subscription fee of 3.50% and ongoing charges of 1.89%.
For the year-to-date period, the fund has recorded an overall growth of 2.8%, as compared to the benchmarks’ 1.1%. Looking at the past year, the fund has delivered negative returns of 1.4%, while its benchmark has fallen by 2.4%. In the last five years, this fund has exhibited returns of 62.4%, well ahead of the benchmark’s of 26.9% during the same period.**
Similar to the Baring’s fund, Candriam has BHP Group (9.54%) and CSL (8.47%) as the top two holdings. The Commonwealth Bank of Australia (7.53%), National Australia Bank (6.31%), and Rio Tinto (4.40%) conculde Candriam’s top five.**
Furthermore, Candriam, like Barings, predominantly focuses on the financials (25.75%) and materials (25.50%) sectors within Australia’s economy, followed by healthcare (10.15%), consumer discretionary (5.15%), and consumer staples (5.10%).**
This fund is managed by Paul Xiradis and John Grace. Xiradis has over 40 years of industry experience, while Grace has been a portfolio manager for 35 years.
iShares MSCI Australia UCITS ETF Acc
Among passive investment options, investors can consider the iShares MSCI Australia UCITS ETF. This ETF replicates the performance of the MSCI Australia Index, which monitors large and mid-cap companies in Australia.
This ETF has total assets under management of $424.26 mn.*** Also, the fund has a total expense ratio of 0.50%, lower than the actively managed funds mentioned in this list.
Over the past year, the ETF has delivered a total return of 1.32%, whereas the benchmark achieved returns of 1.72%. Furthermore, the exchange traded fund has experienced a year-to-date increase of 3.48%, compared to the benchmark’s rise of 3.82%. Since its inception in 2010, the fund has produced 82.78% returns, in contrast to the benchmark index, which recorded a return of 93.77%.**
iShares invests in similar companies like the other two funds in our list: BHP Group (14.05%), Commonwealth Bank of Australia (10.35%), CSL (7.55%) and the National Australia Bank (5.30%), and Westpac, a financial services company (4.43%).***
Also, like the two preceding funds, iShares has the highest allocation in financials (32.67%) and materials (25.02%). They are followed by healthcare (9.97%), consumer discretionary (5.74%) and real estate (5.63%).***
*As of October 2023
**As of November 2023
*** As of December 15, 2023
