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Fund managers look overseas

FOR years, investors planning for retirement have heard the reasons for holding Australian stocks in their portfolio.

These include dividend imputation, increasing income and capital growth.

However, fund managers, are moving to higher international equities holdings.

Examples include Merrill Lynch Mercury and Mercantile Mutual (MML). BT and MLC already hold higher international equity positions.

The most potent arguments for international equities include:

* The long-term return from international shares is higher than Australia;

* Globalisation – assessment of the value of stocks in international rather than national valuations, often leading to lucrative takeovers;

* Growing cross border trade (assisted by the Internet), opening Australian companies to aggressive competition;

* Global brand power in creating margins increasing revenue and profitability (eg Gilette);

* Lack of adequate representation of the fastest growing sectors of telecommunication, computer and biotechnology in the Australian stockmarket;

* Lack of diversification of the Australian market being only 1.5 per cent of MSCI capitalisation; and

* The benefit of international currencies in reducing the risk of (unnoticed) relative Australian economic under-performance, being masked by currency depreciation.

A pleasant by-product of valuation of stocks in international terms is that a number of Australian companies are also being taken over by international companies.

How can international shares specifically benefit retirement portfolios?

Increased capital growth is easily turned into income, to spend in retirement, by selling some of the shares that have grown, while still keeping the (inflation indexed) capital intact.

Outside superannuation – the way realised capital gains are now taxed – growth above inflation is more fully rewarded.

Inside superannuation – the capital gains are now 33 per cent less taxed (taxed at 10 per cent maximum. rather than 15 per cent).

In an allocated pension – capital gains are currently fully rewarded i.e. not taxed at all.

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