• Australian Equity

    Don’t bank on the Royal Commission

    Arian Neiron, Managing Director
    01 May 2018
     

    The headlines in April from the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have been nothing short of sensational.  One thing is clear, change within financial services is very likely to occur following Hayne’s findings.  While it is unclear what form these changes will take, the big banks face further challenges to their reputations and profitability. 

    This is a problem for many Australian investors as their equity portfolios have significant exposure to the big four banks.  These four stocks represent a quarter of the S&P/ASX 200 Accumulation Index (S&P/ASX 200). In other words, if you hold a blue chip portfolio or are invested in an Australian equity fund that tracks or benchmarks to the S&P/ASX 200, one out of every four dollars is likely to be invested in banks facing, at the very best, a PR disaster.  At worst, their profits and share prices could drop.

    Reducing bank exposure is key

    To address bank concentration risk, the VanEck Vectors Australian Equal Weight ETF (ASX: MVW) is a diversified portfolio that is underweight the big four banks compared to a market-cap weighted portfolio. MVW has outperformed the S&P/ASX 200 by 4.48% per annum over the last three years and 3.90% p.a. since inception, as the table below reveals.

    MVW March 2018 performance

    MVW equally weights the largest and most liquid stocks on the ASX (84 stocks @ 1.19% each). Relative to the S&P/ASX 200, the resulting portfolio reduces the big four bank exposure to 4.8% from 24.5% and it reduces the ASX top 10 company exposure to 11.8% from 44.8%.

    MVW Banks exposure

    With the public hearings of the Royal Commission going having ended in April, followed by Hayne presenting an interim report no later than 30 September 2018, with a final report no later than 1 February 2019, bad headlines for the big banks are likely to continue.  Prudent investors should consider an alternative approach for their Australian equity allocation. MVW is underweight banks and has consistently outperformed since its inception in 2014, consistently achieving top quartile performance, as the table below reveals.

    MVW v Morningstar universe



    IMPORTANT NOTICE:

    This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity of the VanEck Vectors Australian Equal Weight ETF (MVW) (‘Fund’). This is general information only and not financial advice. It is intended for use by financial services professionals only. It does not take into account any person’s individual objectives, financial situation nor needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser and consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 3837. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the Fund.