Many Australian investors prefer to invest in Australian shares rather than international shares. It makes sense for a range of reasons:
- it’s a good rule of thumb to invest in what you know;
- franked dividends provide tax-effective income; and
- the Australian share market has performed strongly over the long-run, outperforming broad international share markets (MSCI World ex-Australia) by around 2% p.a. over the last 20 years.
But the reality is that Australian shares account for only around 2% of the global share markets.
In an increasingly interconnected world, global technology platforms are breaking traditional boundaries and disrupting long-held ways of doing business. There is a strong argument that Australian investors need to look abroad for investment opportunities. Even if they still maintain a strategic tilt towards Australian shares.
5 reasons to explore international shares
Here are five key reasons why you might benefit from exploring opportunities in international equity markets:
1. Tech opportunities
It’s a truism that we are living in the technological age. While we’re seeing the rise of remote work, technological innovation still seems to cluster in certain geographical locations. Silicon Valley, London, Beijing, Tel Aviv and Bangalore for example. Australia has produced some world leading tech companies (Atlassian, Afterpay, Xero), but these are a very small fraction of the ASX200.
The Australian share market (S&P ASX200) has a disproportionate exposure to companies in the ‘Financials’ and ‘Materials’ sectors. These two sectors alone account for around 50% of the index, and investor returns are heavily influenced by the performance of the ‘Big 4’ banks and the miners.
3. Australian residential property market
The success of the Australian residential property market is renowned across the world. However, Australian households have the second highest level of debt to GDP (~120%) in the world, and risks to the property market feed quickly into the ASX200, particularly through the banks. Most investors have a significant percentage of their net worth in Australian property. Investing more in unrelated markets usually makes a lot of sense.
4. Emerging markets
Emerging market economies provide Australian investors with access to fundamentally different opportunities than those available in Australia. Many emerging markets have demographic tailwinds, less red tape, and much higher potential economic growth over the next decades. Of course this comes with its associated risks, so it pays to employ a good manager to select quality stocks.
5. Currency risk
The Aussie Dollar (AUD) is often considered a “risk-on” currency that performs well when other risk assets are going strong (e.g. share markets). This is largely due to our economic exposure to emerging markets and commodity prices. When share markets are having a tough time, the AUD can often come under pressure. Holding unhedged international shares can be a good way to diversify investments outside of the AUD and protect international purchasing power.
Best ways to access international share investments
For those sold on the idea of investing in international markets, the key challenge becomes the question of access. What are the best ways to access international share investments and how can they blend into an existing portfolio?
Buying direct shares on international exchanges
In this case, the simplest answer might be the most complex to administer. Buying direct shares on international exchanges can create a headache for SMSF trustees and individual investors as they navigate their way through different legal frameworks, tax treaties, and additional paperwork. For those with the expertise, it is the most cost-effective approach. It can also express an investment idea a lot more strongly than buying broader baskets of investment, but it’s a relatively niche cohort that choose this approach.
Managed Funds or Exchange Traded Funds
The most common way that Australian investors access international shares is through Managed Funds or Exchange Traded Funds (ETFs). These are pooled investments, registered in Australia for simplicity, and provide the benefits of a diversified portfolio of international investments without having to own the investments directly. Investors buy ‘units’ in the Fund, and are provided with the growth and income benefits of the fund’s underlying investments in proportion to their unitholding.
Traditionally, investors have used one or two managed funds to access international shares. They might buy units in a broad based ‘Global Fund’, and units in an ‘Emerging markets’ fund. These have tended to be ‘Actively’ managed, and come with higher investment and performance fees. In recent years, a whole range of new ETFs have come onto the market allowing Australian investors to access much more specific international share investments. From investing in global cybersecurity businesses, renewable energy leaders, and robotics and artificial intelligence companies, there are a lot more ways to access international thematic investments. Some of these ETFs offer lower investment fees, being more ‘passive’ investments in nature, and come with unique risk/reward opportunities.
At Synectic Wealth, we research a wide range of international share investment vehicles. We look to blend styles (growth vs value investments), manager selection (active vs passive), and regions (developed vs emerging) to create robust portfolios that can adapt to changing markets. The explosion of ETFs into the market has been fantastic for investors, but has also increased a range of risk factors that need to be considered against overall investment objectives. If you would like to discuss potential investment opportunities in international shares, we’d love to chat and see how we can help.
About the author
PJ provides proactive, strategic advice to help you invest with confidence, structure your affairs intelligently, and get the most out of your unique circumstances. Contact us today and ask to speak with PJ.
Peter-James Cameron is a Sub-authorised Representative (#1266801 ) of Synectic Wealth Pty Ltd (ABN 24 615 317 194) which is a Corporate Authorised Representative (#1250871) of Alliance Wealth Pty Ltd (ABN 93 161 647 007 | AFSL 449221) www.centrepointalliance.com.au. Synectic Wealth Pty Ltd is the financial services division of Synectic. Learn more here.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.