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Why international investments are growing in popularity

What was once foreign investment is no longer foreign at all, thanks to the technologies and products that are now an integral part of our daily lives.

Brands like Facebook, Apple, Amazon, Netflix and Google are now as familiar to Australians as Woolworths, Telstra and the Commonwealth Bank. In fact, the five big US tech stocks have become so popular they’re known by the acronym FAANG.

These high-profile overseas brands and others, that are regularly reported locally, have helped to stimulate Australian investors’ interest in investing offshore.

Today, for example, almost 8 per cent of Australians say they directly hold international shares, according to an ASX study1. That’s doubled in seven years when the global financial crisis saw Australians flee international investments for the safety of local stocks.

SMSFs setting the pace offshore

But it’s self-managed super funds that are leading the charge on international investment. The value of direct international shares traded by SMSFs grew by 57 per cent over the past year, a CommSec report2 found.

Investors are more comfortable buying brands that they’re very familiar with, says CBA Head of SMSF Customers, Marcus Evans.

“They’re using many of those international brands every day. They’re probably bigger brands in their lives than most domestic stocks,” he says.

However, be warned, direct share investment on overseas exchanges is not for the inexperienced. It can be expensive, risky and difficult to access.

As a result, many investors are turning to managed funds or exchange traded funds (ETFs) to access international exposure for their portfolios, with SMSFs increasingly using ETFs to diversify offshore, with internationally-focused funds now comprising nearly 47 per cent.

ASX data shows that, since 2014, the number of ETFs on issue in Australia has increased by 61 per cent, to 203. Over the same period, the proportion of funds under management allocated to global equity has increased to 39.2 per cent.

The value of direct international shares traded by SMSFs grew by 57 per cent over the past year.

Looking for global gains

So, what’s the big deal with investing overseas? The key advantage of international investment is to create better diversity in your portfolio.

In other words, it gives you a chance to improve or stabilise your overall returns even if the Australian market isn’t doing so well.

Peter O’Callaghan, Partner at MSI Taylor Wealth Management, points out that the Australian stock market represents less than 2.5 per cent of global shares.

“It’s a very limited universe to play in,” he says.

Given that the Australian market has lagged behind others in recent years, keeping your investments on home turf denies you exposure to a broad range of growth companies, such as the big tech stocks in the US, says O’Callaghan.

So, investing outside Australia opens up the opportunity for bigger growth.

Consider the downside risks

Of course, there’s also potential downside risks to consider when investing overseas. You may know the brands you’re investing in, but how well do you understand the market in which they’re listed?

And, when you don’t know the market you have a bigger chance of losing money by, say, buying or selling at the wrong time.

“I’ve always been a big fan of investing in companies you understand,” says O’Callaghan. “When they’re domestic there’s generally a lot more information available about them, but it may be a little bit harder to get if they’re based overseas.”

For example, the overseas-based company may invest in other markets even further from Australia, and you may not be aware of its activities.

“You could be inadvertently investing into an area you don’t want to be. That’s particularly relevant to socially responsible investors,” says O’Callaghan. For example, if you’re opposed to tobacco investments but you’ve bought shares in a company that owns a stake in a tobacco company.

Currency risk is also ever-present for Australians investing overseas. If the Australian dollar rises against, say, the US dollar then the value of any investments you hold in US dollars will fall. On the other hand, a fall in the Australian dollar against a currency will increase the value of your investments in that currency.

Movements in currency can sometimes be caused by government interventions and that’s another risk for international investors, particularly in controlled economies such as China.

“There’s the risk of political intervention through nationalisation of businesses for example,” says O’Callaghan.

One way of tapping into emerging markets or controlled economies may be to invest in companies based in open markets such as Australia or the US that have a presence in those riskier markets, he says.

Four ways to invest overseas


The four main approaches for Australian investors looking to gain international exposure are:

  1. International shares – you can invest directly through a broker or buy units in a managed fund or exchange traded fund.
  2. Foreign exchange trading – you buy and sell foreign currencies to try to make a profit.
  3. Managed funds – you look for a fund that includes international shares, foreign government bonds and overseas property.
  4. Exchange traded funds – you find a fund that tracks the returns of global markets, regional indices or specific asset classes in a particular region overseas.


Get good advice

To better understand the pros and cons of investing overseas, a financial adviser can help guide you in the right direction.

Disclaimer

Information on this webpage is provided by Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the Target Market Determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the Financial Services Guide (FSG) available online for information about our services. This information is based on current requirements and laws as at the date of publication.

Tax considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

AIL and CFSIL are not registered tax (financial) advisers under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise under a tax law.