Investment
Investing overseas
Investing internationally can increase your diversification and give access to industries and companies not available in Australia. After all, Australia represents less than three per cent of the total world sharemarket.
Many industries are not represented or under represented in Australia. For example, the MSCI World Index has an allocation of more than 20 per cent to the fast growing information technology and healthcare sectors. By comparison, Australia has around five per cent in these sectors.
The Australian market is highly concentrated with a large representation in the financial services and resource sectors. The top 10 Australian companies make up more than 40 per cent of S&P/ASX 300 Index, with three out of the top five companies in the financials sector.
Improving your risk/return profile
Diversifying your portfolio internationally can help to improve your return potential and potentially lower your risk. The average Australian diversified fund holds between 20 per cent to 30 per cent exposure to international equities.
As each country experiences different economic growth rates, consumer sentiment and political issues, international sharemarkets can grow at different time and rates. Within each country there will also be industries and companies that perform better at different times. For example, the retail sector tends to perform well when interest rates are low and consumer confidence is high.
Accessing global investment opportunities
Investing in a global equity fund that tracks the MSCI World Index is one way of achieving access to many of the world's best known brands such as Coca-Cola, Microsoft, Nestle and Vodafone. These companies can be classified as truly global with customers all around the world.
The MSCI World (ex Australia) Index comprises more than 1,700 companies listed on the exchanges of 22 of the world's major developed economies.
There are a number of different international share fund types, including:
- Country or regional funds invest in a single country, like the US, or a single region like South East Asia
- Global share funds hold a diversified portfolio across world sharemarkets
- Specialist funds like global sector, theme or style biased funds can invest in a single sector like global resources or a basket of countries like emerging markets for example.
- Indexed funds are designed to track a market index so they will hold a wide variety of stocks. Index funds are also available in global, country and sector types.
Top 10 companies in MSCI World (ex-Australia) Index*
- Exxon Mobil
- Procter & Gamble
- General Electric
- AT&T
- Johnson & Johnson
- Microsoft
- Royal Dutch Shell
- Chevron
- Nestle
- BP
Risk/return characteristics
International shares are considered a high risk and high return investment. As such, they are suited to investors with longer-term investment horizons (seven years plus).
International shares don't provide the same tax-effective income benefits as their Australian counterparts. Income generated from international assets is generally in the form of realised capital gains rather than dividends.
Currency
International share portfolios get their returns from two sources - the change in the value of the investment and currency returns. When the Australian dollar falls relative to overseas currencies, it has a positive performance impact for Australian investors, and vice-versa.
Fully hedged funds incorporate a currency edge to act as a buffer against local currency fluctuations. In effect, fully hedged investors receive returns equal to a weighted average of individual country returns in local currency terms. As the Australian dollar exchange impact has been removed, hedged investors can focus solely on international market movements.
Having said that there can be an opportunity cost to currency hedging. Currency exposure can add an important diversification element to overseas investing. While US dollar denominated assets usually make up the largest component of an international equity portfolio at around 50 per cent, a diversified international portfolio can be exposed to more than 20 different currencies.
Some fund managers will partially hedge their portfolios based on their market outlook. Currency markets can be volatile and speculation on currency movements risky.
* Source: Vanguard - 30 November 2008