Here's what you should consider when building international exposure into your portfolio.
Diversifying across different geographic markets can help counter some of the losses you could face if the local economy suffers a downturn, because other global markets may be performing better at those times.
This reduces the risk of your entire investment portfolio being derailed in the event that your local economy slumps.
Another big benefit of looking offshore is the opportunity to gain exposure to a broader range of investments than those available in the Australian market.
There are very limited options for investing in technology and branded consumer goods on the Australian share market, for instance, whereas there are many more options if you're willing to look to places such as the US or Japan.
As with most investments, however, investing offshore is not without risk. Depending on what type of investment you select, there will be different risks attached, but two important considerations to call out are country-specific risks and currency risk.
Currency risk is when movements in the exchange rate can impact the Australian dollar returns of your investments. Some international investors may choose to handle this by opting for hedged investment choices, which, although they can cost more, remove the impact of currency moves on performance.
Longer term investors however, may choose to invest internationally on an unhedged basis on the grounds that this is a way to access additional diversification by also providing exposure to currency moves.
Other country-specific risks might include a certain economy performing poorly or political risk – for example if a country’s policies change then the company you are invested in may suffer adverse consequences.
Another consideration for Australian investors interested in global exposure is taxation.
You must declare income from overseas investments, such as rental income from overseas property and realised capital gains on overseas assets. Although you can claim a foreign income tax offset in Australia if you have paid tax on this income in another country, it’s also worth considering the fact that Australian shares may deliver some tax advantages that global investments do not, such as franking credits.
Many Australians typically have exposure to international investments via their super funds.
While the relative weighting of these assets will change in accordance with what option you are invested in, many large super funds will allocate an equal portion of funds to global and Australian shares in addition to investing some money in other international asset classes, such as global property and infrastructure.
For self-managed super funds (SMSFs), however, the allocation to international assets is typically much lower than larger super funds. The latest asset allocation tables for SMSFs from the Australian Taxation office showed allocation to Australian investments far outweighs international exposure.
Some brokers, such as CommSec, enable you to buy and sell shares directly in companies listed on different global stock exchanges.
While at Level 1 (the outer coloured ring of the chart below) you can access specific global brands that you might know, there can also be challenges in comparing prospective investments, as you might in Australia, because of differences in disclosure requirements for example.
Image: CommBank
To get a broader exposure to regions and sectors and delve beyond single companies, some investors look to index and managed funds.
Index and managed funds
An index fund tracks the market return of a specific share index or other group of assets, such as the US S&P 500, or Global Consumer Staples, for instance.
Exchange traded funds (ETFs) are listed on a stock exchange with units in an ETF available to be bought and sold like shares through a broker, providing access to specific regions or countries, as well as particular themes.
They offer a relatively low-cost entry into markets that might otherwise be difficult to gain entry and provide diversity, transparency and liquidity to assist in mitigating risk, particularly when markets are volatile.
Managed funds that invest in global securities can provide another option for introducing international exposure to a portfolio with professionals actively managing the assets of the fund.
Funds can invest in global shares, global property, global infrastructure and in countries with specific profiles, such as emerging markets.
While managed funds can take the fuss out of choosing specific investments and can also give you access to an asset mix that might otherwise be difficult to replicate, they can also come with higher fees than some other types of investments and may underperform the relevant index.
Another way it may be possible to introduce international exposure to your investments is via certain companies which are listed on the ASX but have significant offshore operations, deriving the majority of their revenue from overseas markets.
While these sorts of companies can more readily be found in some sectors than others, such as health care and resources, for instance, there are other locally listed industrial and property companies that may also fit this bill.
Things you should know
This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. You can view the CommSec Share Trading Terms and Conditions and Financial Services Guide, and should consider them before making any decision about these products and services. Any securities or prices used in the examples, including but not limited to Exchange Traded Funds given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance.
© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly CHI-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
Commonwealth Bank is also not a registered tax (financial) adviser 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, or could arise, under a taxation law.
