Accessing global equities: New opportunities
Going global: Accessing new opportunities
Strong returns have placed global shares back in the spotlight. We explore the different avenues an investor can take when adding some global growth to their portfolio.
The Australian sharemarket has delivered out-sized returns over many years relative to its place in global markets.
Annualised returns of 9.2 per cent over the decade ended December 20131 have been highly attractive, placing international shares into the shade. However, Australian shares represent approximately just 2 per cent of the world’s stocks by market capitalisation2 meaning a world of opportunity has also been largely ignored.
That situation is now changing as investors take note of the slowing Australian economy, with approximately 15 per cent of self-managed super funds (SMSFs) considering investing in international shares, according to last year’s Financial Services Council survey3.
However, there are a number of choices when weighing up ways to gain access to global growth including: Australian shares with offshore operations; international exchange-traded share funds (ETFs); direct international equities and international equity managed funds.
Each choice has its benefits and drawbacks.
Australian companies with significant offshore operations can give investors a simple way to boost their global exposure. Companies such as blood product maker CSL, bionic ear company Cochlear, property company Westfield Corporation, and logistics group Brambles offer strong overseas exposure. Nonetheless, the Australian sharemarket remains dominated by financial services and resources (largely tied to China’s fortunes), unlike many offshore sharemarkets which boast significantly larger health and IT sectors.
Locally-listed ETFs are another attractive option for investors who want broad exposure to a basket of international stocks at low-cost. There has been significant growth in the popularity of international-focused ETFs with five of the top 10 by market cap offering global exposure4. However, while ETFs are low-cost, they are also passively managed: they will not outperform the market.
Investors seeking 100 per cent global exposure and the potential for outperformance must invest in global shares directly or via a managed fund.
A number of brokers are now offering direct global share trading due to rising demand by SMSFs. However, there are some pitfalls to be wary of according to Bell Direct chief executive Arnie Selvarajah.
“Clients investing in direct global equities have found managing both the stock price exposure and the foreign exchange exposure difficult,” he says. “The stock is also moving around when you sleep – so you're exposed to intra-day movements.”
Selvarajah also notes that investors must absorb an FX spread when buying and selling direct international shares, which is an extra hidden cost on top of brokerage.
Managed funds offer the final avenue to active management. While investors must also pay an ongoing management fee they enjoy the benefits of a professionally-managed diversified portfolio of global stocks denominated in Australian dollars.
An investor can mix and match the various international equity options. For example, a portfolio with a small existing allocation to direct global shares can be further diversified by adding funds to an international ETF or actively-managed mFund depending on the investor’s goals.
1ASX/Russell Investments 2014 Long-term Investing Report.
2Perpetual/Morgan Stanley Capital International 2009. https://www.perpetual.com.au/pdf/Real_value_of_investing_internationally.pdf
3Financial Services Council survey. http://www.fsc.org.au/downloads/file/MediaReleaseFile/2014_1113_FSC-UBSSMSFreleaseFinal.pdf
4BetaShares Australian ETF Review April 2015.