Only 11% of Australian shareholders own international shares, according to an ASX investor study. Of that 11%, a significant portion is held as the result of overseas companies buying Australian businesses. As a whole, Australian investors are very domestically focussed, isolated from foreign markets.
In particular, self managed super funds (SMSFs) are noticeably underexposed to international markets. According to Canstar’s General Manager for Wealth, Josh Callaghan, international assets on average amount to only 1.2% of a SMSF portfolio compared to around 25% for the average balanced super fund.
A United Nations analysis of global foreign direct investment recently ranked Australia seventeenth in terms of proportion of foreign investment, just behind Belgium, Italy and Spain. Unsurprisingly, the United States and United Kingdom are the two major destinations for Australian investment, with $617 billion AUD and $351 billion respectively. Major Asian economies see relatively little investment, with only $381 billion invested in all of East Asia combined.
While investing locally can be advantageous due to a better understanding of the markets, it does leave you at the mercy of local financial cycles. Mr Callaghan says one of the major potential benefits of investing overseas is that you can gain exposure to markets with different economic forces.
“International shares and funds offer investors exposure to assets that may not move in line with the domestic economy and therefore, provide some counter-cyclical returns,” he said.
That is, by investing in a spread of different countries, when some regions are experiencing a downturn, others may be seeing growth, thus smoothing your returns.
How to invest overseas
As with investing in Australia, there are two main ways of investing overseas – directly and indirectly.
Direct investment
Direct investment is where you purchase an asset under your own name, such as shares or a property. The only difference is that the asset is located in another country.
While this gives you the freedom and control to manage your investments as you wish, it can also come with some drawbacks. When you invest directly in another country, you need to be aware of the regulations and taxes that apply in both the country you’re investing in, and in Australia when you collect your returns. Foreign countries can have very different legal systems than Australia, which can cause you trouble if you don’t research the differences first.
Indirect investment
Indirect investment is where you buy an asset through another party. Examples of indirect investment are managed funds, exchange traded funds or purchasing shares in an Australian company with overseas exposure.
This is an easier way of gaining foreign exposure, although you lose the control of picking and choosing your investments directly. Indirect investment can also be more expensive, due to management fees, but the ease and peace of mind can be worth the extra cost.
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Risks of international investment
Like all investments, investing overseas carries risk. However, due to the unique nature of overseas investment, there are some additional risks to be cautious of.
Different rules
Rules and regulations in other countries do not always match those in Australia, and this can lead to differences in how and when investments are processed, leading to longer delays in buying and selling assets.
There may also be differences in the type of information companies are required to provide to investors, resulting in less or different information than you can expect in Australia.
Added costs
Investing overseas can also come with additional costs, from currency conversions, foreign levies and taxes, and other transaction fees. There is also a risk of currency fluctuations negatively affecting your return, though this can also swing the other way.
It’s also important to remember that income from your overseas investments is still subject to taxation in Australia, though you may be able to obtain a tax offset if you have already paid tax in the foreign country. The ATO’s website has more information on this.
Economic and political threats
Another, harder to quantify risk in overseas investments, is that of changes in the economy or politics of a foreign country. Major changes in a country can occasionally occur without warning, particularly if you don’t speak the language. Trends and changes that would be well reported on if they were taking place in Australia may not be as well covered in other countries by Australian media.
A world of investment options
Investing overseas is not without its risks. Nevertheless, for those prepared to do the due diligence, it can provide access to different markets with different pressures, potentially enhancing or smoothing your returns. In an increasingly interconnected world, investing internationally can provide you with more options and more control over your money.
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