Despite a ‘home country bias’, investing overseas is picking up speed in Australia. Here’s what you need to know.
Australian investors have long shown a ‘home country bias’, which is a fancy way of saying we prefer to invest in our own backyard. Some Australians have exposure to overseas shares via their super fund, but most wouldn’t know it. In fact, 54 per cent of Australia’s $2.0 trillion super investments were invested in equities as at the end of March 2021. Of that, 27 per cent was in international listed equities.
However, according to the ASX Australian Investor Study 2020, only 16 per cent of Australian shareholders directly own international shares.
Advantages of investing overseas
Putting all your eggs in the Aussie share basket means you may be missing out. There are three big advantages to investing overseas.
Sticking so close to home means you miss out on investing in some of the world’s most successful companies. Widening your investment horizons gives you access to a much larger marketplace.
The ASX has remained largely the same over the last decade, with the ASX300 mainly featuring resource companies and financial organisations. The world’s biggest and most successful companies are listed elsewhere.
In fact, the Forbes Global 2000 (which measures the world’s largest public companies by assets, market value, sales and profits) lists the CBA as the #1 Australian company, which is a very humble #78 on the global list. The BHP Group is #79 and then ANZ is way down at $141.
A further advantage of investing overseas is that you can diversify your risk. The home country bias leaves your investment portfolio overweight in Aussie assets. If the Australian economy slumps, so will your entire portfolio.
Investing overseas allows you to take advantage of the strength of a particular economy and cushion the risk of being tied to the success of the Australian economy. You basically spread your investment risk and hopefully smooth your returns.
The risks of investing overseas
Before you get too excited, you also need to understand the risks.
Different rules and regulations
We have our way of doing things, and other countries (and exchanges) have their own way of doing them. It can be challenging to get your head around what you can and can’t do. You also have to contend with what the law in each country requires of companies – you may find that you don’t have access to the same published information you are used to in Australia.
Exchange rate fluctuations
Exchange rate fluctuations can magnify gains or losses and this can be very difficult to predict.
Fees and levies
Fees can rack up when you’re investing overseas. As well as foreign levies and taxes, transaction fees can often be higher than domestic fees.
Income from overseas investments is still subject to tax in Australia. Tax offsets may be available if you’ve already paid tax in the foreign country, so consult a tax specialist or financial adviser for advice.
Increased political and regulatory risks mean that international markets can be highly volatile. Unexpected major changes in a country can create economic and political threats. These may not even be covered in the Australian media, so you can be completely blindsided.
How to invest overseas
Now you’ve weighed up the pros and cons of investing overseas, you need to decide how you want to invest. There are three main options:
1. Managed funds
Investing in an international managed fund means a team of professionals make investment decisions on your behalf.
There are countless different funds that track different benchmarks and are either actively or passively managed, so look for one that best suits your needs.
2. Exchange Traded Funds (ETFs)
These track the performance of an index, but unlike managed funds, can be bought and sold at any time on the share market. These provides a simple and cost effective way for investors to gain international exposure. Find more about this here: How to get started micro-investing and why you’ll want to
3. Direct investments
It’s relatively simple to invest directly in international shares these days, although it can be expensive. Remember, as with any direct investment, you’re responsible for understanding the risks and making decisions about when to buy or sell.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.