5 tips for investing directly in international shares
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Australian investors need to be aware of the risks an over-exposure to domestic companies pose to their portfolio.
There are some good reasons why equity investors around the world favour their home market. For example, in Australia, imputation credits earned by holding shares in locally-listed companies are a particularly attractive tax incentive.
On more of a subconscious level, a greater familiarity with local versus foreign companies also influences many people to stick with domestic equities.
However, numerous studies highlight the pitfalls of taking too narrow a view on the assets you're willing to add to your portfolio. Australian Tax Office figures indicate less than 1 per cent of Australian SMSF assets are invested directly overseas.
"It's out of whack in terms of well-adopted investment theories on the principles of diversification as followed by the professionals, [which are] not echoed in Australian SMSFs," says Andrew Alcock, managing director of managed portfolio provider HUB24.
1) Be aware of concentration risk
The Australian stock market is particularly concentrated, with the big four banks plus BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), the "big four" banks, Telstra (ASX: TLS), Wesfarmers (ASX: WES), CSL Limited (ASX: CSL) and Woolworths (ASX: WOW)accounting for more than 50 per cent its total capitalisation.
Collectively, the financial and mining sectors account for around 60 per cent of the ASX All Ordinaries Index.
Diversifying your portfolio beyond Australia can offer a much broader range of class-leading businesses--and there are various ways of gaining direct access to international equities.
2) Consider using an online broker
The four major Australian banks--Westpac (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA), Australian and New Zealand Banking Group (ASX: ANZ), and National Australia Bank (ASX: NAB)--each provide an online retail platform for the purchase and trade of international shares.
The CommSec, Westpac Online Investing, ANZ Share Investing, and nabtrade platforms enable investors to buy and sell shares from the major international exchanges, including the New York Stock Exchange, the NASDAQ, the London Stock Exchange, and Euronext.
You can also choose from a number of non-bank stockbrokers including Bell Potter, Morgans, Patersons, and CMC Markets. While some of these currently only offer access to Australian-listed stocks, this is changing--and CMC Markets does facilitate the purchase of stocks in a number international markets.
3) Read the fine-print on fees
The higher costs of trading international shares, compared with domestic shares, is a key consideration--with direct investing in international stocks considerably more expensive.
Fees and charges to look out for include those for brokerage, currency conversion, foreign security custody, and internal transfers.
Separately managed accounts (SMAs), which are mentioned in more detail below, tend to be lower cost than managed funds, with fees usually in the range of 0.5 and 1 per cent, depending on who is providing the model.
On top of this, you will also pay a platform fee of around 0.5 per cent.
4) Sign up with a private bank
Particularly for high net wealth individuals, a private bank may also provide a viable way of accessing direct international shares. Each of the "big four" mentioned earlier have private banking divisions.
Other key players in this space are Credit Suisse, Deutsche Bank, Macquarie Group, and UBS. These are typically open to investors who have at least $1.5 million in loans or $2 million of investable assets.
5) Establish an SMA
SMAs--also known as managed portfolios--enable you to maintain direct ownership of your investment portfolio, managed in line with a set investment strategy.
SMA providers build a model portfolio according to their investment selections and relative weightings, with HUB24 and Praemium two key players in the Australian space. Both currently provide access to Morningstar Investment Management's Australian Income Portfolio, among others.
While SMAs are generally only accessible if you have a financial planner, this is expected to change in the near future. Praemium is planning to roll out a direct offering in 2017. Similarly, HUB24 will be providing direct access to individual international equities.
Currently, Praemium only caters for self-directed investors through a couple of robo-investment platforms, including InFocus's earnie.com.au. This also uses Morningstar's investment calculation methodology, which supports some of the United States' largest direct advice providers, and has been specifically modified for Australian investors.
"I think that we'll find by the end of next year, most SMAs will offer a combination of direct international and domestic equities," says Andrew McDonald, head of strategy, Praemium.
He suggests that for international exposure, most advisers "still prefer to put people into internationally-focused managed funds and ETFs ... but that will probably change progressively over time. There's still a big focus on direct equities through the SMA world."
Market capitalisation of 15 largest exchanges (December 2015) - AUD trillions
Source: World Federation of Exchanges
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Glenn Freeman is Morningstar's senior editor.
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