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The how and why of buying international shares

Morningstar staff  |  23 May 2017Text size  Decrease  Increase  |  

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International share ownership among Australian investors is rising, but domestic exchange-listed companies are still preferred, according to a new study from Deloitte and the ASX.

 

Around 75 per cent of share-market investors hold only domestically listed stocks, the Australian Investor Study 2017 found. Deloitte Access Economics and the ASX surveyed 4,000 people for the study, which has been conducted since 1986.

More than one-third (37 per cent) of Australia's adult population held shares in listed companies as of February 2017, up slightly from 36 per cent in 2014. While this has remained largely consistent over recent years, the rate of international share ownership has increased, as shown in the chart below.

The researchers suggest this may partly reflect both improved appetite for overseas listed investments and better access.

Below are some tips for Australian investors who are considering either buying direct international shares for the first time, or increasing their international share exposure.

In addition to these points, a subscription to Morningstar can provide detailed analysis on some of the top overseas-listed companies, along with a large range of Australian companies.

 

International share ownership, proportion of adult population

chart

Source: Deloitte Access Economics

 

Be aware of concentration risk

The Australian stock market is particularly concentrated, with the big four banks plus BHP (ASX: BHP), Rio Tinto (ASX: RIO), Telstra (ASX: TLS), Wesfarmers (ASX: WES), CSL Limited (ASX: CSL), and Woolworths (ASX: WOW) accounting for more than 50 per cent of 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.

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. However, they're regarded as relatively expensive.

You can also choose from several non-bank stockbrokers including Interactive Brokers, 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 also facilitates the purchase of stocks in a number international markets.

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.

Sign up with a private bank

For high net wealth individuals in particular, 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.

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 soon, with providers including Praemium and HUB24 planning to launch direct offerings.

"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."

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