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Australians travel offshore to seek better returns

Nicki Bourlioufas  |  09 Aug 2021Text size  Decrease  Increase  |  
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Australians are investing record amounts in overseas markets seeking diversification and strong equity returns, according to data from the Australian Bureau of Statistics.

Offshore assets held by all managed funds, including superannuation funds, struck a record $696.6 billion, up 6.9 per cent from the December 2000 quarter. This exceeded the levels held in Australian shares which stood at $592.1 billion, up from $562.6 billion.

Shares were boosted by gains in overseas and Australian share markets. In the US, progress on vaccination distribution, particularly in the US, improved investor sentiment. US stocks hit record highs during the first quarter of 2021.

In contrast to rising equity values, the amounts invested by all managed funds in cash deposits fell by 6.5 per to $265.5 billion from $267.1 in the March quarter, in line with interest rates remaining at historically low levels.

The total assets held with managed funds hit $4.11 trillion at 31 March 2021, according to ABS data, driven by big increases in share values.

Financial professionals say Australian investors are increasingly investing offshore given that international share markets offer greater investment opportunities and potentially greater returns.

Hugh Lovibond, a senior financial adviser with Millennium Wealth, says much of the money going offshore has been invested in US shares where the market’s outperformance driven by technology stocks such as Amazon, Alphabet, Apple, Facebook, Microsoft and Netflix.

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“One of the largest holdings of managed funds is generally US shares," he says. "This may include exposure to shares in the S&P 500, Nasdaq or Dow Jones Industrial Average. These indexes have shown huge growth over the 16 months, well surpassing the increase we saw here on the ASX.

“The ASX comparatively is very heavy on financials and mining, which have performed well over the last six months, however, not nearly as well as technology stocks overseas."

Felicity Thomas, senior private wealth adviser with Shaw and Partners, adds that the Australian share market is very small compared to other international markets.

“For example, the ASX had a US$1.3 trillion market capitalisation as at December 2020, while the US [share market] was worth US$26.1 trillion, China was worth US$11.3 trillion and the UK share market was worth US$3.3 trillion," she says. "To put this in perspective, Apple, Microsoft and Amazon all have a larger market capitalisation than the entire Australian market."

“Australia only has three mega-capitalisation companies [worth] over $100 billion - BHP, Commonwealth Bank and CSL.”

Karyn West, managing director of Apostle Funds Management says there has also been some movement away from the ASX to MSCI orientated portfolios.

“With regards to equities, we believe that this is driven by greater diversity offshore than domestically and specifically in areas of healthcare and IT," she says. "There may also be an element of concentration risk with very large institutional clients needing to reduce their home country bias."

The chart below displays the outperformance of international shares over a one-year and three-year period to March 31, 2021, compared to Australian shares.

Asset class index returns

Source: GESB Superannuation (Australian Shares - S&P/ASX Total Return 200 Index; International Shares - MSCI World ex-Australia Net Total Return AUD Index; Global Listed Property - FTSE Custom EPRA/NAREIT Developed Index Net TRI AUD; Australian Bonds - Bloomberg AusBond Composite 0+ Yr Index; Global Bonds - Bloomberg Barclays Global-Aggregate Total Return Index Value Hedged AUD; Cash - Bloomberg AusBond Bank Bill Index).

Over the longer term (over 10 years), international share investments and global listed property have easily outstripped gains on domestic shares, while cash has delivered the lowest, according to GESB Superannuation.

Cumulative asset class index returns

Source:  GESB Superannuation (Cash - Bloomberg AusBond Bank Bill Index; Global Bonds - Bloomberg Barclays Global-Aggregate Total Return Index Value Hedged AUD; Australian Bonds - Bloomberg AusBond Composite 0+ Yr Index; Global Listed Property - FTSE Custom EPRA/NAREIT Developed Index Net TRI AUD; Australian Shares - S&P/ASX Total Return 300 Index; International Shares - MSCI World ex-Australia Net Total Return AUD Index).

Don't forget about currency

However, some additional risks come with investing in offshore assets, including currency volatility.

“With international investing in particular in direct equities the biggest risk would be currency risk,” says Shaw’s Thomas. “However, when you plan to hold an investment over the long term the currency risk usually comes out in the wash.”

Any drop in the Australian dollar helps investors as it magnifies gains when assets are converted into local dollars. For example, if the Australian dollar fell by 10 per cent, the value of your offshore investments would rise by 10 per cent. However, any rise in the Australian dollar diminishes returns when assets are converted into the local currency.

MORE ON THIS TOPIC: Hedging for currency risk

Hugh Lovibond says the risks of investing in international shares or property come with all the normal risks of investing.

"This includes the ability to lose money if your asset goes down in value, he says. "You are also exposed to regulatory or political risks in the country you are investing in.

“On top of this all you get currency risk. When you invest overseas, you need to convert your Australian dollars into another currency to buy the asset. There is the potential that when you sell this asset, that the currency value has moved negatively.

"Some managed funds provided ‘hedged’ versions of their investments to help mitigate this risk. However, with property investments this is a lot more difficult to do." 

is a Morningstar contributor.

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