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Morningstar Guide to International Investing

Mark LaMonica, CFA  |  26 Jul 2022Text size  Decrease  Increase  |  
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A key part of my job as the individual investor product manager here at Morningstar Australia is to know as much about our subscribers’ investing habits as possible. In a little over two years at Morningstar I have been constantly surprised by the domestic bias of our subscribers—that is, their tendency to only invest in local shares. A recent survey of our Investor subscribers shows that the average allocation to international investments is 21%. And 54% of subscribers have no international exposure in their portfolio.

Context is crucial here, so I am going to use my own portfolio as an example. Not because I’ve done it all right—on the contrary—but because a real-life example will better show what’s at stake. Like most things in life, I’m striving to become a better investor. This is a personal example, but I think it nevertheless highlights some of the crucial principles of this investing guide.

Take a deeper exploration of my portfolio through the full guide in Morningstar Investor

How does my portfolio compare to the global market?

Does it matter where a company is headquartered?

Global allocation: how much is enough?

The Morningstar Portfolio Construction Guide contains five different defensive/growth asset class combinations related to five different levels of risk:

  • Conservative
  • Cautious
  • Balanced
  • Growth
  • Aggressive

To understand the recommended allocations, you can read the full Morningstar Portfolio Construction Guide in Morningstar investor. 

What are the impediments to international investing?

The purpose of this guide is to examine the reasons why our subscribers don’t invest internationally. The reasons make complete sense and echo some of my own experiences in trying to increase my global allocation.

The rationale that our subscribers gave for not having a higher global allocation:

  • 29% said they don’t know enough about overseas markets
  • 20% said they are concerned about currency risk
  • 10% said they don’t know what to invest in
  • 7% said they don’t know how to access investments in overseas markets
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At Morningstar, our mission is to empower you to make sound investing decisions. We believe that being better informed about global investing is a means to that end. Along with the information contained in this guide we are happy to announce that we’ve expanded our stock coverage to include global data and research. Where we previously covered 200 companies from Australia and New Zealand, we’re now adding research on 1300 additional global companies from North America, Europe and Asia.

We hope you will find this guide useful. Happy investing. 

 

Introduction

“I wanted real adventures to happen to myself, but real adventures, I reflected, do not happen to people who remain at home: they must be sought abroad.” – James Joyce

 

The Australian Stock Exchange makes up just 2% of global sharemarkets. That’s a whopping 98% of the world’s sharemarkets that remain untapped if your portfolio only includes Australian investments.

Within the ASX, 60% of companies belong to the banking and resources sectors. This consequently means limited asset class diversification and little exposure to emerging industries. Investing overseas, however, can mitigate concentration risk while providing exposure to a great mix of stocks that are otherwise underrepresented in Australia, such as technology. By spreading your investments and risks strategically you insulate yourself against the potentially nasty side-effects of one market falling.

 

Why should you invest overseas?

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill

Diversification

Diversification is a straightforward concept that is commonly misapplied and misunderstood. The goal of building a diversified portfolio is to lower risk without affecting the level of returns. The key question is: What is the risk that you are trying to diversify away from? At Morningstar, we think about risk differently than most of the financial industry, who use terms such as “price volatility” and “standard deviation”. Traditional views of diversification prioritise the correlation between different assets classes and focus on creating a portfolio that contains asset classes that show little correlation. In other words, the portfolio contains some asset classes that are supposed to go up when other asset classes go down. That way there is less short-term volatility in the overall account value.

Explore the Morningstar definition of diversification in the full guide on Morningstar Investor.

Composition of global sharemarket

 

Risks of overseas investments

“Most people talk about fear of the unknown, but if there is anything to fear, it is the known.” – Deepak Chopra

International investing presents a list of advantages but also a unique set of risks. How you negotiate these risks will again depend on your personal circumstances and risk appetite. In addition to garden-variety investing risks, you must also be aware of currency risk and political, economic and regulatory risk.

Currency risk

Political, economic and regulatory risks

The full guide looks at the reasonings and risks of international investing in more detail. Find it on Morningstar Investor. 

 

How do you invest globally?

“Risk comes from not knowing what you’re doing.” – Warren Buffett

We have gone through the why and how of international investing. The biggest question that investors typically have is what to buy. That is where Morningstar can help. Our global coverage uses the same consistent research framework in every region where our 270 analysts are evaluating investments. We offer independent research on more than 1500 global equities spanning markets in Europe, North America, Asia and Australia. We also offer research on more than 450 managed products, including a number of LICs, ETFs and managed funds that provide global exposure.

Below are some of the ways that Morningstar Investor can help you invest globally:

Morningstar Portfolio Construction Guide

The Morningstar Portfolio Construction Guide offers suggestions on global asset allocation and the portfolio construction process.

Image of the Morningstar Portfolio Construction Guide

Global Equity Best Ideas

Morningstar’s monthly Global Equity Best Ideas is a compilation of stock ideas sourced from Morningstar’s global equity research team. Coverage includes companies based in Australia & New Zealand, Asia, the Americas and Europe, which are currently trading at significant discounts to our assessed fair values.

Image of the Morningstar Global Equity Best Ideas

Discover investments

Our Discover investments features provide a summary of investment ideas that have received ratings from our Equity and Manager research team. See our 5-star and Moat-rated equity ratings from the US, Europe and Asia and our Gold-, Silver- and Bronze-rated ETFs and Funds.

Image of the Discover Investments

Morningstar Equity Research Reports

Morningstar’s Equity Research Reports contain a comprehensive view of each security that we cover. We provide an overall recommendation based on our calculated intrinsic value compared to the current price of the security. The key to our evaluation of each security is our assessment of the four key components of our fundamental analysis: the fair value estimate, uncertainty rating, economic moat, and stewardship rating. Our analyst report also includes our full investment thesis and comments on the valuation and risk of the security.

Image of Morningstar Equity Research Reports

Morningstar Manager Research Reports

Morningstar’s Manager Research covers LICs, ETFs and Managed Funds. We provide our forward-looking qualitative Morningstar Analyst Rating along with detailed research reports. Our full analyst report includes our view of the role that the fund or ETF can play in a diversified portfolio as well as our assessment of the investment team, investment process and the various fees that investors are likely to incur.

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is a product manager, individual investor, Australia.

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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