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Aussies flock to offshore assets

Nicki Bourlioufas  |  13 Sep 2019Text size  Decrease  Increase  |  
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In the chase for yield and diversification Australians are investing record amounts of money offshore, new figures show.

Despite the wider scope of investments opportunities, however, there are currency and political risks investors should factor in, asset managers say.

Data released by the Australian Bureau of Statistics for the June quarter of 2019 shows that offshore investments by all managed funds institutions in Australia, including superannuation funds, totalled a record $561.1 billion.

That represents 16 per cent of all managed funds of $3.53 trillion. The level of offshore managed funds soared 13 per cent from $496.9 billion a year earlier.

Financial experts say people are diversifying their portfolios away from Australian shares and property into assets abroad.

Alastair Reynolds, a portfolio manager of global emerging markets at fund manager Martin Currie, a Legg Mason affiliate, says international equities, including emerging market equities, can diminish “home country” bias – the tendency for Australian shareholders to overly rely on banks and miners.

Looking abroad may also allow investors to tap into emerging trends that are less developed in Australia, Reynolds says.

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“This is not just geographical diversification, but also access to a wider range of sectors and ability to invest in thematic opportunities than is available in the Australian market.

“Examples of these thematics include cloud computing, social media, renewable energy, underpenetrated consumer markets and infrastructure build out,” says Reynolds.

Giuseppe Corona, AMP Capital head of global listed infrastructure, says by choosing a single country/sector approach rather than adopting a global approach, the investor can be overly exposed to the value drivers and risks of that specific country or sector.

“By solely focusing on the domestic market, investors may miss out on exposures to global infrastructure thematics such as the explosion of data usage worldwide and the race to 5G.

“Additionally, within particular sectors such as transportation infrastructure, we currently see better value opportunities internationally,” says Corona.

Chasing growth

International investing also lets you take advantage of higher potential economic growth in foreign countries, especially in emerging markets, where investment returns are expected to be higher time, though at higher risk.

“International investing provides diversification to different points in the economic cycle,” says Reynolds.

That is backed up by economic growth forecasts which paint a dire outlook for developed nations, including Australia, while emerging Asian nations are expected to still experience strong growth.

According to IMF forecasts, China is predicted to grow 6.3 per cent in 2019 and 6.1 per cent in 2020 and India’s economy is set to grow at 7.0 per cent in 2019, picking up to 7.2 per cent in 2020.

That is more rapid than Australia’s expected economic expansion of 2.1 per cent in 2019 and 2.8 per cent in 2020 and the US, which is expected to grow 2.6 per cent in 2019 and 1.9 per cent in 2020.

Reflecting a stronger performance too, mainland Chinese shares, or China A-shares, have gained around 34 per cent, as measured by A-Share benchmark, the CSI 300 over the year to 13 September. That compares to Australia’s ASX/S&P 200, which is up by about 18 per cent and the US benchmark, the S&P 500, which is up by 20 per cent.

“For our global emerging markets portfolio, we are particularly favourable towards China, simply for the wealth or opportunity it presents for active managers and fundamental stock pickers,” says Reynolds.

“We are also favourable towards in India for its high growth potential and the likelihood that the Indian government will continue its policy of structural reforms to make the country more productive.” 

Factoring in country-specific risks 

However, investors are subject to country-specific risks such as political, economic and regulatory changes when investing offshore. The current tensions in US-China political and trade relations highlight this risk, which has added to the volatility of Chinese share investing.  

Currency risk is another big risk investors face if they go offshore. Foreign investments are usually held in the currency of the country of origin. Income and capital gains or losses must be converted into Australian dollars, which exposes investors to the risk of exchange rate movements.

Any rise in the Australian dollar diminishes returns when assets are converted into the local currency. However, any drop in the Australian dollar helps investors as it magnifies gains when assets are converted into local dollars. 

“Hedging can play a role in making currency outcomes more predictable, but this does come at a cost. We don’t typically hedge equity portfolios for our clients,” says Reynolds. 

If investors do opt to hedge their offshore investments, hedging typically adds an additional 2 to 5 basis points to the cost of a managed fund where fund managers offer both hedged and unhedged versions.

is a Morningstar contributor.

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