by Patrick Garrett We live and work in an increasingly globalised world; advances in technology and telecommunications make it easier to work, travel, shop and invest around the world. Despite the prevalence of global products and services in our local market, many Australians hold most of their wealth in property or blue-chip Australian shares. Wealthy investors and family often invest significant amounts overseas … so, what do they know that you may not?
WHY GLOBAL INVESTMENT?
While Australia is the world’s 13th largest economy, it contributes less than 2% of global economic output and represents less than 2% of world markets based on market capitalisation.
Feeling nervous about the likelihood of Australia experiencing an economic slowdown or property market correction? Investment in the other 98% of the world’s markets presents many opportunities to diversify your portfolio:
By industry: global investment provides access to several industries that aren’t available domestically:
- Information technology makes up 16.4% of the MSCI World Index but just 1.5% of the ASX200; tech giants such as Apple, Microsoft or Google aren’t available locally;
- Aircraft manufacturers, such as Lockheed Martin and Boeing;
- Healthcare, including household names such as GlaxoSmithKline, manufacturer of Panadol and Sanofi, manufacturer of Nature’s Own;
- Multinationals such as Kimberley Clark, Nestle, and Proctor & Gamble, all of which produce many everyday brands, ranging from food to cleaning products to toiletries.
By geography: in both developed and developing countries, economies grow at different rates and have different economic cycles. Investing across a range of economies can help smooth your overall portfolio returns when one economy experiences a downturn.
By demographic trends: global investment provides exposure to demographic trends that are shaping the world such as:
- The ageing population in developed markets, which is creating a growing need for advances in healthcare, aged care facilities and in-home support. The retirement of baby boomers will also support industries such as travel and leisure.
- The emerging ‘consumer class’ in China and India, two countries with large populations, solid economic growth and a burgeoning middle class with an appetite for ‘brand’ consumer goods.
While Australia has a buoyant sharemarket and many world-class companies, many of the companies positioned to benefit from global trends are based in other markets.
2. The Australian sharemarket is concentrated
As well as representing just 2% of world markets, the Australian sharemarket is highly concentrated; Australia’s top 20 companies comprise nearly 56% of the S&P/ASX-200 index and of these, banks and resource companies dominate. The Australian property market is fundamentally tied to the banking sector, given the large concentration of retail bank assets held within residential mortgages. This further reduces the diversification of portfolios with large exposures to both Australian property and blue chip Australian equities.
3. Everyday products
On a typical day, Australians use a wide range of products and services sourced from across the globe; we wake up to an alarm from an Apple iPhone (US), shower using Pantene shampoo (UK) and Dove soap (Netherlands), and make a morning Nespresso (Switzerland). Technology plays a significant role in most of our lives, at work and home; you may use Google (US) to undertake research, catch up with friends on Facebook (US) or buy a Sony (Japan) TV on eBay (Germany) using PayPal (US).
You might drive your Toyota (Japan), BMW (Germany) or Mini Cooper (UK) to work, stop to fill up at Shell (Netherlands), BP (UK) or Caltex (US) and grab a Coke (US) along the way. Everyday products, global companies.
4. Investment returns
As well as having a sound investment premise, investing in global equities can deliver solid long-term returns.
| MARKET | BENCHMARK ETF | 1 YEAR % P.A. | 3 YEARS % P.A. | 5 YEARS % P.A. |
|---|---|---|---|---|
| Australia | S&P/ASX 200 (“STW”) | 14.61 | 8.72 | 10.56 |
| US | S&P 500 unhedged (“IVV”) | 19.59 | 15.32 | 23.34 |
| Global ex Aust | MSCI index ex AUS (“QUAL”) | 20.51 | 12.62 | 19.38 |
| Emerging markets | FTSE Emerging Markets All Cap (“IEM”) | 29.27 | 10.37 | 11.48 |
Annualised returns for global indices at 30 November 2017. Source: Fact sheets from ETF providers. Past performance isn’t a reliable indicator of future returns.
The growth potential of global businesses is enormous and enables you to build an investment portfolio to meet your financial objectives, and suit your risk profile and investment horizon.
HOW TO INVEST INTERNATIONALLY
It’s now easier and more affordable than ever to invest globally using ASX-listed Exchange Traded Funds (ETFs), passive index funds that provide exposure to a range of global investments and enable you to easily construct a portfolio that includes exposure to thousands of companies around the world.
ETFs have experienced enormous growth worldwide, and the Australian ETF sector recorded a record month in September 2017, with the ASX reporting that more than one billion dollars flowing into the sector, taking its total market cap to $32 billion. Of this, 40.8% was invested in global equity ETFs.
As well as global equities, you can further diversify your portfolio by using ETFs that track more defensive global asset classes such as infrastructure, fixed income and listed property. This can help you to manage risk through prudent asset allocation, while still diversifying into global markets.
If you’re unsure about selecting the right ETFs to meet your financial objectives and for your risk profile, an automated investment service, such as a robo-advisor, is worth considering. A robo-advisor typically provides investors with a personalised portfolio of globally diversified ETFs, at a low cost – click here to read about why low costs matter. That’s important because you want your investments working for you, not being eaten away by unnecessary or excessive fees. You could, of course, try other ways to invest in global markets.
1. Managed funds
You (or your financial adviser) could buy managed funds and try to outperform the market. Before you do, consider this – analysis by Standard & Poor’s shows that most Australian actively-managed, general international equity managed funds have not outperformed the benchmarks they are measured against. Why would you overpay for underperformance?
PERIODS ENDING JUNE 30, 2017
| TIME | % FUNDS OUTPERFORMED BY INDEX |
|---|---|
| 3 years | 84% |
| 5 years | 91% |
| 10 years | 90% |
Source: SPIVA Australia Scorecard, Index: S&P Developed Ex-Australia LargeMidCap Index
2. Direct investment
While technology makes direct investment in global shares more accessible, it can be costly, time-consuming and stressful. If the experts can’t outperform the markets, you will probably find it challenging too!
As with all investments, it’s important to consider how global shares and other global investments fit within your investment goals, risk tolerance, investment timeframe and overall portfolio. It’s important to remember that while some countries and industries may experience higher growth and offer higher potential returns, they may also come with a higher level of risk.
At Six Park, we believe doing the following three things will help you achieve optimal long-term investment results:
- Getting your asset allocation correct (which might include global assets)
- Keeping your costs low
- Reviewing your portfolio periodically to ensure it remains appropriate for your circumstances.
Using ETFs and a low-cost, automated robo-advice investment solution such as Six Park can be an effective way to achieve your financial goals, and provide comfort that your investments are being monitored by a group of experienced investment professionals.
This article may contain general financial product information but should not be relied upon or construed as a recommendation of any financial product. This information has been prepared without taking into account your objectives, financial situation or needs.
For further details on our service please see our Financial Services Guide at http://www.sixpark.com.au. Past performance is not a reliable indicator of future performance.