International shares finding favour with SMSFs

Self managed super funds account for a sizeable chunk of Australia's total retirement savings. So it's good to hear that these do-it-yourself funds tick plenty of boxes when it comes to building diverse investment portfolios that span local and international markets.

A recent report from self managed super fund (SMSF) administrator Multiport says that SMSFs are reducing their cash investments in response to low interest rates. At present, SMSFs hold, on average, 16.5% of their total investments in cash and term deposits, down from 19.1% a year ago.

On the flipside, SMSFs are increasingly turning to shares – both Australian and international, in pursuit of higher returns. As a guide, local shares make up almost 42% of SMSF portfolios, with a further 12.5% invested in overseas sharemarkets.

Australian shares have certainly performed well lately with the S&P/ASX 200 index recording year-to-date gains of 10.16%. SMSFs are taking a conservative but sensible approach by focusing on quality stocks like the big banks, and major retailers like Woolworths and Wesfarmers.

What’s really interesting is the way SMSFs are embracing global sharemarkets. According to Multiport, international equities now make up around 12.5% of SMSF portfolios, up from 10.8% 12 months ago.

The key driver for SMSF expansion into offshore shares is healthy returns. The MSCI World ex Australia Index, which measures sharemarket performance across 22 developed countries, has notched up annualised 1-year gains of 7.02% and 3-year gains of 13.08%.

Investing internationally isn’t limited to self managed super funds. Adding some overseas exposure to a portfolio can give all investors the benefit of diversity, and while it may sound daunting, offshore investing can be very straightforward when you use an international share fund.

There are a number of low-fee, exchange traded international share funds listed on the Australian Securities Exchange. Alternatively, our large financial institutions offer a variety of global share funds that can let you pick and choose the exact region, country or industry that you’d like to invest in.

However before you invest outside Australia, it’s important to understand that international shares can be higher risk than Australian equities.

For starters, global markets can be highly volatile. In 2008 for instance, international shares were smashed, plunging in value by 40%. Investing internationally can also expose your portfolio to currency fluctuations. Opting for a ‘hedged’ fund will shelter your money from currency movements but this won’t always work to your advantage – it depends on which way currencies move. A fall in the value of the Australian dollar relative to the currencies of foreign assets is favourable to international share investors’ returns here, but hedging can see you miss out on these gains.

No matter whether you are investing in international shares as an individual or through a SMSF it is essential to understand the risks as well as the upsides. Speak with your financial adviser, or take a look at my book Making Money for a better idea of what’s involved.

 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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