For a large part of the last decade, many Australian investors may have questioned why they should hold overseas shares given the performance of the local market together with the added attraction of franked dividends.
Yet over the past five years, global shares have truly outperformed the local market as a glance of the MSCI World Index (ex Australia) shows – on both a hedged and unhedged basis.
Yet regardless of the strong performance of global shares in recent years, it always makes sense for investors to consider an appropriate offshore share exposure as part of setting an asset allocation for their portfolios. This is definitely not an issue of chasing past returns.
Research has long shown that asset allocation is the primary determinant of an investment portfolio’s return viability and long-term performance. (The main asset classes are, of course, local shares, international shares, property, fixed interest and cash.)
The holding of a diversified portfolio with an appropriate asset allocation is one of the most fundamental principles for investment success. In short, investors spread their risks and their opportunities as they work towards meeting their long-term investment goals.
As Smart Investing recently discussed, research by SuperRatings shows that the balanced portfolios of the large APRA-regulated super funds have an average strategic asset allocation to international shares that is nearing their exposure to Australian shares. (See Exposure to overseas shares: beyond the bare statistics, 5 October.)
When considering how much of their portfolios to direct into overseas shares, investors (including SMSFs) should keep in mind:
- The Australian market is highly concentrated with a large representation in the financial services and resource sectors. (The top 10 Australian companies make up about half of the S&P/ASX 300 Index, with four out of the top five companies in the financial sector.)
- Investing in a global equity fund that tracks the MSCI World Index (ex Australia), for instance, is a means to invest in the world’s best-known brands. (The top 10 companies in the index are Apple, Microsoft, Exxon Mobile, Wells Fargo, Johnson & Johnson, General Electric, JP Morgan Chase, Nestle, Novartis and Pfizer.)
- The MSCI World (ex Australia) Index comprises approximately 1,600 companies listed on the exchanges of 22 of the world’s major developed economies.
As many Australian investors have experienced, the Australian dollar’s fall in value against the US dollar has lifted returns from unhedged global share funds.
It can make much sense to look beyond the Australian coastline when investing in shares.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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