Based on these figures, it may well be the case then that SMSF Trustees have overlooked at least some of the benefits of investing a meaningful proportion of their funds in International Share based investments. Some of the reasons for this might include their familiarity with Australian companies, dividends and the imputation system but a lack of familiarity with overseas markets and concerns with currency fluctuations.
In this article we discuss why Investors should more rigorously consider International Share based investments, in particular though Exchange Traded Funds (ETFs) and the benefits of doing so.
The Australian Share market and the MSCI.
The Australian Share Market, as represented below by the ASX 300 Index, is characterised by the significance of the Financials and Materials Sectors which constitute around half of the value of the Index. In comparison, the International Share Market, as represented below by the MSCI World ex Australia Index (USD), with 1,581 constituents, has a broader distribution across the 11 GICS Sectors. In particular the IT Sector which includes Microsoft and Apple, and the Consumer Discretionary Sector which includes Amazon, are much more substantial than those sectors in the ASX 300 Index.
If an investor held a portfolio of Australian Shares which, like the ASX 300, had a substantial weighting in Financials and Materials, and added a portfolio of International Share based investments, similar to the GICS weights of the MSCI World ex Australia Index (USD), they would benefit through greater diversification across sectors.
Moreover, given the number of shares in the MSCI World ex Australia Index (USD) and the distribution across countries, in particular the United States, Japan and the UK, the opportunity set for Investors is much broader. This might be particularly important when segments of the Australian Share Market may seem relatively fully priced from time to time.
The Australian Share Market
is characterised by the significance of the Financials and Materials Sectors, while the International Share Market
has a broader distribution across the 11 GICS Sectors.
When evaluating International Share based investments, currency risk needs to be addressed. In general, for an unhedged portfolio (excluding a change in the market value of the investment itself), there is an inverse relationship between movements in the value of the Australian Dollar (AUD) and the value of an International Share based investment which is denominated in a foreign currency.
Very simply for Australian investors:
- If the AUD rises, there is a decrease in the value of your international investment; and
- If the AUD falls, there is an increase in the value of your international investment
An increase in the market value of the investment itself may or may not be sufficiently pronounced to reduce, or eliminate, the effect of an adverse movement in the value of the AUD.
A common method of reducing currency risk is hedging using Forward Exchange Contracts (FEC). Using a FEC, a Fund Manager, after investing in a portfolio of International Shares, then buys $AUD at a specified date in the future to lock in a specified rate of exchange, rather than be subject to adverse currency movements. The cost of a FEC is substantially dependent on the difference in interest rates between any 2 countries.
Broadly, the returns from a portfolio of International Shares which is hedged will be less volatile than a portfolio of International Shares which is unhedged. So, depending upon your Risk Profile, you may prefer to have an International Share based investment which is fully hedged, partly hedged or completely unhedged.
Managed Funds and ETFs
Managed funds, which are usually open-ended, meaning they are open for the addition of new monies from investors, are unlisted. The Fund Manager controls the application and redemption price which is usually updated once per day based on the Net Asset Value (NAV) of the Fund. The application and redemption process can take several days. ETFs are bought and sold during the day when the ASX is open and the pricing is continuous. This means that you will know exactly how much you have paid for an investment at the time your order is actioned.
Exchange Traded Funds (International)
Until fairly recently, many Australian Investors, when seeking to invest in International Shares, chose to use an unlisted Managed Fund. Whilst these remain available and are still fairly popular, over the past few years the number of Exchanged Traded Funds (ETF) available to investors has grown significantly.
An ETF is an investment fund that can be bought and sold on a securities exchange market. There are different types of ETFs, including ETFs which provide investors exposure to investments in International Shares.
As an example of some of the ETFs that are available on the ASX, set out below are ETFs which we have classified as “International Equities – Active Strategies”. Some investors will recognise the names of a number of wellknown Fund Managers including Platinum, Schroders and Magellan.
International Equities - Active Strategies
||Exchange Traded Funds
||VanEck MSCI World ex-Aust Quality
||VanEck Morningstar Wide Moat
||BetaShares FTSE RAFI US 1000
||K2 Global Equities Fund
||Magellan Global Equites
||Magellan Global Equites (H)
||Platinum International Fund
||SPDR Global Dividend
||BetaShares S&P 500 Yield Maximiser
||BetaShares Geared US Equity
||Schroders Real Return Fund
||AMP Capital Dynamic Markets
||iShares Edge MSCI World Min Vol
||BetasShares Managed Risk Global
||iShares Edge MSCI World Multifactor
||BetaShares US Strong Bear (H)
||BetaShares WisdomTree Europe (H)
||Platinum Asia Fund
||BetaShares WisdomTree Japan (H)
||AMP Capital Global Infrastructure
||Magellan Infrastructure Fund
||AMP Capital Global Property
(H) = A$ Hedged
Note: The exchange is AXQ not ASX
In this sample group there are 22 active strategies, 4 of which are hedged, ranging from very broad Global strategies to Regional strategies, Sector strategies and stock picking strategies.
Please note that this list is not a recommended list. We have merely set out some of the International Share based investments that are available to SMSF Trustees through the ASX. There are, of course a number of other strategies available on the ASX including passive strategies. We suggest that given the current asset composition of many SMSFs that Trustees ought to thoroughly consider the portfolio diversification benefits of International Share based investments available through an ETF.
Your Patersons Wealth Adviser is authorised to advise you on all ASX listed entities, including International Equities ETFs, and would welcome a conversation with you to discuss whether you should include some international share based investments in your portfolio based on your objectives, situation and needs.