Investing across assets and markets could be an important part of a balanced SMSF strategy.
According to the Australian Tax Office’s quarterly report released in March 2019, in practise, SMSF portfolios tend to be concentrated in Australian investments1, with Investment Trends research finding trustees are under-allocated to international assets and may be unaware of the value of this exposure. Access doesn’t need to be difficult, with a range of options available to incorporate international markets into an SMSF portfolio.
Using international exposure as a form of diversification
SMSF trustees may be accustomed to diversifying their investments across asset classes and industries within Australia. Diversification is a strategy to assist in managing the risk of gains or losses in investments by spreading your exposure across asset classes. However, diversifying investments across countries and regions could also assist with risk management and offer opportunities not readily available in the Australian market.
The Australian market is relatively small and concentrated in comparison to other markets. For example, the Australian share market is dominated by financials companies and less exposed to fast growing industries like information technology. To demonstrate, in August 2019, information technology companies accounted for 17.02% of the MSCI World ex Australia Index, but only 3.8% of the ASX200 Index.
Or consider that the scale of international companies can be much larger. According to the PwC Global Top 100 companies by market capitalisation report June 2019, the largest global company is valued at $US905bn compared to the largest Australian company valued at $US131bn2.
There are three key concerns that can rise from excluding international investments.
- By excluding international markets, SMSF trustees may be missing growth opportunities (noting that growth can also mean higher risk of loss).
- SMSF investment portfolios dedicated to domestic investments may find it difficult to diversify adequately across industries, becoming dependent on the fortunes of a key industry like financials companies.
- It leaves SMSF portfolios purely at the behest of the Australian economy, which may or may not follow the direction of global economies.
Some other areas to consider as part of diversifying a portfolio to include international investments are currencies, interest rates or physical assets. For example, foreign currencies may perform differently to the Australian dollar, interest rates may be rising or falling at a different pace in other countries, property and commodities may be more or less accessible and valuable in different regions.
Incorporating international exposures
For SMSF trustees wishing to include international exposures within their investment portfolio, typical avenues include managed funds and portfolios or exchange traded funds (ETFs) (generally available through the SMSF investment platform provider).
Whether a particular investment type will be appropriate will depend on the SMSF’s investment strategy, compliance and taxation requirements and management costs for the investment.
Managed funds allow SMSF trustees to purchase ‘units’ of a trust where the investment from the SMSF is pooled with other investments and managed by an investment manager. Any income earnt by the pool of investments is paid based on the unit allocation in the form of distributions.
By contrast, in a managed portfolio, the SMSF has beneficial ownership of international shares or assets meaning sole access to any income attributed to those assets but the management of these assets is done on behalf of the SMSF by an investment manager.
ETFs are an investment fund holding a basket of security – such as shares or bonds tracking a specified index – and is listed on a stock exchange. For this reason, they are often considered more liquid as an investment option and a means of fast access to a particular asset or region.
In any of the above, there are options available that focus on one or many asset classes, specific regions or worldwide. ETFs tend to be passive – that is based on an index with a pool of investments to mimic the index performance. Managed funds and portfolios can be either passive or actively managed using a variety of investment strategies and styles.
The costs to invest in each vary. Managed portfolios are generally a more personalised option, so costs may be higher in some circumstances and include foreign brokerage. Managed funds and ETFs are pooled with an overall trust which may save some brokerage, however you may pay a higher fee for the expertise of an investment manager in the managed fund compared to an ETF.
For international exposure, SMSF trustees could consider any of these options individually or in combination to meet the needs of the portfolio investment strategy.
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.