Australian companies represent only about 2% of all company shares available around the world, yet the average Australian managed fund has around the same proportion of its investments in Australian equities as it does in international equities. Investors who manage their own assets, however - such as many with self-managed super funds - tend to have a higher weighting to Australian shares and much less invested internationally.
While there are some benefits to Australian equities - higher dividends and franking credits, for example - they do not have the same exposure to major world industries as international equities.
Fifty-nine per cent of the Australian market is dominated by financial companies (think the big four banks), materials companies such as BHP, and healthcare companies such as CSL Ltd. Only 8% is in the telecommunications and the information technology sectors. International markets, however, have much greater exposure to high-growth sectors like technology (think Apple, Alphabet - the company that owns Google - and the China-based digital media giant Ali Baba), automotives and pharmaceuticals. Investors who want a truly diversified portfolio should include these sectors or they risk missing out on being exposed to some of the world's fastest-growing companies.
Investment in international equities can also be made based on where the companies are located, for example, in developed markets like the US, Europe, Japan or Australia, or emerging markets like China, India, Eastern
Europe and South America.
Developed markets represent countries with advanced economies and capital markets. Emerging markets have lower economic development, but often these economies are growing rapidly. Emerging markets represent
significant investment opportunities, which are offset by less liquidity and transparency regarding how companies operate, and lower standards of governance (how they are regulated).
While developed economy equities markets represent 88% of the global sharemarket, the emerging market share is still five times the size of Australia's 2% share of the global sharemarket.
Just like with Australian shares, there are two main sources of return for international shares. The first is company earnings or net profit. Some of this is paid out in the form of dividends to shareholders while the rest is retained by the company in order to help fund future growth. The second is the change in valuation or price of the company. This is what the market thinks the company is worth based on the price they are willing to trade its shares for each day. The income you receive is made up of dividends from the underlying shares and realised capital gains from selling shares that have gone up in price.
The sheer size of the international equities asset class means there is a fund to suit every investor - whether they want a fund for the long term or they have a particular investment view they want reflected in their portfolio.
The most general form is a fund that covers the developed world. The next most common form is what is called an "all countries" fund. This includes both developed markets and emerging markets. Next are pure emerging markets funds. These can cover all emerging markets or just certain geographic regions (usually Asia outside of Japan) and single countries such as India or China.
Managed funds can also be focused just on specific countries or regions, such as the US, Europe and Japan.
There are also sector and theme funds. These cover different industry sectors, such as healthcare or technology, or worldwide themes the manager thinks will benefit specifically from global trends (such as an ageing population or the growing middle class in emerging markets).
|Match the index
|Beat the index
|To hedge the Australian dollar or not
Investment in international shares can be made on a currency-hedged or currency-unhedged basis. When the investment is made on a currency-hedged basis the returns from international shares are not affected by changes in the relative exchange rates of the Australian dollar and the home currencies of the international shares.
When the investment is made on a currency-unhedged basis the return from the investment is affected by any change in the value between the Australian dollar and the international currency. For example, when the Australian dollar rises (appreciates) against the international currency, the returns to the Australian investor are lower than they would be for the local international investor.
International shares are considered high risk because of the potential for loss of capital. This is more likely over short time periods rather than long time periods.