The big opportunity that can power SMSFs
Tuesday, March 13, 2018/
Many Australians dream of exploring the globe when they retire, but funding this ambition – and many other retirement goals – often depends on the size of their superannuation.
If your nest egg is invested in one of the 600,000 self-managed super funds in Australia, now may be the time to look around the world for more ways to power your retirement.
Most super funds diversify their portfolio by investing in both international and domestic markets. While the Australian Stock Exchange has a market capitalisation of approximately $1.5 trillion, it is dominated by the financial and mining sectors, which account for 60 per cent of the ASX All Ordinaries index. The ASX also accounts for less than 2 per cent of the world’s market capitalisation.
“The Australian stock market, is relatively small on a global scale,” says Jordan George, head of policy at the Self-Managed Super Fund Association, an independent body representing Australia’s SMSF sector.
“If you look at the US stock market, there’s access to a lot of high-performing tech firms, for example, and we just don’t have the likes of Google or Apple or Facebook listed on the ASX.”
The benefits of going global
In addition to increasing your exposure to top global performers, investing in international markets can enhance that vital element of any SMSF strategy: diversification.
“It allows you to spread your risk and increases your ability to absorb volatility,” says George.
“We always encourage self-managed fund trustees to consider being well diversified and investing in overseas markets as a positive way of doing this.”
George explains that the extent of diversification comes down to individual preferences, however, Liam Shorte, director and SMSF specialist adviser at Verante Financial Planning, suggests diversifying across the top 100 shares in your chosen international markets.
“This is generally a wise place to start,” he says. “From there, you can then start to diversify across asset classes, such as international infrastructure or property.”
A world of opportunities
If you’re running your own SMSF, there are three main ways to access international share markets. The first is through direct investment via a broking house or online trading platform. It’s generally as simple as setting up an international trading account, transferring funds into the relevant currency for trading and then choosing your shares.
The second method is through a managed fund, which pools your money with that of other investors and manages it on your behalf. The third way is via exchange traded funds (ETFs), which are investment funds listed on a stock exchange that track the returns of a specific market sector.
Risk versus return
Like all financial investments, international shares present possible risks as well as potential returns.
By virtue of their size, global markets tend to be more volatile than smaller markets such as the ASX. The New York Stock Exchange, for example, has a market capitalization of US$13.4 trillion. “They’ve been subject to bigger crashes and bigger upswings,” says George.
Shorte adds that differences in time zones can also present a downside. “If you’re buying shares directly, you may not be awake when some of the big markets open and this means you may not be able to react quickly to significant movements.”
Investing in international markets also exposes your portfolio to currency fluctuations, but this can work in your favour.
“If the Australian dollar appreciates, you get lower real returns on an investment in, say, US shares,” explains George.
“But if the Aussie dollar goes down against the US, you’ll get a better return.”
A final point to consider are the tax implications of buying international shares. Dividends may be subject to a withholding tax by the host country’s revenue office and you may also be slugged with a tax bill from the ATO on income you earn outside Australia.
The good news is that Australia has tax treaties with more than 40 countries to reduce or eliminate your chance of paying tax twice. The list of countries with available tax treaties include those with the largest share markets, such as the US, UK and Japan.
However, like all matters involving SMSFs and taxation, it’s best to seek financial advice before you get started.