Time to invest offshore?

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With many international equities currently outstripping their Australian counterparts, many share investors are turning their minds to investing overseas. The question is, what’s the best way to go about it?

According to Andrew Bird, executive director of online share portfolio management specialist Sharesight, so long as DIY investors have done their research and set themselves up properly, geography should pose no barriers.

“With relatively strong performance, not to mention the much broader choice of companies and industry sectors to invest in, it’s understandable that Australian investors may be looking further afield. And, should they decide that investing offshore is right for them, there are a number of issues for them to consider,” said Mr Bird.

He went on to explain that of the available options, each has its pros and cons.

First is trading through a local, Australia-based broker – and most major players now offer an overseas trading service. This is relatively straightforward – especially if you are used to trading with that provider – and you can generally pay for trades from your existing broker cash account.  Brokerage fees are higher than for Australian shares  and there can be additional fees for things like custody and foreign exchange which can eat into returns if you make a lot of trades. But for those investors looking to trade infrequently overseas this can be a good option.

A second option is to open a trading account directly with on overseas online broker, which does require some initial paperwork but is simple to run once you’re set up. The benefit of this approach is significantly reduced brokerage fees and, according to Mr Bird, it may be a good option for an investor who has already tried an Australia-based broker and begun to trade more heavily overseas.  Foreign exchange costs can also be controlled more easily by transferring funds to an overseas account in larger tranches.

Option three is to choose a pooled investment vehicle such as an international Exchange Traded Fund (ETF), which is traded on the ASX, or a managed fund.  These allow you to buy whole markets with one stock or have a professional manager choose for you in the case of an active managed fund.

“There are some quality overseas ETFs now available on the ASX that cover the major overseas indices. These offer investors the benefit of exposure to a wider range of shares than they might be able to access directly, are cost effective and are listed on the local exchange, so can they can be traded through your local broker or online trading service,” said Mr Bird.  “A traditional managed fund which focuses on overseas shares can also provide offshore exposure, with associated expenses dependent on the manager.”

It’s important to note that ETFs are generally unhedged with regard to currency so the local value will be determined by the performance of the index it covers, like the US S&P 500 as well as the currency movement between the Australian dollar and the currency in which the index is denominated.  Managed funds are often available in hedged or unhedged options, enabling investors to decide how to address the potential positive or negative effects of currency fluctuations on the value of their investments.

Once the decision on where and how to invest is made, it’s a question of making sure you administer the portfolio properly, to ensure you address factors such as currency shifts and the offshore taxation requirements.

“That’s where using a portfolio management system that’s been set up to administer international as well as local equities comes in,” said Mr Bird. “At Sharesight, for example, we offer date on five international markets, including the NASDAQ, NYSE, London Stock Exchange and New Zealand Stock Exchange. This helps keep investors up to speed with the latest in dividend information, corporate updates and so on, just as they would expect from their local Sharesight data.”

Two other significant international investing bugbears: currency conversion, which is automated for the user so they can see at a glance their true Australian dollar position; and the taxation issues, are also addressed by the Sharesight system.

“Some offshore markets impose a withholding tax that can be increased if overseas investors don’t properly register with the relevant authority,” he explained. In the US, for example the withholding can be 15% or 30%.

“Once they do register, which the broker will facilitate, Sharesight captures that information so the investor can be sure to record the correct tax credit.

“What it all comes down to is, if you’ve done the research and believe there are benefits to be found offshore for you, investing overseas need not be difficult.  But it’s crucial to keep accurate and timely records so that the paperwork doesn’t detract from the benefits.”

 

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