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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“Many investors consider the performance of their share portfolios only in the context of changes to the stock price,” Mr Bird said.

“Investors should instead concentrate on understanding the true performance of their portfolios without focusing too much on short-term share price fluctuations. The long-term performance of a portfolio generally more than compensates for short-term ups and downs.”

Determining the true performance of a portfolio over the term of the investment should include a review of the following key factors:

• Annualised returns
• The impact of dividends and franking credits
• Currency effects from overseas equity investments
• Valid comparisons with returns from other alternative investments.

An annualised return enables investors to factor in share price movements over selected time periods for any individual stock or for a whole portfolio.

“If a stock’s price rose from $1 to $1.20, an annualised return will factor in how long it took for that price to increase. If it went up 20 cents in two years, it is only half as good as if it rose the same amount in one year,” Mr Bird said.

Share dividends were also an important factor to consider because they could often be more significant than a price change.

“A lot of people grossly underestimate the impact of dividends, particularly in the current tumultuous market conditions where a stock’s price might drop but it won’t affect the dividend the company will pay,” Mr Bird said.

Investors should also consider the impact that franking credits have on reducing or eliminating their tax liability for the dividend received from the company, depending on their marginal tax bracket. 

Mr Bird said that understanding the true value of a share portfolio enabled an investor to more accurately compare the returns with other investments and make balanced portfolio management decisions.

 “If you don’t know how well your portfolio is performing it can impact on the level of enjoyment you derive from monitoring its progress and from the rewards it generates,” Mr Bird said.

“It also means when you have a sudden downturn like we are experiencing at the moment, you don’t have the tools to accurately assess the impact on your portfolio, which can lead to panic selling.

“Having a good handle on a portfolio’s long-term performance can remind the investor that, even if they have lost money in the short-term, they are doing pretty well considering the overall period of their investment.”

For example, CBA’s total return over the last six months to 18 August 2011 was – 8.1 per cent, including a capital loss of 13.6 per cent and a dividend return of 4.8% per cent from the interim dividend received during the period.  This compares with its 10-year return up to the same date of 9.4 per cent per annum, with capital gain of 4.0% per cent and a dividend return of 7.2% per cent per annum.  The dividend provided more than half of the total return to the investor over this period.  This is not uncommon for many of the large dividend paying stocks in the ASX/S&P 200.

An online share portfolio management service like Sharesight is able to provide investors with a holistic view of the true performance of a portfolio with prices and dividends automatically updated daily.

“Many investors dislike record keeping and struggle to keep track of their portfolios because annualised returns are complex to calculate and investors do not have price, dividend or currency movement data at their fingertips” Mr Bird said.

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Andrew Bird, Executive Director of Sharesight, believes cloud technology benefits advisers by enabling planners to offer new service lines to both existing and new clients.

“Cloud computing allows planners and their clients to access portfolio performance and admin records online, on demand, from any computer in the world,” Mr Bird said.

“Services that automatically collect performance and tax reporting information also allow planners to access their clients’ up-to-date records instantly – meaning that advisers are freed up from the time-consuming admin work to concentrate on the roles they really enjoy such as portfolio construction and offering advice.”

Mr Bird also believes that cloud technology can open up new client bases for advisers.

“Cloud computing software can also enable planners to offer advice to investors on limited budgets as the admin and reporting work will already be done for them, reducing the cost to the adviser of servicing their needs. This means that clients can spend the hours they can afford with an adviser on more high-level issues than tax and record-keeping.

“According to the ASX, over 6.5 million Australians, or 39% of the adult population, directly own shares1. There is obviously a huge market of self-directed investors out there that financial advisers could support but I know from feedback from Sharesight members that many of those people feel they cannot afford the services of a financial adviser. However, using software such as Sharesight to reduce the admin burden on the adviser can make professional advice much more affordable.”

As the popularity of cloud computing grows, Mr Bird believes advisers will see increasing benefits from the interconnectivity the technology provides.

“More and more financial institutions are considering cloud computing as a service for their clients as it allows data to be entered into the system once and then automatically shared with other relevant, designated systems as needed. This will create both efficiencies and opportunities for planners when advising their client in future.”

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