Question of the Week

Should my SMSF really invest offshore?

Co-founder of the Switzer Report
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Q: Our SMSF is 95% in pension phase. Our investments are now all in Australia, as investing overseas has currency risk and we do not get the benefits of any franking credits. Previously, we had a mediocre to poor experience investing overseas with some managed funds, such as Hunter Ethical & Platinum Japan. We are now exposed overseas only through Australian companies such as BHP. What is wrong with this as a strategy?

A: There is nothing wrong with this strategy per se – it really depends on your fund’s investment objectives and investment time frame.

That said, it is worth recapping on why investing offshore will make sense for many funds:

  • The Australian sharemarket is incredibly narrow, dominated by financial and resource companies – we simply don’t have the IT companies such as Google, Apple or IBM; the pharmaceutical companies like Pfizer, Merck or Johnson & Johnson; or the industrial conglomerates like GE;
  • The range of investment opportunities must by definition be so much bigger overseas. As a developed nation with a mature economy, the growth opportunities available in Australia are limited compared with those available where the consumer/services markets are growing or the economies developing; and
  • Portfolio research (which studies how different asset classes perform in relation to each other – in other words, their correlation) substantiates investment in offshore assets in accordance with a fund’s return and risk objectives.

The downsides

One downside clearly is the currency risk, which is arguably as important a consideration as a view on the offshore asset price. Understanding whether your investment is ‘hedged’ or ‘unhedged’, and if the latter, the timing for potential entry and exit are critical factors. And, there is no dividend imputation available. This is a system that is unique to Australia, and for funds in pension, it is pretty hard to beat the after-tax income returns from high quality Australian companies paying fully franked dividends.

Is BHP or RIO a substitute for investing offshore?

While they have substantial operations and sell most of their production offshore, I’m not sure they are a real substitute. Arguably, they are a substitute for that part of the world economy that depends on manufacturing growth – how they benefit from growth in the other sectors like services or technology is less clear. They are not the next Apple, which is now the largest company (by market capitalisation) in the world!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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