The case for international equities

Commentary by Ace Ilievski CFP

You may be among the many Australian based investors thinking ‘why should I hold international shares in my super investment portfolio?’ Certainly a valid question if your sole measure of including assets in a portfolio is the historical returns they have delivered. Even if we compare indicia returns over the past seven years, international shares have under-delivered in regards to the overall risk they contributed to a portfolio:


Source: AXA Market Watch, August 2010


There are, however, some strong arguments why you shouldn’t abandon this asset class, particularly in an Australian context (and it’s not simply about the fact that we make a very small part of the global market or that you shouldn’t carry your eggs in one basket).

Let’s for a moment consider what you invest in when you choose an Australian share fund or an option containing Australian shares in your superannuation. Consider an investment that replicates the S&P/ASX 300 benchmark – approximately 75% of your superannuation allocated to Australian shares would be invested in financial services, resources and a few supermarkets. This is a high concentration of sector specific risk, and it is little wonder why governments find it so difficult to impose taxes, enforce competition and break up oligopolies given that these three sectors keep Australia at the current standard of living we all enjoy.

So what’s so wrong with this picture from an investment perspective? After all, these sectors contain such big names as BHP Billiton, RIO Tinto, Woolworths, Westpac, Commonwealth Bank and AMP; these companies are financially strong and reasonably well run – so much so that competitors find it tough if not impossible to muscle in on the action. Sounds like a pretty good investment! This is all very true; however the gaps in this argument appear as we take a longer term view.

Let’s consider the supermarkets and financial services sector – both have failed to make any successfully significant inroads into foreign markets and some of them have certainly embarked on some misadventures abroad, not necessarily through lack of trying. CBA, NAB, Westpac, AMP, Woolworths, Wesfarmers, etc are not global brand powerhouses like HSBC, ING, Goldman Sachs, Costco, Walmart or Aldi (although not listed). 

Given these Australian companies’ limited geographic reach there is only so much profit they can squeeze out of the Australian consumer before their share prices start to falter when compared to their global peers. Stock prices go up depending on how quickly companies can grow their profits – it really is as simple as that.

On that simple note, let’s consider the miners. They’ve been roaring along purely off the back of Chinese demand driving resource prices; there is no rocket science to what they are doing. Eventually demand will stabilise on a longer term trajectory and the low hanging fruit will disappear. Sure this might be 5 to 10 years away but it will happen and this doesn't even consider geopolitical problems that could arise in the region.  In any event making resources your power play alone is a risky game.

So where does this leave Australia and its domestic investors? Well, it leaves us with an economy with a finite amount of growth and not doing very much for the global economy in our part of the world. Although important & essential activities, I don’t count digging, retailing and shuffling interest on bank accounts around as productive future. Long term this won’t be enough.

So herein lies the answer, Australian investors should own foreign as well as local assets. This includes some of the well known global brands as well as companies which have foot holds in fast growing markets. Investment returns don’t follow an arithmetic pattern or rule book, so looking at the returns on international shares over the past 3, 5 or 10 years won’t give you an insight of where you should put your money for the next 3, 5 or 10 years – although seasoned thinking and reason will.