Invest overseas to access bigger pie

How often do we hear investment advisors and financial planners exhort us to invest some of our money overseas?

The primary reason ventured for this push by planners is to achieve diversification. But why diversify internationally?

The fact is that the Australian sharemarket represents only 1.3 per cent of the world’s total sharemarket capitalisation.

Investors could be surprised that our market is smaller than the markets of Canada and Switzerland. It is only marginally bigger than the Hong Kong market. (See Table 1).

The most efficient and effective way to access the 98.7 per cent of the market outside Australia is to use a managed fund that invests its money in the international market.

It seems that Australians are already taking advantage of the myriad of managed funds available.

In 1989 the amount of money held in international funds was around $1,800 million. That figure has grown to an amount of just under $5,000 million in 1999.

The performance of the funds in this area has also been very strong. The value added by skilled managers has been compounded by their astute management of the Australian currency vis-à-vis international currencies.

For smaller investors, the use of a managed fund takes away the need for ongoing research into the particular share investments that may be available. Reliance on the manager’s ability and capabilities is all we have to demonstrate.

The downside of an investment in an international fund is that the investor is actually exposing themselves to two levels of risk.

Firstly, there is the inherent risk in the underlying investment itself. Secondly, the currency exposure can create additional risk.

In any continuum of risk levels, international investments are generally seen to be the highest risk assets. However, the commensurate return also tends to be higher.

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