After a dismal decade, the tide may finally be turning for international shares.
The recent weakness in the Australian dollar has raised the question of whether it is time to reconsider investing in international shares.
The past decade has been a dismal one for Australians investing overseas. As if the turmoil in global sharemarkets hasn't been enough to deal with, the rising dollar has further eroded the value of dollars sent offshore.
The table from Morningstar shows the average unhedged international share fund has lost almost 6.9 per cent a year over the five years to July 31, with only a third of this loss coming from falling share prices. Hedged funds, which are protected from the impact of currency movements, lost 2.36 per cent a year. Over the past three years, during which the dollar has risen by 27 per cent against the US dollar and 20 per cent against the trade-weighted index, unhedged investors have missed out entirely on the 8.86 per cent annual return enjoyed by investors in the averaged hedged fund.
According to Select Asset Management chief investment officer Dominic McCormick, this isn't just a recent trend. Unhedged investors have been missing out for much of the past 10 years.
He says while you would not want to buy overseas shares purely on the hope the dollar will fall, it is a good time to reconsider the advantages overseas share investments can offer.
Chief among these, he argues, is the chance to diversify into industries that are under-represented, or not represented at all, in the Australian market. "We have a very concentrated market that is highly dependent on financials and resource-and-energy stocks," he says. "Both of those sectors are also dependent, to a large degree, on what happens in China."
A senior research analyst at Morningstar, Julian Robertson, says Australia simply doesn't have the scope of companies that are available in other parts of the developed world: we don't have the big consumer multinational companies that are earning more and more of their revenue from emerging markets and stand to benefit when China becomes less dependent on infrastructure investment and more dependent on domestic demand.
Robertson says while there will still be a demand for commodities if this happens, the commodities boom that has been so profitable for Australian companies won't be the driver it has been.
McCormick says while the recent underperformance of Australian shares has made them more attractive in relation to overseas stocks, he is also seeing good value in Europe, Asia and the emerging markets. He says there are still plenty of risks, but many of these are already reflected in share prices.
He says Select has also reduced its hedging because of the high dollar, though this is more a reflection of its judgment that the risks for the dollar are mostly on the downside rather than a prediction of a short-term fall.
Robertson says unhedged shares tend to give greater diversification benefits, even though they have underperformed in recent years.