InvestSMART

Unlocking overseas investment opportunities... and why so few Aussies do it

Investing globally provides us with an enormous opportunity set. At any point in time there are high quality businesses trading at attractive prices somewhere in the world.
By · 5 Oct 2023
By ·
5 Oct 2023 · 5 min read
comments Comments
Upsell Banner

Sure, these companies aren’t without their concerns or risks, but we want to be investing in market leaders with rock solid balance sheets and large addressable markets in front of them. 

We’ve covered some of the concerns about investing overseas here. This article looks more closely at the dividend and diversification arguments, as well as passive vs active investing to access international exposure. 

Dividends vs returns 

We’re not going to argue dividends aren’t important, they are. But an overreliance on dividends and the mature nature of our largest businesses in their home markets is putting a ceiling on the growth of investors suffering from home bias.  

There is a general understanding that international companies are not good dividend payers and this, on the whole, is accurate. Australian companies are some of the highest dividend payers in the world. This is due to our taxation system but also our growth limitations. Overseas businesses tend to reinvest profits back into the business, so there’s less of an expectation from shareholders in say the US or UK on dividend payouts.  

To put this into context, let's look at Commonwealth Bank (CBA) vs one of the ASX's truly global businesses, CSL. 

CSL is a blood plasma business. Comparatively speaking when compared to Australian banks, it is geographically unconstrained, everyone around the globe has a need for this product. The total addressable market is multiples bigger leading to a much longer growth runway.  

By comparison there are only so many home-loans Commonwealth Bank can sell before it hits a brick wall. 

At the time of writing CBA’s market capitalisation is $167.53 billion. CSL’s trails at a market capitalisation of $121.75 billion. CBA’s latest dividend yield was 4.5% while CSL’s was 1.44%. (Source: Morningstar) 

Yes, CSL may not currently be as profitable as CBA, but it is growing faster than its banking counterparts with a far bigger potential audience, which means far greater potential capital growth in the future.  

The point is, CSL is a truly global business, one of the few in Australia. CEOs in the driver's seat of these types of companies with large addressable markets and long growth runways have the luxury of reinvesting in their businesses rather than having to make difficult capital allocation decisions such as risky acquisitions, share buybacks or dividends. 

Tech isn’t diversification 

An argument often used for adding international equities to your portfolio is the added diversification you get across sectors.  

The ASX 200 is dominated by banks and resource companies. These two sectors make up over 50% of the ASX 200. BHP alone is over 10%, and you can claim they're a diversified miner as much as you like, however the lion's share of revenue is generated by iron ore. This makes the Australian market one of the most concentrated in the world. 

However, recently an argument has cropped up regarding the diversification of the US and global markets being no better and heavily weighted towards tech giants. For example: "The S&P500 and global indices are dominated by IT giants, it doesn't add to my diversification".  

While IT/tech is the highest weighted sector at 22.5% of the MSCI All World ex-Australian index (the indices most index tracking ETFs follow), it pays to take a closer look at where the revenue of these giants comes from.  

Apple is arguably a communications business. 

Alphabet is an advertising platform. 

Amazon is e-commerce and cloud computing. 

Microsoft is a SaaS business.  

NVIDIA is a chip manufacturer originally for gamers.  

Technology is what powers this broad array of sectors under its blanket term. 

Turning back to Australia, the argument could be made that 40% of the index is home loans and iron ore. 

Active vs Passive for international investing 

It’s easy to invest abroad these days. The difficult part is deciding which pathway to take to gain the right type of global exposure.  

The easiest, and in our opinion, the best way is via index tracking exchange traded funds. They give you broad exposure to the largest businesses in the world at a low cost. You receive instant diversification but in doing so need to accept the sectors you're exposed to. 

A lot of investors outsource all or a portion of their portfolio management to companies like InvestSMART who offer passive investing via diversified ETF portfolios.  

The International Equities portfolio invests in 5 different international ETFs, investors like it as a low cost way of diversifying a portfolio that lacks international equity exposure. Alternatively, investors aiming for long term growth and full diversification across a variety of assets like the High Growth ETF Portfolio as it not only includes international and Aussie equity ETFs for growth, it holds defensive bonds and cash to reduce volatility of returns.  

You could of course do it yourself and pick the individual businesses to invest in. But to get it right, this course of action requires a lot of your time and energy poured into researching businesses and is inherent with risks.

Then there are active strategies such as Intelligent Investor’s Select Value Fund (ASX:IISV) fund (disclosure: Intelligent Investor is a part of the InvestSMART Group). With over 58,000 companies listed around the world, for a fund with an open mandate, such as IISV, global investing truly is a stock pickers paradise. A quick look at the top ten holdings of IISV and you will see minimal overlap to the MSCI All World ex-Aus index and a significantly higher weight for those businesses the fund manager believes to be of exceptional quality. 
 

 

IISV weight 

MSCI All world ex-Aus 

Fairfax

5.68% 

0.03% 

Mastercard 

4.74% 

0.58% 

Visa 

4.62% 

0.67% 

Amazon 

4.19% 

2.15% 

Rightmove 

3.80% 

0.00% 

HDFC 

3.58% 

0.00% 

Atlanta Braves 

3.43% 

0.00% 

Alphabet 

3.13% 

1.37% 

Afya 

2.95% 

0.00% 

Ferguson 

2.85% 

0.06% 

Instead of looking at an active fund and an index tracking ETF portfolio as an either/or option, these two approaches can be complimentary

The ETF can ensure you're holding the giants of the world such as Apple, Amazon and Google and you receive the combined average return of global markets. A fund such as ASX:IISV can sit back and invest in tomorrow's emerging leaders and companies compounding above the market average and provide uncorrelated returns to the index. The important thing is to ensure your portfolio has the right level of international exposure for your risk profile. 

 

 

Share this article and show your support
Free Membership
Free Membership
Mitchell Sneddon
Mitchell Sneddon
Keep on reading more articles from Mitchell Sneddon. See more articles
Join the conversation
Join the conversation...
There are comments posted so far. Join the conversation, please login or Sign up.