Why offshore investing is the right move for retirees
By Ben Power. This article orginally appeared in the Sydney Morning Herarld.
Most Australian retirees would admit they prefer to invest in Australia. But Myooran Mahalingam, Portfolio Manager – Global Equities and Listed Property at MLC, says retirees should be increasing their exposure to international assets now to diversify away from a subdued Australian economy and seize greater opportunities.
By investing more offshore, retirees can cut the risk and volatility of their portfolios while still generating decent returns.
Mahalingam says he understands why Australian retirees favour local investments. "It's natural that Australians want to invest in things that they know and can touch and feel," he says. "Dividend yields in Australia are higher and there's the additional boost from franking credits. Overseas investments may also have a perception of being risky."
But the Australian market has its own downsides and risks.
Downside to investing domestically
The Australian equities market accounts for just four per cent of listed equities globally. Some 96 per cent of opportunities, therefore, lie outside Australia, providing greater opportunities for retirees.
Many international shares are in exciting and innovative companies. "If you take a simple example like your smartphone, you simply can't get domestic exposure to companies such as Apple and Samsung," Mahalingam says.
"The best IT companies, consumer companies and healthcare companies are seldom located in Australia," he adds. "Apart from mining, what is Australia's competitive advantage from a resource perspective?"
Biggest risk in Australia is a subdued economy
The Australian market is also concentrated in a handful of major bank and resource stocks, which increases the risk if one of those stocks underperforms. The top 10 stocks on the ASX account for 40 per cent of the index, while the global market is much less concentrated, with the top 10 stocks accounting for just over 10 per cent.
But the biggest current risk in Australia is the subdued domestic economy, particularly given valuations are not cheap. That's putting company profit growth and dividends at risk – and could trigger a surge in market volatility.
"We've had a long run of uninterrupted economic growth, but the domestic economy is now soft," Mahalingam says. "The Australian economy isn’t growing strongly. That's why the Reserve Bank has interest rates at record lows."
Mahalingam notes that most retirees own their own home, which increases their exposure to the vagaries of the domestic economy.
Retirees aren't restricted to equities when investing internationally. They also have opportunities in other asset classes including listed and unlisted property, cash and fixed income. "Whatever you can buy here is also available offshore," Mahalingam says.
Retirees do face some additional complexities when investing overseas, including the need to manage currency and geopolitical risks. That's why Mahalingam says it makes sense for a retiree to consult with a financial planner or outsource to a fund manager when it comes to international investment. Retirees can also buy passive index funds that track international markets, including specific countries and sectors.
Global equities delivered the same returns as Australian stocks
Mahalingam says some retirees may be reluctant to invest in global equities because local stocks have attractive dividends and franking credits. But he says the lower income from overseas stocks is often offset by higher capital growth.
Over the long run, global equities have delivered the same returns as Australian stocks. But those returns are achieved with less volatility than the Australian market, Mahalingam says.
"Over the last 40 years, Australian and international equities have produced similar returns, but international equities have been 15 per cent less volatile."
Less volatility means a smoother ride for retirees who need to avoid big falls in their portfolios.
While retirees feel more comfortable with the Australian market, and it does offer good income, global markets offer a whole new world of opportunities.
"The global economy is also subdued, but there are select and more diverse opportunities overseas that can increase a retiree's wealth," Mahalingam says, adding that if investors are selective, there are currently good global market opportunities in banking, insurance and healthcare stocks.
Retirees also need to recognise that the Australian economy is subdued, which could increase risk and volatility.
In this environment, Mahalingam says retirees should bolster their allocations to international investments.
"There's far greater opportunity available offshore in innovative businesses. Going global will help retirees generate decent returns in a risk-controlled and diversified manner."