24 September 2015
By Campbell Neal
With sophisticated investors and Self Managed Super Fund (SMSF) trustees increasingly seeking yield and value in offshore assets, recent debate has focussed on global equities as an investment destination. Self-directed investors are able to gain direct access to global equities via their stockbroker or online platform such as CommSec. While this may initially appear to be an easy and smooth route to accessing global equity markets and its opportunities, people wanting to build wealth should also take a detailed look at the complexities of investing internationally. It’s not as easy as it sounds.
Setting up an international broker account, while not impossible, is not as straight forward as creating a local online account. Access is only one of the issues. There are a number of added complexities for a direct investor which make international investing difficult, time consuming, and more challenging than direct Australian share ownership.
One of the key areas of complexity for those venturing into the area is stock selection. How does an investor narrow down the universe of opportunities? Is it to be done by country, by region, by sector, by industry? Is it to be large, medium, small or micro cap? Should an investor look at second board exchanges such as Hong Kong, and consider emerging markets such as those in South America and Africa?
As with Australian equities it takes time to undertake the research and understand the businesses – yet the global canvas an investor is working with is much bigger, broader – and riskier. Sophisticated investors seeking to diversify in global equities, but also balance risk, need to be able to access information in a timely manner, gaining independent and accurate information from offshore. That too, is more difficult. Knowing where to access the information and obtain ideas, while at the same time diversifying your portfolio and spreading the risks across sectors and geographical regions is a considerable challenge.
Above this still, is the question of currency risk and whether to hedge or not. While many sophisticated investors and SMSF trustees understand risk, they are typically not professional fund managers or foreign exchange traders. Knowing that movements in the $AUD can have a significant effect on returns both positively and negatively - and the rapidity in which a currency can turn - adds to the mix.
As the market saw earlier in the year when the Swiss took the world by surprise and revalued the Swiss Franc by 20% there can be unexpected impacts – both positive and negative – even for those who do have the skills. Managing the currency is complex; without hedging, a rising $AUD erodes the gains made if offshore share prices rise. In most cases, for reasons like these, investors will remain unhedged and will thus take on the roller- coaster ride of the dollar.
Then there are tax implications. Owning direct shares in foreign tax jurisdictions inevitably creates tax issues with tax payable overseas in the jurisdictions where the global equity holdings reside. A good understanding of withholding tax arrangements is needed. In addition, there have been well-reported examples of complexities with tax arising from Australian companies relocating offshore, and the added tax consequences for investors.
Local Australian fund structures bring the benefits of tax simplicity. But for those investors who buy shares directly in the USA, tax on income from the US is deducted and withheld at a rate of 30%. For an Australian resident to claim an offset for the tax requires a W-8BEN form to be completed to reduce the withholding tax to 15%. This is a form available from the US Department of Inland Revenue, certifying that, as an investor in US equities, you’re not also a US resident.
Given this landscape some investors seeking global equities exposure have looked at an exchange quoted managed fund as an alternative. They might weigh this up against Listed Investment Companies (LICs) – a gathering of offshore equities in a company structure and with a defined number of shares on issue versus the market tradeable exchange quoted managed fund which is open-ended.
In the case of the exchange quoted managed fund, the fund outsources management to an expert focused 24/7 on international opportunities. For investors, the benefits include avoiding the tax issues by investing in a locally domiciled fund, with the management of the currency call likewise outsourced to experienced management. Investors can elect to re-invest their distributions while the quoted price of the fund tracks the underlying performance of the fund’s portfolio.
What’s more, there is a high level of transparency around the fund’s investments and net asset value (NAV) as well as liquidity to ensure that units can be bought or sold on the ASX at a price that is very close to the underlying net asset value.
Like LICs, investors in the exchange quoted managed fund can buy units in an ASX-quoted fund through any broker, and will receive a CHESS holding statement. It is one route for investors seeking to increase their global equities exposure who are also looking for streamlined access that is both understandable and tradeable.
Campbell Neal is co-founder of K2 Asset Management Ltd, an Australian based equity fund manager with a specialisation in global funds management.
If you would like further information about the K2 International Strategies, please contact a member of our distribution team on 03 9691 6111 or visit k2am.com
DISCLAIMER: The information contained in this presentation is produced by K2 Asset Management Ltd (“K2”) in good faith, but does not constitute any representation or offer by K2. It is subject to change without notice, and is intended as general information only and is not complete or definitive. K2 does not accept any responsibility, and disclaims any liability whatsoever for loss caused to any party by reliance on the information in this presentation. Please note that past performance is not a guarantee of future performance. A product disclosure statement and additional information booklet or information memorandum or general information on the funds referred to in this presentation can be obtained at www.k2am.com or by contacting K2. You should consider the product disclosure statement before making a decision to acquire an interest in the fund.