International shares - worth a look for your SMSF

Australians love heading overseas, and having just returned from a trip to France (yes, the Bordeaux was excellent!) I can vouch for the near-certainty that you’ll bump into an Aussie no matter where you head internationally.

We also take something of a global view when it comes to our portfolios. A 2020 ASX survey[1] found 15% of Australian shareholders own international shares.

However, the growing ranks of self-managed super funds (SMSFs) buck this trend, preferring a home grown approach to investing, which can mean missing out on valuable benefits.

SMSFs focus on two main asset classes

The latest Australian Tax Office (ATO) data shows more than 5,700 new SMSFs were established in the first three months of 2023. It brings the total number of SMSFs to 606,217, with over 1.1 million Australians now controlling their retirement savings.

In fact ‘control’ is a leading driver for setting up a SMSF.

The 2023 Vanguard/Investment Trends SMSF Report shows almost 70% of people who opt for a do-it-yourself super fund are motivated by having a greater say in their retirement savings.

The report also found two out of five people believe they can achieve better returns with a SMSF than a professionally run super fund.

Of course, every SMSF has a unique investment mix so there is no apples-for-apples comparison between SMSFs and APRA-regulated super funds.

What is clear from ATO figures is that across the $855 billion worth of retirement savings controlled by SMSFs almost half is invested in two main asset classes – Aussie shares (30%) and cash (16%).

Surprisingly, overseas shares make up a tiny proportion of SMSF holdings, just 1.8% of total investments. That’s despite the Australian sharemarket accounting for less than 2% of the global equities market.

Vanguard has put this down to ‘home bias’ – the way we’re more comfortable investing in Australian companies, plus perceptions that overseas shares can be more risky. And it doesn’t hurt that Aussie shares can come with attractive franking credits.

Even so, concentrating on local shares means ignoring around 98% of the global sharemarket, and missing out on potential return and diversification benefits.

Plenty of upsides to international shares

Past results are no guide for the future, but over the last five years international shares have done quite nicely, dishing up annual returns averaging 11.87%[2]. By comparison, Australian shares have notched up total returns (dividends plus price growth) averaging 7.39% annually over the same period.

Global shares can have a reputation for being higher risk than Aussie equities, and I’m the first to admit that it’s not always smooth sailing with global shares. But it’s not always the wild ride that some investors may believe.

Yes, 2022 was a stinker for international shares (it was a tough year for sharemarkets per se), but from there you have to go back to 2011 to see a loss (-4.8%) on overseas shares.

Adding overseas shares to an SMSF – or your personal portfolio – can bring extra diversification. It’s not just about the ASX being heavily skewed to resources and the big banks.

You see, not all sharemarkets perform similarly at the same time. Some may record losses, and others record gains in the same year.

We saw this in 2022, when Japan’s sharemarket dropped 11%, while India’s sharemarket climbed 4.4%. Australian shares fell by just over 5%, and Britain’s FTSE 100 index gained almost 1%.

Given the world’s sharemarkets do not all move in sync, international shares present a good avenue of diversification, which is all about reducing risk while maintaining an acceptable level of return.

As for the commonly held wisdom that overseas sharemarkets are riskier than Australian shares, this is not necessarily the case. The level of risk depends on which overseas markets you invest in. Some are definitely more volatile and more variable than ours, others aren’t.

What’s interesting is that InvestSMART’s International Equities Portfolio, which invests in some of the world’s biggest companies across Europe, Asia and the US, has been InvestSMART’s top performer over the past 1, 3, 5 and 10 years, with annual returns averaging 10% over the last 11 years since inception.

It’s a good argument for considering global shares, and this type of readymade portfolio takes away the hard decisions about which markets to invest in, and how to make it happen.