It's worth noting two points here: First, the sheer power of capital markets to provide strong investment returns over time - $10,000 into nearly $300,000 in 25 years for just investing in the average market return with a buy and hold strategy is extraordinary. Second, the reason I chose 25 years is because most people looking to retire at between ages 55 and 65 may well have retirements much longer than 25 years and can't afford to ignore the importance of having growth assets in their portfolio to producing strong long-term investment returns. But global returns have been poor
As at the end of February 2007 the seven-year return for the MSCI World Index (dividends re-invested) was 1.73% a year. That's a terrible return; why would you invest in that asset class when cash is returning 6% or more?
Most of the poor performance from international shares has been due to currency movements. If you take out the currency movements, global sharemarkets have actually returned 10.45% a year over that same period.
Moreover, there is no reason to think that going forward global sharemarkets will not provide reasonable long-term investment returns. Indeed, the very reason that five-year returns have been generally poor - the rising Australian dollar - now provides an opportunity to use this strong Australian dollar and invest in international assets. How to invest globally
While there are quickly expanding opportunities to invest directly in international shares through Australian brokers and online brokers, the reality is that most people still choose a managed fund approach to accessing international shares. Their reasoning is generally that it is difficult to have access to the research to understand and trade companies in foreign markets.
Keep in mind that if you do want to invest directly in overseas firms, it can be done through the majority of brokers but you will generally pay a higher rate of brokerage for this access. In assessing this option, and indeed all global investments, keep in mind that the income paid from overseas shares will not have the benefit of franking credits.
The other way of investing is through managed investments, with the options being an "active approach" through a managed fund, or a lower-cost index fund.
Here is an interesting twist on the index fund idea. Most Australian brokers now give access to overseas sharemarkets. Rather than invest in an Australian index fund, you could investigate using an exchange-traded fund listed on an overseas market. These are stock exchange-listed investments that mirror an index return, usually at a very low management costs, especially when compared to Australian funds.
Australia has some international fund managers that have been outstandingly successful. Kerr Nielson's Platinum Asset Management is about to float for about $3 billion, while the smaller Hunter Hall's Value Growth Trust, managed by Peter Hall, has an impressive 10-year compound return of 19.2% a year. If you choose to take an active approach though an active fund manager such as Platinum or Hunter Hall, always be aware of the fees you are paying. Also keep in mind that there are some very good, low-cost listed investment companies that invest in global shares. These are well worth considering. The ASX website
has a spreadsheet with data about available listed investment companies. Hedged or unhedged?
There are two ways to invest in overseas assets. One is to use a currency hedged fund, where currency movements are taken out of the equation for returns and returns simply come from the movements in the overseas investments.
An unhedged fund leaves you exposed to gains and losses from both the market return and the currency return.
Over the long term, the decision whether to hedge currency risk or not does become less important. Unlike investment returns, which can continue to build over time, the currency effect is limited to the range that the currencies trade in - and so its effect over longer time frames becomes less important. Of course, it does not have to be an "all or nothing" decision. Many fund managers use partial hedging and you may choose to have some hedged investments and some unhedged.
If your opinion is that the dollar is at the top of its likely valuation range, and certainly the 17-year highs might indicate that, then an unhedged approach will help you pick up additional returns if the dollar falls. Conclusion
In the long term there is a diversification story in holding some international investments as part of your portfolio. Short term, the Australian dollar is at 17-year record highs. International shares are well worth a look now.