Adviser-to-client template: Why we invest internationally
For financial advisers to use with clients.
This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
It is common for people to question why we invest internationally. This is a well-intended question, especially when we consider remote positions that don’t feature in everyday conversation. After all, why bring perceived uncertainty into your portfolio in a world of constant geopolitical issues and international conflict?
Yet, we find it helpful to turn this question the other way around: Why would we invest only in Australia and the U.S. when over 80% of the world’s economic growth sits outside these two regions? Why would you invest only in Australia and the U.S. when you can buy strikingly similar companies at less than half the price?
Investing in Australia and the U.S. will always be important, but we need to remember it is not the only game in town. Here is a current snapshot of where Australia and the U.S. currently fit in the world:
- Population: Australia is only 0.33% of the global population. The U.S. is 4.23% of the global population. So, over 95% of the world lives beyond these borders.
- Size of Economy: Australia is only 1.0% of global GDP. The U.S. is 15.4%. Combined, over 83% of the global economy is outside these borders.
- Market breadth: Australia has just over 2,000 public listed companies and the U.S. has over 9,000. Yet, there are almost 60,000 equities in the world, so approximately 80% of all public listed companies in the world exist outside these markets.
Getting Your Asset Allocation Right
If it wasn’t yet obvious, investing internationally can bring potential opportunities for wealth creation. It brings different risks too, but these can be managed. And with the right investment manager on our side, leveraging a global team can be well worth the effort. For Morningstar, who manages your portfolio, the key to winning in this space involves:
- Using strength in numbers, with a large team around the world to identify and understand foreign markets.
- Adding diversification to Australian and U.S. investments, with different risk and return drivers.
- Not overpaying for growth, by focusing on areas that trade at sizeable discounts.
- Sizing these positions appropriately, then being patient with them until the opportunity matures.
In truth, international diversification should always be part of the conversation, but it feels particularly important today. By selectively holding international companies, you have a better chance of differentiating your exposure and driving new revenue sources in the fastest-growing parts of the world.
Another reason to like international stocks is that they tend to do well when major U.S. stocks do badly. This is obviously not our “base case” and a scenario we’d all like to avoid, but it certainly helps to have a growth-oriented ballast in the face of inevitable setbacks. The below research from Morningstar shows that when U.S. stocks do poorly, international stocks (defined as Europe, Australasia, and Far East) have historically risen to the occasion.
Source: Morningstar Direct 30 June 2023. 10 Year rolling returns calculated with data starting 1/1/1970. You cannot invest directly in an index. Past performance is no guarantee of future returns.
A Reason for Confidence
We appreciate some clients feel uneasy when investing outside their comfort zone. We believe this is in part a misunderstanding, although is usually well intended. Local equities will always feature earnestly in client portfolios and the merit for international investing should only be considered with strong risk management.
In today’s case, there is a growing sense that international exposure can provide both diversification and opportunity at the same time. Or said another way, we can potentially have our cake and eat it. International investing will never take 100% of your asset allocation, but it certainly deserves a place in your portfolio—and we feel positive about the international exposure we have. We will continue to monitor developments closely and update you as needed.
If you’d like to discuss this further, or any other matter, please don’t hesitate to get in touch.
As noted previously, this document is intended to support your service proposition to clients and the commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only.
Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Wealth makes no warranty, express or implied regarding such information. Except as otherwise required by law, Morningstar Wealth shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.
How we look after your savings
- A key focus on risk management, not just the potential for returns
- Increasing your buying power
- Today’s best investment opportunities