Moving offshore: how to boost yields by going global
Yield has been a key theme for Australian markets in recent years, with falling interest rates forcing risk-conscious investors to chase high-dividend paying stocks such as banks and telcos. Yet with domestic cash and bond yields staying low, corporate earnings growth lagging and reliable dividend stocks becoming increasingly expensive, is it time to look further afield?
The potential for greater returns from offshore investments is shown by the latest ASX/Russell Investments “2015 Long-term Investing Report,” which found that international shares and bonds outperformed their domestic rivals over the past decade.
According to the report, unhedged international shares were the top performer in the 10 years to 31 December 2014 with a 7.8 per cent annual return before tax, followed closely by global fixed income (hedged) on 7.6 per cent, with Australian shares earning 7.1 per cent and Australian residential property 7 per cent.
Australia’s ageing population and the growing popularity of self-managed super funds (SMSFs) has made high-income portfolios particularly popular, including the benefit of franked dividends. However, with the Australian equity market heavily weighted towards financials and materials, and higher-yield sectors dominated by a few large companies, purely domestic portfolios risk becoming highly concentrated.
Fortunately, it is possible to achieve stable returns while also reducing risk by diversifying offshore through a global income exchange-traded fund (ETF), as outlined by State Street Global Advisors in its publication, “Global Income Strategies for Australian Investors.”
As noted by State Street Global Advisors, international high-yield investments offer a range of benefits for investors, including the ability to access new companies and sectors with different economic and growth profiles; reduced portfolio and concentration risk through more effective diversification; and obtaining more attractive equity valuations in undervalued markets, while gaining from structural trends such as growth in emerging markets.
The need for greater diversification is shown by recent ATO data, which found that SMSFs have only an average of 0.4 per cent of capital invested in overseas shares, with 28 per cent in cash and 32 per cent in Australian equities. By investing in a global income fund such as an SPDR ETF, trustees can gain access to a cost-effective and easily administered vehicle for offshore diversification, without the complexities of a direct investment.
According to State Street Global Advisors, high quality dividend-based investment strategies have historically participated in the majority of market upswings, while also potentially offering downside protection in turbulent times. An added advantage of investing offshore is introducing increased quality into a portfolio by adding stocks that consistently grow dividends.
Australia’s economy has enjoyed a record-winning streak in recent years, but with the slowdown in China, the end of the mining boom and the risks of a property bubble in cities such as Sydney and Melbourne, there is no guarantee such strong domestic performance will continue. In today’s borderless world, there are possible opportunities to be found to improve on your yield via international ETFs.
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