A strong Aussie dollar and a wealth of online information mean it’s never been easier to invest overseas. However, those who dined on similar logic ten years ago may wish they’d skipped a meal.
The MSCI world stock market index has withered by 0.73% per year over the past decade. Though it’s a damning statistic, stock prices in 1999 were intoxicated by the excitement of the new millenium and in many cases it’s taken a decade for earnings to catch up. With valuations now looking more reasonable, this augurs favourably for future returns.
Successful international investing isn’t guaranteed by our strong currency, though. Practicalities, such as having time to commit to learning about new businesses and negotiating various taxation and legal regimes, for example, put many investors off the idea of diversifying their portfolios overseas. But for those interested, this blog aims to help get you started.
Choosing a broker
I use Commonwealth Bank’s Pershing service, a decision born mainly of convenience. You can download the application forms online and the service is relatively efficient, though the website is slow. Here’s how it works.
Once your application has been approved, you’ll be issued logon details as though it were an ordinary Australian brokerage account, but you can’t place an order without first making a foreign currency deposit.
I’ve only traded in the US, but if I call Pershing before 10:30am, or thereabouts, cash will be withdrawn from my local bank account and converted into US dollars at the morning’s prevailing exchange rate. If you miss the cut off, you’ll be waiting another 24 hours before your funds are exchanged and a further 24 hours after that before your funds are available to trade. Your cash won’t earn interest, either, so the opportunity cost of holding US dollars, for example, is high.
Service and cost
Pershing provides access to the world’s major markets but the costs vary. For example, Pershing’s minimum US brokerage charge is currently US$65; potentially four times what you might pay in Australia. This is particularly onerous if you’re investing small amounts. Be sure to ask what protection you have, if any, against your broker getting into financial trouble.
The other foreign online broker we’re aware of but haven’t investigated is US-listed Interactive Brokers, which seemingly offers lower transaction costs and is relatively easy to open an account with.
Taxation is considerably more complicated with overseas investments and your author is not an expert. However, you can make life much easier by keeping your transaction records, including dividends (showing withholding tax that you might be able to claim a refund for) and the exchange rate on the day the transaction took place. Pershing only holds these details for two years, for example, so remember to keep a well secured personal copy as well.
The Australian Tax Office provides a schedule of average exchange rates each year to assist investors. However, I find it far easier to open Yahoo! Finance, which provides current and historical exchange rates for major currencies at the touch of a button.
Not many investors have the time or inclination to invest overseas. But if you have experience or tips that could benefit others, such as a good online broker, helpful websites or a tax tips and traps, for example, then please leave your comments below.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.