What goes into an international equities portfolio?

International share markets have been on fire for the past 12 months, returning 23.27%, driven largely by the US technology companies and the take-off of AI. But it's not just the last 12 months that count: no matter which way you cut it, international equities have outperformed Australian equities over 1, 3, 5 and 10 years. 

If you’re not diversified with international shares, you could be missing out on growth opportunities for your portfolio. 

Fans of dividends (and who isn’t a dividend fan?) argue ASX listed companies pay better dividends than their global peers. Which is true. Dividends are important, particularly for retirees. But for most Aussie investors, the dividends paid out are not enough to counter the capital growth opportunities available in international markets. 

This in itself should be enough to consider some overseas exposure. There are, however, more compelling reasons for doing so. 

As Jack Bogle said: “diversify, diversify, diversify” 

Australia-focused investors are inadvertently taking concentrated and correlated risks. The ASX is a small market that over-emphasises banks and resources. In fact, around 55% of the Australian stock market is concentrated in just two sectors: financials (e.g. the banks), and materials (e.g. BHP). 

International investing not only provides exposure to the other 98% of world equities, but also exposes investors to growth industries that are underrepresented in Australia, such as technology and healthcare. 

Another often overlooked fact, is that many of the world’s biggest companies such as Apple, Microsoft and Coca-Cola, are in themselves highly diversified across products and markets. For example, Microsoft sells a wide range of products and services into over 190 countries worldwide. 

InvestSMART’s International Equities Portfolio 

The following table provides a breakdown of InvestSMART’s International Equities Portfolio as at 30 June 2023. 

The table has been ordered by holding size within the portfolio, from largest to smallest. The two largest holdings in the portfolio, VGS and IVV, also charge the lowerst fees in the portfolio the lowest MERs (Management Expense Ratios) ie the fees you pay to the ETF provider,in the portfolio. 

Here is a summary of the ETFs in the portfolio: 

VGS: The Vanguard MSCI Index International Shares ETF provides wide diversification across 1466 stocks from 23 developed countries in North America, Europe and Asia (particularly Japan). US stocks make up 71.3% of this ETF, followed by Japan, UK, France and Canada. The ETF includes Apple (5.3%), Microsoft (4.1%), and Alphabet (2.7%). A review of this ETF can be found here. 

IVV: Blackrock’s iShares S&P 500 ETF holds shares exclusively in its US counterpart, the iShares Core S&P 500 ETF, which also has the ticker IVV. Given its massive size, this ETF attracts one of the lowest MERs on the exchange. Given the ETF holds the 500 biggest companies in the US, its biggest holdings are Apple, Microsoft, Alphabet, Amazon and NVIDIA. 

VEQ: The Vanguard FTSE Europe Shares ETF provides exposure to Europe’s biggest stocks, and provides an extra level of diversity to InvestSMART’s International Equities Portfolio. The ETF has 1324 holdings, with its biggest holdings being from the UK (24.3%), France (17.2%), Switzerland (14.6%) and Germany (12.6%). The biggest companies in the fund are Nestle, Novo Nordisk, ASML Holdings, Roche Holdings, and Shell plc. 

IAA: Blackrock’s iShares Asia 50 ETF makes up around 5% of the InvestSMART International Equities Portfolio. The ETF holds the 50 largest stocks in Asia, from countries such as China, South Korea, Taiwan, Hong Kong, and Singapore. The biggest companies in the fund are Taiwan Semiconductor Manufacturing, Samsung Electronics, and Tencent Holdings. 

UMAX: The Betashares S&P 500 Yield Maximiser Fund is a management investment fund that trades on the ASX. The fund provides exposure to a basket of 500 large US equities, which provide regular income and the potential for capital growth. 

Performance 

The following table shows the performance (Total Return) of each of the ETFs within the InvestSMART International Equities Portfolio including the returns of the portfolio itself, as at 31 August 2023.  

Since the date of inception (Oct 2014), the InvestSMART International Equities Portfolio has returned on average 10.71% p.a. 

As can be seen from the table, the InvestSMART International Equities Portfolio has had an excellent 12 months, due to strong stock market performances, particularly in the US, Europe and Japan. 

This performance highlights the benefits of wide diversification across stocks, sectors and geographies. 

What's the recommended investment timeframe?

InvestSMART’s International Equities Portfolio has a minimum initial investment amount of $10,000, and it’s recommended that investors stay invested in the fund for a minimum of 7 years. This gives plenty of time for the investment to grow and compound, and also helps iron out some of the ups and downs in the stock market. 

The fund has a capped management fee of 0.55%, which means that once your investment exceeds $100,000 in size, the maximum management fee you will pay is $550 p.a. 

The fund is unhedged, which means that there is some currency movement risk, which could be positive or negative depending on the direction of the currency. Currency risk can be minimised somewhat by investing long-term. ETFs that are unhedged also tend to have a slightly lower MER (Management Expense Ratio) than their hedged equivalents. 

The InvestSMART International Equities Portfolio can also be added to an existing InvestSMART PMA (Professionally Managed Account). 

In summary 

The case for investing internationally is strong, as it increases portfolio diversification, and gives access to sectors that are underrepresented in Australia. It also provides exposure to some of the biggest and best companies in the world, such as Apple and Microsoft. 

As with any investment there are always risks, but many of these risks can be minimised with wide diversification and by maintaining a long-term time horizon. 

We believe that the InvestSMART International Equities Portfolio is a great option for investors, that should provide excellent growth over the long term.