Investors aged 25 to 49 have a roughly half-half split between domestic and international markets, but the change has been most marked among over-50s.
Some investing trends can take decades to evolve, while others seem to happen almost overnight.
In the context of Australian investors, it’s evident that the latter scenario is continuing to play out as a growing amount of money is being deployed into offshore sharemarkets.
Our research shows that across a range of Australian investor age groups there has been a marked tilt by investors towards international share markets since 2021.
Broadly speaking, it’s clear that the home shares bias once prevalent among Australian investors has taken a back seat in the plane.
That largely accords with the Australian Securities Exchange’s data that tracks flows into exchange traded funds (ETFs) every month.
Over the first three quarters of 2024, ASX-listed international equities funds attracted about 56 per cent of the $23.3 billion in total inflows into ETFs. By comparison, Australian equities ETFs attracted only 22 per cent of the total inflows.
But things become even more interesting when viewed across the different age cohorts investing in ETFs and unlisted managed funds that provide broad exposure to the Australian and international sharemarkets.
Diversification is critical
We looked at the investing patterns of thousands of Australian investors using Vanguard’s personal investing platform over the past four financial years, breaking them down into four age bands – under 25, 25 to 39, 40 to 49, and 50 and over.
Our data shows that in 2020-21, Australian investors aged 50 and over were investing about $4 out of every $5 into the Australian sharemarket. By June 30 this year, that number had dropped to about $1.70, with the balance going to international shares.
Investors aged between 25 and 49 were investing about $2.20 into the Australian market in 2020-21 for every dollar invested in international markets. Now that number is essentially dollar for dollar.
It’s a similar story for the youngest age cohort, the under 25s, although in 2020-21 they were investing about $3 into the Australian share market for every $1 invested offshore. At the end of 2023-24 that number was also about one for one.
So, the message seems to be getting through. Diversification across asset classes and geographies is really critical in investing.
Fundamentally, this shift to offshore sharemarkets is a recognition by many investors that the Australian sharemarket makes up only a small percentage – about 2 per cent – of the global sharemarket. Indeed, most of the largest companies in the world by market capitalisation are listed outside Australia, in North America, Europe and Asia.
The recent strong performance of international markets, especially United States’ markets, also has encouraged many investors to move outside the Australian market. It is evident many investors have been chasing performance, even though past performance is never an indicator of future returns.
International shares have outperformed Australian shares in eight of the past 10 financial years.
In 2023-24, the US sharemarket delivered a total return of 24.1 per cent, and the broader category of international shares 19.9 per cent. This compared with the Australian sharemarket’s 12.5 per cent total return.
US markets shot up again on news of Donald Trump’s win, with the Dow Jones experiencing its best day in two years, while the S&P 500 and the Nasdaq also hit record highs.
International shares have outperformed Australian shares in eight of the past 10 financial years. To quantify that, a $10,000 investment into international shares in July 2014 would have achieved an average annual return of 13.1 per cent by June 30 this year and grown to $34,329 before costs and taxes, and assuming all distributions had been reinvested.
The same investment into Australian shares would have lagged, delivering an average annual return of 8.3 per cent, and growing in value to $22,239.
The trend across all age groups points to investors wanting greater investment diversification by accessing international markets. There are many ETFs listed on the ASX that provide quick exposure to international shares.
Although returns from international sharemarkets have been relatively strong over time, having good diversification can help to smooth out returns during times when different sectors underperform others.
Hopefully, investors who have made the shift to offshore shares see the value of diversification and stick with it through all market cycles.
It is important for investors in international assets to be aware of potential tax consequences and the risks associated with foreign currency movements, which can have a significant impact on returns.
as published in Australian Financial Review (Sat, 9-Nov,2024)