By Jayson Forrest - Managing Editor  - IMAP Perspectives

When considering the opportunities of investing overseas, Nathan believes it is critical for advisers and investors to first consider the respective times zones of the countries and cities they intend to be trading in. For example, Hong Kong is three hours behind Sydney (Eastern Daylight Savings Time), while London is 11 hours behind and there is a 15 hour difference between Sydney and New York.

“Time wise, these major cities and stock exchanges are behind Australian cities. And while it seems obvious, many people don’t understand that different time zones create problems when you try and buy a stock that is listed on the ASX but trades in another country, because the country with the underlying market that you want to access is likely to be closed,” Nathan says.

An example he likes to use to demonstrate this point involves the use of ETFs.

“A market maker has to build a margin to account for the fact that there is an unknown, as a result of trading in different time zones. It means that implicitly, you’re going to have higher transaction costs compared to executing in a live exchange,” Nathan says.

A consequence of investors trading directly in overseas exchanges, they will need to deal with local tax implications. For example, in the U.S., investors will need to deal with state taxes, which can be quite onerous.

“There is also the issue of withholding taxes,” Nathan adds. “Often you get withholding taxes automatically deducted from you account.

You then have to claim back these taxes with the ATO that were withheld against you, assuming you have already made the appropriate arrangements with an accountant and that an existing tax treaty exists between Australia and the other country you were trading in.”

Nathan is quick to point out that not every overseas market is like Australia, where you can buy one share in a company, with many overseas jurisdictions requiring shares to be bought in lots. An example is Japan, which has minimum trading lot sizes of 100 units. 

“This can be particularly troublesome for investors with small portfolios,” Nathan says. “When you have these minimum lot sizes, it means that investors generally need to have larger portfolios, in order to be able to achieve good diversification.”

In addition to minimum lot sizes required by some countries, Nathan adds that accessing some overseas ‘blue-chip’ stocks can be quite expensive. Take for example, Amazon, where buying one share will cost an Australian investor approximately $4,500.

“So, if you’ve got a modest $10,000 account, how are you going to achieve diversification when one share in Amazon will eat up half the value of your portfolio?”

Another consideration are brokerage costs. When an investor uses an SMA platform to trade globally, the investor will naturally incur trading costs as they go in and out of the platform, which can add up very quickly.

Foreign exchange is an area of international investing that Nathan believes both advisers and investors don’t spend enough time thinking about. He says the core issue with foreign exchange is that it’s not really transparent, with no concept of a volume-weighted average price (VWAP).

“You really don’t know whether or not you actually got a good price when you converted your foreign exchange. There are some PDS statements that include wording like ‘a competitive foreign exchange rate’, but that is a very undefined term. In reality, it’s actually difficult to get a good idea on whether or not you actually got a good price with the conversion.”

Another area that is not well publicised, which Nathan believes investors should also carefully consider, is the added complications caused by using a platform that cannot handle multiple currencies when transacting overseas shares.

Nathan explains: “Assume you already own shares in Amazon. If you sold your Amazon shares and then bought Microsoft shares in the same day, what effectively happens is that the sale will happen in U.S. dollars, which then gets converted back into Australian dollars. At the same time, the transaction for the Microsoft buy goes from the Australian dollar account and converts back into U.S. dollars,” Nathan says.

“So, even though the transaction itself is all happening overseas in the U.S., there are two cuts of the transaction that go through foreign exchange. Every time there is a transaction, there are costs, and that’s something that many people are not aware of. All these extra costs build up over time.”   

In terms of costs as a practical consideration that investors need to make when investing overseas, Nathan says in addition to the foreign exchange transaction cost, many investors focus on the fact that model manager fees on SMAs are a lot cheaper than a unitised structure. However, he believes this is not necessarily the case.

Instead, Nathan says if you want to make a like-for-like comparison of SMAs and unitised structures, you need to think more holistically about costs.

“Other than foreign exchange costs, there are also settlement costs, execution costs and custody costs. From a unitised structure, all these costs are deducted from the net asset value (NAV), so it’s not really clear to the investor that they are being charged all these additional costs.

“However, on an SMA structure, all those charges are more transparent to the investor. And while we do like the fee transparency that comes from an SMA, at the end of the day, the client is still paying these costs.

“So, it’s worth remembering that when it comes to costs, it’s not always clear-cut,” he says. “Just because you use an SMA doesn’t mean it’s going to be cheaper to use.”

Nathan Lim is Morgan Stanley Head of Wealth Management Research Australia. He spoke  on international investing as part of an IMAP specialist webinar series on ‘International Equities in the current global market’.

Morgan Stanley Wealth Management Australia was named winner of the 2020 IMAP Award for Licensee Managed Account.