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Investing offshore

Advances in technology have opened up a huge range of overseas markets to traders and investors the world over. Once the domain of those with either the technological know-how to do it themselves, a large capital base to pay the exorbitant brokerage rates or those with a true passion to trade offshore markets, the ability to invest in and trade in many markets all over the globe is now open to anyone with a computer and an Internet connection.

For Australian investors it is just as easy to buy and sell shares on the NASDAQ and NYSE exchanges as it is on the ASX. Technological developments and electronic transactions have allowed investors access to global markets that were out of reach only 10 years ago. This means that investors the world over can diversify their portfolios and improve returns by taking advantage of opportunities in markets other than their own domestic markets.

A survey by technology consultancy Capgemini found that the world’s 13.7 million richest people lifted their allocation to offshore markets to 37 per cent from 25 per cent in the year to March 2014. So, a US investor can diversify offshore by buying Australian shares or assets, just as an Australian investor might diversify by buying US shares or assets. The survey also found that European investors with more than $US1 million of assets outside the family home were among the most active in offshore investing. According to Capgemini, Asian investors in the same wealth bracket increased their offshore investing to 33% from 21% in the same 12 month period.

One of the other major findings of this survey was the expectation by these investors that they would have ease of access to all aspects of their investing activities online. The “electronic revolution” of the past few years has not only improved access to global markets but has also improved the availability and transfer of all forms of information. Investors now have a high expectation that all the information they need to make informed decisions and to manage their portfolios will be available electronically and instantly.

Electronic access to a huge range of global markets, like the NASDAQ for example, means that it is possible to take advantage of opportunities all around the world, not just in your local, domestic market. In order to improve portfolio returns and to diversify both opportunity and risk, investing in overseas markets will help investors achieve these aims.

A survey in Australia found that Australian investors are increasingly looking to investing off-shore. As at the end of 2013, 22% of investors were saying that they plan to increase their level of investment in international shares, up from just 3% in August 2012, only 18 months earlier. The majority were looking to the United States with almost half focused on managed funds, just under a third on direct shares and around 15% on ETFs.

One of the fastest growing investment vehicles used by investors to gain access to offshore markets are Exchange Traded Funds or ETF’s. ETFs blend the benefits of managed funds and shares. They generally contain a parcel of securities designed to replicate a particular index or sector and are actively traded on major stock markets. There are a wide variety of ETF’s available including stock, commodity and currency ETF’s to name just a few. The main benefits to investors is the ability to gain exposure to offshore markets through a product that trades on a stock exchange. In this way, investors can gain access and exposure to metals, currencies, agricultural commodities and many other sectors through an exchange traded product. As of January 2014 for example, there were over 1,500 ETFs traded in the U.S., with over $1.7 trillion in assets.

For years I have been a strong advocate for multi-strategy investing. There is actually a chapter in the ‘SPA3 Reference Manual’ which I wrote some 15 years ago that supports all my reasons why, especially to achieve vertical diversification across strategies, instruments and asset classes rather than the popular but incorrect horizontal diversification that most do across a single strategy and asset class that carry a high correlation.

When I wrote that chapter I could not have foreseen the growth or explosion in technological advances that would make it as simple and as cheap as it is today to execute. The cost of execution can be up to a tenth of what it was just a decade ago. Nor could I have foreseen that a product like ETFs would explode and allow investors of any skill level to access instruments that were once only the domain of experienced traders and investors.

The trend for investors to invest off-shore is only going to increase over the coming years. As many active investors know, controlling risk takes priority over trying to maximise return, which is why it can make perfect investment sense to use at least two strategies in your direct investment approach.

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