INVESTORS, no matter where they are from, tend to favour stocks, bonds and financial assets in their own country because they are more familiar with companies in their backyard.
While this may seem like a safe strategy, they should also bear in mind a key tenet when it comes to investing: never put all your eggs in one basket, as things can go wrong in domestic economies and financial markets and it makes sense to reduce this risk by diversifying geographically.
If you are employed in your home country and have bought a house there and invested in other properties as well, you already have significant exposure to one specific market.
If you tilt your portfolio towards stocks and bonds listed at home, you may inadvertently be taking on more risk than you realise, says Mr Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank.
“There could also be attractive global investment opportunities you are missing out on by being too home-centric,” he says.
Take, for example, the Straits Times Index. If a Singapore investor had invested in the index over the last five years between Nov 30, 2010 and Oct 30, 2015, the total returns in Singapore dollars terms would have been 11 per cent or an annualised return of 2.2 per cent.
In contrast, the MSCI World Index, which includes an array of global stocks, returned 73 per cent over the same period or a double-digit, annualised return of about 12 per cent — significantly higher than what the ST Index offered.
Of course, this is not to say that you should steer clear of stocks listed on the local bourse, Mr Menon says.
On the contrary, there could be gems on the local bourse as well and it still makes sense for investors to seek out and invest in some of them.
“However, it also makes sense for investors here to look beyond Singapore’s shores even though they may not be familiar with markets elsewhere,” he says.
“For those with the means and know-how, they could do their own research and buy into individual stocks listed in other markets.”
For those with less time on their hands, a good way to invest in overseas markets is through unit trusts or funds available here.
For investors who want to mitigate potential downside risks, given the recent market volatility, OCBC recommends the multi-asset strategy fund BlackRock Global Multi-Asset Income Fund.While these funds may cost you more than buying individual stocks, they can also be less risky, as unit trusts typically invest in a diversified pool of stocks, selected by professional fund managers, Mr Menon says.
The trick is to pick the right fund managers and right funds and this is where a good relationship manager, who is supported by good research, can help you to zero in on attractive fund ideas, he adds.
Currency-hedged equity funds
Mr Menon highlights one aspect of overseas investing that potential investors need to bear in mind: currency risk.
This is because currency markets have been extremely volatile in recent years, especially after several major central banks like the US Federal Reserve, Bank of England, Bank of Japan and the European Central Bank (ECB) embarked on quantitative easing to boost growth following the global financial crisis and the European debt crisis.
“The volatile currency markets means that the currency overlay with overseas investments can affect returns significantly and one way to reduce currency risk is through currency hedging,” he explains.
“The good news is that some fund managers offer currency hedged unit trusts to reduce currency risk.”
So where are some good investment opportunities beyond Singapore’s shores?
In the equities space, OCBC favours developed markets like Europe over emerging markets, as the former looks set to benefit from the ECB’s loose monetary policy while the latter is facing pressure due to the stronger US dollar as the Fed looks set to raise interest rates soon.
For Singapore investors keen on investing in European equities, there are unit trusts available that allow them to do that.
However, OCBC advises investors to buy into currency-hedged European equity funds, given expectations that the ECB could loosen monetary policy further, which may cause the Euro to weaken.
The BlackRock European Equity Income Fund and the JPMorgan Europe Dynamic Fund are OCBC’s top picks for investors looking for diversified exposure to European equities.
“Yes, there is a cost to currency hedging but it may make sense to hedge if you want to ensure that your returns are not too badly affected by currency weakness,” Mr Menon explains.
“By not investing outside your home country, you may pass up opportunities to invest in faster-growing markets where valuations might be more attractive,” he adds.
“It clearly makes sense for local investors to look beyond Singapore’s shores — the world after all, is your oyster.”
OCBC has established direct relationships with over 60 global fund managers. Its team of highly qualified funds research specialists conducts independent in-house research to hand-pick and actively monitor about 100 best-in-class funds from a universe of some 80,000 tradeable funds. This enables OCBC to present top investment ideas to its premier customers as a way to help them growing their wealth.
In my view
Have you made any overseas investments and what did you learn from that experience?
One of the areas outside of Singapore that I have invested in is the Asia Pacific region. I used my funds in my Supplementary Retirement Scheme account a few years ago to invest in an Asia Pacific equity fund run by a well-regarded fund manager with a strong track record and sound investment philosophy.
I was convinced that the Asia Pacific will remain a dynamic and fast-growing region in the years ahead, having emerged stronger and healthier after the 1997/98 Asian financial crisis.
My investment has returned more than 60 per cent and I have no plans to take profit despite the macro headwinds facing Asia, given the potential rate hikes by the US Federal Reserve in the coming months. This is because my exposure to Asia Pacific equities is not large and I will in fact look to increase my exposure if Asian markets see significant pullbacks in the coming months.
MR VASU MENON
Senior Investment Strategist
Wealth Management Singapore, OCBC Bank