Investing in international shares allows access to some of the world’s largest and most influential companies. From Apple and Microsoft to Nestlé and Toyota, international equities span a broad array of industries, markets, and geographies offering both diversification and long-term growth potential for investors.
The aim of this article is to provide a better understanding of the characteristics of international share funds and why they form a key part of a well-diversified investment portfolio.
Market capitalisation bias
The MSCI World ex-Australia Index, a common benchmark for international developed markets, is heavily weighted toward large and mega-cap companies. Mega caps make up a significant portion of the index, with names like Apple, Microsoft, Amazon, and Alphabet leading the way. These companies are typically dominant in their sectors and often have global business models.
Active international fund managers may choose to invest across the market cap spectrum, but many maintain a bias toward large-cap stocks given their stability and liquidity. That said, there are managers who specifically target mid and small-cap companies to capture higher growth potential, albeit with more volatility.
Regional and sector bias
The MSCI World Index has a strong regional skew, with the United States accounting for approximately 70% of the index. This means that global share portfolios tend to have a heavy U.S. weighting, particularly in sectors such as technology, consumer discretionary, and healthcare.
Other significant markets include Japan, the United Kingdom, France, Canada, and Germany. While these countries represent a smaller portion of the index individually, they offer exposure to different economic cycles, currencies, and regulatory environments, adding to diversification.
Fund performance may be influenced by regional or sectoral biases. For example, funds overweight in U.S. tech stocks may outperform in bullish markets but lag during downturns or periods of rising interest rates.
Number of stocks held in the portfolio
International share funds can vary significantly in the number of holdings. Some active managers run concentrated portfolios of 30–60 stocks, allowing them to take meaningful positions in their highest-conviction ideas. Others, particularly index funds or diversified global funds, may hold over 1,000 stocks.
The level of diversification within a portfolio can influence its risk-return profile. Concentrated portfolios tend to have greater performance dispersion and volatility, while broader portfolios may provide smoother returns over time.
Active versus passive
Given the size, depth, and efficiency of international markets, particularly in developed economies, it is often more difficult for active managers to consistently outperform passive benchmarks. However, some active managers have demonstrated skill in identifying high-quality businesses and managing downside risk over time.
Passive international funds, such as ETFs that track indices like the MSCI World or S&P 500, offer cost-effective, broad-based exposure to global equity markets. These are commonly used as core holdings in diversified portfolios.
Currency exposure
Investing in international shares introduces currency risk. Movements in the Australian dollar (AUD) relative to foreign currencies can impact returns. When the AUD falls, unhedged international investments typically benefit, as foreign earnings are worth more in local currency. Conversely, a rising AUD can detract from returns.
Some funds offer currency-hedged versions to reduce this volatility, though this can remove the diversification benefits of currency fluctuations.
Correlation/diversification
International shares offer valuable diversification benefits for Australian investors. Historically, global markets have shown moderate correlation with the S&P/ASX 200. This means international equities may respond differently to global economic conditions and provide a buffer during periods of local market underperformance.
Furthermore, the broader industry and sector exposure, such as to global technology, healthcare, and consumer giants, complements the resource and financials heavy Australian market.
Growth and income
International shares tend to provide a combination of growth and income, though their dividend yields are typically lower than those of Australian shares. For instance, global developed markets tend to yield around 1.5% to 2.5% p.a., with dividends often reinvested to fund growth.
Investors relying on income may need to balance international exposure with other asset classes, while long-term growth investors often appreciate the capital appreciation potential from global leaders.
Written by
Michael Simmons
Financial Planner