Should you buy international shares?

It makes sense for investors to add high-quality international companies to their portfolios, particularly when these companies are only listed on overseas stock exchanges. And the amount of information available online has made it much easier to research international companies.

Mark Whitehead, portfolio manager of Securities Trust of Scotland (STS), a global equity income investment trust, says: "Look at the giants of the technology sector. Some of the biggest growth stories in recent times are Apple (AAPL:NSQ), Facebook (FB:NSQ), Tencent (HKG:700), Samsung Electronics (SMSD) and Alibaba (BABA:NYQ). The unfortunate fact is that none of them are UK companies. In fact, the recent sale of Arm Holdings to a Japanese company means that there are almost no significant technology companies left in the UK. The result is that investors exclusively in UK funds will have had no chance to access the extraordinary growth of these companies, and their portfolio will have lagged accordingly."

Broadening your equity exposure beyond the UK can also provide diversification benefits. Especially as the UK market is quite concentrated, with around 50 per cent of the FTSE 100 in financials, consumer goods and oil & gas companies. And just five companies accounted for 38 per cent of the UK dividend total in 2016. 

Having exposure to international equities can also be a way of benefiting from currency movements, according to Justin Modray, director at Candid Financial Advice.

"It wouldn’t be a specific reason to buy a particular company, but it could form part of your overall investment case," he says. "If an investor thinks the pound is going to get weaker (perhaps because of the Brexit process), then they may buy overseas shares to protect against further sterling falls, as the exchange rate will lead to an increase in the value of those [overseas] investments when you bring them back into sterling."

International stockpicking risks

However, currency movement is also one of the main things that can go wrong when investing in overseas equities. If the pound strengthens against the currency your shares are priced in, then the value of your shares will be worth less when translated back into sterling.

Lee Wild, head of equity strategy at Interactive Investor, prefers to keep his overseas stockpicking to larger companies as small-caps will be harder to research. In areas such as Japanese smaller companies, for example, he suggests funds as a lower-risk way of getting exposure.

Investors also need to understand that companies in different parts of the world may report information in different ways or have different regulatory standards. And the level of transparency may not be as good in some emerging markets.

"Political and regulatory issues can also affect your investment in overseas markets," adds Mr Wild. "This becomes more pertinent in emerging markets. For example, if you’re investing in countries such as Argentina and Brazil, the effect [on your returns] could be quite dramatic as they have a reputation for volatility; although you’d hope to be rewarded for taking that risk in the long term."

Tax is another key consideration when owning international shares. There is a risk you may be taxed twice on any income you receive from foreign companies, by both HM Revenue and Customs (HMRC) and the country where you are taking your income. You can usually claim tax relief to get some or all of this tax back as the UK has entered into double-taxation agreements with a number of countries. How much relief you get depends on the UK’s agreement with the country. Generally HMRC will give a credit against UK taxes where you can show that a withholding tax has been paid.

The most important bilateral relationship in this respect is with the US, where a 30 per cent withholding tax on income can be cut to 15 per cent when the recipient fills in a W8-BEN form. This form attests to the investor's non-US domicile.

"The UK has double tax treaties with a large number of countries, but the onus is on the individual investor to reclaim that tax," adds Mr Wild. "We would urge any investor in US stocks to complete the W8-BEN form as that reduces tax from 30 to 15 per cent. The risk with European shares is that, while there are double taxation treaties in place, it’s often more difficult to reclaim taxes that are charged in the host nation."

Buying international shares

There are generally two ways your broker or platform will be able to give you access to international shares. The first is if the broker has access to multiple overseas stock exchanges. When you place your order for a stock on a particular market, the broker will buy the shares directly on that market on your behalf.

The second way is via the UK’s settlement system, Crest. As international shares cannot be transacted directly in Crest, a Crest Depository Interest (CDI) will be created by the broker to facilitate trading. CDIs are securities designed to represent a stock traded on an exchange outside the UK. They offer a straightforward way to trade in a number of overseas stocks and are the main method of foreign dealing provided by a number of UK platforms and brokers.

It is relatively straightforward to buy international equities through DIY platforms, especially stocks traded on North American and European markets as many of these are typically available in CDI form. Brokers offering exposure to shares in these markets include Alliance Trust Savings, Halifax Share Dealing, Hargreaves Lansdown, Interactive Investor and The Share Centre.

"The reason why [CDIs] tend to be popular with brokers is that they can plug them straight into their existing systems; if they wanted to offer sharedealing in each market directly, they’d have to have links to each of those exchanges,” explains Mr Modray. "But CDIs won’t have full market coverage and will only focus on the largest companies and larger markets."

So if you want to go further afield you will generally need to go for a more specialist platform, which is able to provide you with direct access to the stock exchange in question.

As well as North American and most European markets, platforms including AJ Bell Youinvest, Charles Stanley Direct, Degiro, IG Markets and TD Direct Investing also enable you to buy shares in Australian or Asian markets.

Costs

The amount platforms charge to buy and sell international equities can vary widely, making it difficult for investors to compare like with like. But the costs typically include platform fees, dealing charges and foreign exchange (FX) fees. These soon add up and, in particular, brokers have been criticised in the past for the steep mark-up they charge on FX fees. A previous Investors Chronicle investigation found some stockbrokers were marking up the cost of FX on trades by up to 200 times.

Stuart Millson, managing director of online comparison tool Broker Compare, thinks investors are still getting a raw deal. "Platforms are making quite a lot of money on the FX, with most of them charging a flat rate of around 1.5 per cent, and that is pretty steep; if you’re buying £10,000 of shares, that’s £150 in exchange fees," he says. "From the conversations I’ve had, brokers tend to see international share trading as an opportunity to make money and they are definitely making significant profits on it as the exact wholesale rate will be a lot less than 1.5 per cent."

But platforms charging this amount argue they are providing a service by exchanging currency and are upfront with investors about how much this will cost.

However newer entrants into the international sharedealing space are offering cheaper rates. Low-cost broker Degiro charges €0.50 + $0.004 per share to trade US shares, and to trade most European shares it charges €4.00 + 0.04 per cent. To trade shares on more far-flung markets such as the Australia, Hong Kong, Japan and Singapore stock exchanges it charges €10.00 + 0.05 per cent. And to convert foreign currency Degiro charges €10 + 0.02 per cent.

Gijs Nagel, director at Degiro, says his company is able to offer such low rates because unlike many other brokers all its settlement, clearing, trading and IT systems are run in-house rather than via third-parties. Including its institutional business, it has direct access to around 60 stock exchanges.

"Most UK broker costs consist of labour and IT costs, especially as a lot of them outsource the back-end side of things,” he says. “The rate we charge externally is lower than the rate it costs many brokers internally. One trade with Degiro costs on average €3, whereas to execute it internally is around €1 - 2; so we have a margin of 100-150 per cent a trade, and with 40m trades a year we will still end up with a nice profit. Most UK brokers charge their clients around £10 to trade a share and internally to execute it costs them around £5 as that includes the number of people employed and bonuses."

Degiro, which opened its doors to UK investors about a year-and-a-half ago, has 200,000 investors across 18 European countries and its size also enables it to pool the costs of international share trading Mr Nagel says. But Degiro does not currently offer an individual saving account (Isa) or self-invested personal pension (Sipp).

Other platforms that offer more competitive international sharedealing rates include IG Markets, which launched its sharedealing service in 2014. It offers investors non-sterling accounts, which means if they want to trade shares in the same non-sterling currency, they will not need to pay any foreign exchange conversion rate. But even if investors choose not to open a non-sterling account, the FX rate charged by IG to convert currency is lower than most platforms, at 0.3 per cent. To trade US shares online it costs a minimum of $15 per trade, with European shares costing a minimum of €10 and Australian shares a minimum of A$10.

Mr Millson also mentions Selftrade, which charges a rate of 0.5 per cent for foreign exchange conversion and TD Direct Investing. TD Direct charges its standard online rate of £12.50 plus an FX charge of between 1.5 and 0.25 per cent, based on the size of the trade. But its customers can also hold nine different currencies in its trading and Sipp accounts, reducing the amount they need to convert into other currencies.

If you are going to trade international shares often then it may be better to choose a platform with lower foreign exchange costs, but you should also consider your full portfolio of investments. "Make sure your platform fits with all the other assets you’re holding,” says Mr Millson. “For example, if you want to hold funds, you can’t do that with Degiro and IG, although you can hold exchanged traded funds (ETFs). Similarly if you’re mostly holding funds, but also want to own international shares, some brokers can be very expensive. So make sure you’ve considered all the options."

International sharedealing platform comparison

Source: Investors Chronicle, Broker Compare and provider websites