Introduction:
The ATO Self Managed Super Fund (SMSF) statistical report for March 2023 indicates that Australian listed shares made up approximately 29.35% of total SMSF assets, while overseas shares only made up approximately 2.68%¹. This exposure does not consider exposure via managed funds and listed trusts.

SMSF Investors Have a Home Bias:

SMSF investors have a bias for Australian shares relative to international shares. This may be driven by several reasons:

1. Ease of Access:
   Investor preference for investing directly tends to mean SMSF investors favour Australian shares because investing directly into international shares is complex and harder to access. Currency movements affecting returns from international shares and the currency hedging decision increases the complexity of investing in international shares.
2. Quasi Global Exposure:
   Some SMSF investors believe that investing in Australian companies that have a global presence or that are influenced by global developments, such as resource companies, provides adequate exposure to international economies and investment themes.
3. Preference for Tax-Effective and Income-Yielding Shares:
   Australian shares tend to provide relatively higher levels of income with franking credits. This can be an important source of tax-effective income for retirees and pre-retirees. The franking credits can be used to offset other tax within the SMSF in the accumulation phase and refunded credits in the pension phase can add to returns.
4. Greater Understanding of Australian Companies:
   An SMSF investor will typically have a deeper knowledge and understanding of the Australian share market and companies that make up the market than overseas companies. Therefore, SMSF investors may feel more comfortable investing domestically.

The Downside of Excessive Home Bias:

SMSF investors need to determine whether they have a bias towards Australian shares and consider the following implications:

1. Concentrated Exposure of Australian Shares:
   The Australian share market represents a small portion of the global universe (around 1.9% as measured by the S&P Global Broad Market Index as of June 30, 2023). The market is highly concentrated in a few sectors and a handful of companies. The materials and financial sectors comprise around 52.1% of the ASX 300, with the top five stocks being the three major banks, BHP, and CSL^.
   ^ Source: S&P ASX 300 factsheet, June 30, 2023, viewed July 19, 2023.This high level of concentration means that investors are prone to shocks or underperformance affecting these key sectors and companies.
2. Currency Movements Affect Returns from Global Shares:
   SMSF investors should consider the significant impact that the movement in the Australian dollar can have on the total returns from overseas assets (unhedged). A rise in the Australian dollar translates to currency losses, detracting from overall returns. Conversely, a fall in the Australian dollar can provide positive returns from currency movements.
3. Other Australian Assets:
   SMSF investors that operate a small business and/or own investment property (either within or outside of their SMSF) already have heavy exposure to the Australian economy. An excessive home bias to Australian shares exacerbates their reliance on the performance of the Australian economy, limiting diversification. Limited exposure to global assets reduces access to countries with stronger economic growth prospects, such as emerging markets.

How to Diversify into International Shares:

There are several ways of accessing international shares, including via managed funds, exchange-traded funds (ETFs), and direct shares listed on offshore share markets. Different types of international share funds include global diversified funds, sector-specific funds, country funds, and specialist funds. The best way to access international shares depends on the investment strategy of the SMSF and the amount of money to be placed in international shares. Some guidelines include:

1. Direct Investments:
   SMSF investors with a preference for direct investments may consider buying international ETFs that track an international index. Actively managed ETFs that attempt to outperform the index are also an option.
2. Global Diversified Funds:
   Investors with a small amount to invest in international shares may prefer a global diversified fund that provides broad diversification across countries, sectors, and companies.
3. Specialist and Regional/Country Funds:
   Investors with a higher risk tolerance and larger amounts of funds may consider a combination of global, diversified funds supplemented with specialist and regional/country funds.

Dealing with Currency Exposure When Investing Offshore:

Currency can pose a significant risk for international investors but also provide benefits. When the Australian dollar depreciates, currency gains can be made from the international asset when converted back to Australian dollars, boosting returns. Hedging the currency exposure means that investors miss out on this gain if the Australian dollar falls. However, if the Australian dollar appreciates, investors will incur currency losses. Predicting currency movements is difficult and fraught with risk. Nonetheless, if SMSF investors are concerned about the risk of a continued rise in the Australian dollar, they can hedge some or part of their currency risk by the following methods:

1. Managed Funds:
   Investing in a managed fund that actively manages the currency exposure, leaving the hedging decision to the specialist fund manager.
2. Hedged International Share Funds:
   Investing in a managed fund that always has a set amount of hedging in place, such as 50% and 100% hedged international share funds.
3. Currency ETFs:
   Investing in currency ETFs that effectively increase in value if the Australian dollar appreciates, thereby offsetting some or all of the losses made in the international share portfolio.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

1. https://data.gov.au/data/dataset/self-managed-superannuation-funds/resource/50ec132c-06ba-40fd-b9d2-d4dc9435c83b SMSF quarterly statistical report March 2023, Self Managed Superannuation Funds – Dataset ↩︎