Managing risk when investing internationally
There are many ways investors can gain exposure to global stocks and shares, including through managed funds and exchange traded funds (ETFs). For those interested in investing in overseas or emerging markets, here are some risks you should consider:
- Political, economic and regulatory risk – When investing internationally, you are exposed to country-specific risks, such as political, economic and regulatory changes. While it might be easy to keep up with these developments in Australia, it may be harder to monitor what's happening in other markets. Investors also need to understand the laws and regulations relating to foreign investments in overseas territories.
- Information - It can be difficult to find up-to-date information on foreign companies and assets. Some overseas firms may not provide investors with the same type of information as Australian companies, or they may have different legal and accounting standards.
- Currency risk - Foreign investments are usually held in the currency of the country of origin. Any income, capital gains or losses are further affected by the performance of the Australian dollar (AUD), which means that in addition to stock-specific risks, investors are exposed to movements in exchange rates. If the value of the AUD rises against a particular currency, the value of investments held in that currency will fall. Conversely, a fall in the AUD will increase the value of your investments.
There are undoubtedly benefits and risks of global investing. Fidelity is an active manager, which means we aim to outperform the index and actively manage the risk of our funds. We recognise that a major risk in emerging markets stems from poor corporate governance or balance sheet structures. In the Fidelity Global Emerging Markets Fund (Managed Fund) (ASX:FEMX) our investment process is designed to mitigate these risks and concentrate on areas where we can add value:
- We have on-the-ground analysts in emerging markets who research and analyse companies, their competitors and suppliers. They have a deep understanding of the regions in which they operate and fully understand the inherent political, economic and regulatory risk associated with each country.
- We identify companies with a track record of robust corporate governance, then select the 30–50 firms that are best positioned to generate returns through market cycles. This offers investors an excellent opportunity to receive some of the most attractive returns in emerging markets over time, while minimising downside risk.
Investors should note that the exposure to international securities in the Fidelity Global Emerging Markets Fund (Managed Fund) (ASX:FEMX) will not be hedged back to Australian dollars. This means that the value of an investment in the Fund will change not only on the basis of a change in asset values but also because of movements in exchange rates.