International International equities - slightly more complicated foreign exchange question

Hi all,

After the @The Falcon and @austing posted about UK investment trusts (the UK equivalent of LICs) I have been researching them with interest. For simplicity, I will refer to them as UK LICs here.

One big part of my interest is the variety of options available on the London Stock Exchange, investing both UK and internationally. With no withholding tax between the UK and Australia (assuming that doesn't change with Brexit), there is only one real consideration I have left:

As an Australian, if I am investing in UK LICs which invest in UK equities, I understand the exposure - the dividends from the underlying stocks are paid in GBP and the trusts' dividends are also paid in GBP. In this sense I'm exposed to GBP-->AUD exchange rate.

But if that UK LIC is investing mostly in international stocks outside the UK, as is the case of Murray International, I am a bit confused. They are paid in foreign currency, get converted to GBP, then (for me) get converted into AUD.

My question is this - is this, broadly, the same as me investing in those foreign currencies directly? Or does the conversion of those currencies to GBP first, throw a significant spanner in the works?

Or, phrased differently, is this "equation" correct?
Foreign currency --> GBP ---> AUD.... roughly equals..... Foreign currency --> AUD?
Or does the additional step of converting to GBP, significantly change things?

I would guess, for Forex markets to be efficient, that it would have to be roughly the same. For example, I quickly experimented and found if you convert AUD to GBP to USD, you get roughly the same as AUD converted to USD

But I had heard there were variations between currency pairs, so haven't quite got my head around that part. Any help on answering this would be greatly appreciated!

(Side note - as im interested only on the effects on dividends over the long term from international LICs, I'm assuming any extra difference would be very minor, and would wash itself out over time. Am I right in assuming this, or missing something?)

 

Long term its a wash. Variations for your purposes are minor.

 

Great to hear. Thanks mate!

 

@BingoMaster, as an aside NABtrade got back to me in relation to CTY. They said NO ETFs or listed Investment Trusts can be traded on the LSE due to Stamp Duty issues.

 

Thanks @austing - I called them myself to find out and got the same answer.

You can get them via Commsec I beleive. I might set up an account there if i want to buy them. Stamp duty is .5% of the trade, added onto the brokerage, which is $40 USD for international. You have to call to make the trades.

Its a bit more expensive, but I don't really mind. Having higher brokerage might help teach me to not to trade too much and stick to my long term plan!

Im also interested in these for my parents, who have a pretty concentrated portfolio of ASX holdings, for retirees. I think something like Murray International would be good as a one stop shop for a conservatively run, fully international, dividend growth LIC. My parents use a full service broker anyway so the cost shouldn't be too much more.

 

Though their full service broker has been crap in my opinion, sold them BHP saying it was cheap, ugh. They have something like 30% of their portfolio in CSL (which they bought many years ago, nothing to do with the stockbroker), though they are going to very slowly reduce it a little, I believe. I don't know what to tell them - it's a fantastic company, very defensive, overseas earnings... but they have such a massive holding it seems risky to me.

Actually wanting to do some independent research for them was the main driving force for me learning about investing. And led me to sites like this one, which I am very grateful to have found!

Ok im ranting now... will start a different thread on this if i want to haha

 

CSL eh, they have done well on that horse. FWIW I still like that company a lot, though as you have identified a 30% position is pretty extreme I'm holding CSL, 3% of total portfolio position.

 

They bought it at the float, so yes they have done extremely well A significant part of the reason why they have a decent sized portfolio.

I think the idea is to sell a little bit of CSL every year, and use that both for some income, and to diversify a little overseas. The amount of CGT is a key reason why they dont want to sell. Still makes me a little nervous though.

I have been trying to convince them to sell their BHP for almost 2 years Then the broker got them to buy a bit more recently! Terrible stock for retirees. But now that its fallen so much, i'm less inclined to try to convince them.

 

Perhaps I shouldn't be so adverse to having a second broker for the SMSF. But a bit of a pain application wise.

Essentially with CommSec it appears the trade for UK listed Trusts including stamp duty will be close to 1% of trade amount.

Did you ask CommSec how dividends are handled? I vaguely remember someone saying that this was a nuisance also with having to ring them to transfer the distribution etc.

 

I rang CommSec International about CTY and UK Investment Trusts. Got an answer which I wasn't confident in. After waiting awhile for them to check they said you can trade Closed End Funds. I said that is what they are referred to in the US. So does that include UK Listed Trusts specifically CTY. The answer is he thought so if it is a closed end Fund. Hardly a definitive answer.

As for the quarterly distribution it would go into a foreign currency account. To have this transferred to your nominated local account you would need to email them to arrange this each time there is a dividend / distribution. A currency conversion fee would obviously be charged.

@BingoMaster, are you sure your Parents want this much messing around?

 

Looks like quite a hassle at a retail level !

Out of interest I placed query on CTY with my guys (Deutsche) ;

"We’re not aware of any known issues in relation to purchasing the stock. We offer a 75% LVR and the borrowing costs are currently 2.58% pa"

 

What are their fees and conditions?

Thanks

 

Sofistimicated investors only!

On International 1% Bro, 0.15% custodial from memory. Multi currency margin, cheap. (AUD 4.10% / USD 2.85% / GBP 2.58% etc). ASX is cheaper obviously. All the portfolio / tax reporting / research you could want.

 

Damn @austing that does sound like a lot more messing around than i'd like. Perhaps my parents full service broker Ballieu Holst might have a more simple set up. But I'd imagine it would be pretty expensive.

@The Falcon I wish I was a sophisticated investor, your deal sounds much better!

 

I'm not so fussed by the potential total 1% brokerage fee, as a long term buy and hold investor. The main thing that concerned me would be the additional currency converting fees on the dividends. Another concern of mine on this would be the bank selecting their "own" exchange rate for converting for you. This article talks about this, mostly towards the bottom of the article / comments
Overseas brokerage

And the hassle of having to email each time to get dividends sent across, which sounds unnecessary and annoying.

All I want, is an stockbroker that allows me to buy the overseas shares, at a high brokerage if necessary, but after that just passes through the dividends directly to my bank account (which would then do it's own FX exchange, I'd imagine). Not too much to ask for a retail investor, surely?!?

I saw CMC markets and Interactive Brokers look very cheap, but i read they're not "chess sponsored" so I need to refresh what exactly that means. It looks like there might not be much on offer, but I am going to continue looking. I might start a new thread on this...

 

Does that "custodial" fee mean Deutsche is your custodian for international shares? I was reading this on the ANZ website - "Your international securities are held by a custodian (including through a sub-custodian) on your behalf. You retain beneficial ownership (but not legal ownership) of your international securities."

That concerned me when I was reading about it - different to the system here on the ASX. But it would appear if Deutsche and ANZ are doing it that way, via custodial system, that perhaps its common place.

If so, Interactive Brokers and CMC might be a good deal, as long as their "custodial" service is something that can be trusted - havent looked into this yet.

 

During my research I found quite a lot of praise for NABtrade International albeit a limited number of overseas exchanges. Really cheap trades, same as local. Currency conversion fee competitive. Can avoid custody fee as long as you do one trade a year. Dividend Auto converted to $AU then deposited in your local trading account. Only damn issue is they don't do UK LICs and ETFs.

 

Does drinking ALDI Temprinillo and high quality home brew put me into this category?

 

Damn! Just out of reach!

If i can really be bothered getting into it, Interactive Brokers seems very very cheap.
Interactive Brokers

But don't think I can be bothered just yet...

 

I´ve been using these guys for a long time, 6 pounds a trade. Have a margin loan with them, rate is only 1.98% for up to 70K then 1.48% over that. Plenty of FTSE stocks 4-6% dividend so pocket the difference. This week have been buying a few REITS (e.g. BLND), beaten down badly after Brexit, bit of a risk but some are trading at over 30% discounts to net asset backing this week.