Do you invest in overseas companies?

The foreign exchange fee that your platform provider will charge you to convert your pounds into another currency every time you buy a foreign stock could significantly increase the amount you pay in fees each time you invest.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Overseas companies

Over the past year, IG has seen an increase in the number of clients investing in overseas companies. This is a welcome trend given that more often than not, investors around the world tend to focus on stocks from their home country, commonly known as having a ‘home bias’.

While the FTSE 100 is an internationally diverse index, with an estimated 80% of the earnings of its constituents coming from abroad, the performance of a UK—listed company’s share price is highly correlated with the UK market and economy. This means that domestic events such as Brexit can weigh heavily on UK companies, regardless of where they actually generate their revenues.

Expanding your geographical reach can have many benefits for your portfolio. Having broad global diversification helps reduce portfolio concentration risks and also unlocks opportunities in a range of developed and emerging economies.

The chart below shows how neglecting overseas equities can mean missing out on prolonged superior returns. Over the previous five years, US shares have vastly outperformed UK blue chip stocks, with an annualised gain of 12.9% compared with 7.1%. European shares also outpaced the FTSE 100 index, but have lagged behind their US counterparts since the start of 2016.

Figure 1: FTSE 100, S&P 500 and Stoxx Europe 600. All total returns, local currency

Don’t forget the foreign exchange fee

Although there are many benefits to investing in foreign shares, there is an extra cost that is very important to consider — the foreign exchange fee. This is a cost which many investors may struggle to find details on when choosing and comparing platform providers.

Every time you buy and sell shares or exchange traded funds (ETFs) denominated in a different currency to sterling, a percentage fee can be added by your broker to the exchange rate that is used for the conversion.

After trawling through the websites of the seven largest UK share dealing platforms, we found that the average FX fee was 0.79%, with the highest at 1%. Below we’ve illustrated how this charge can impact the overall amount you pay each time you buy or sell a US share.

  IG Example platform
Average trade size $5000 $5000
Commission rate $15 $12
FX fee % 0.30% 1%
FX charge $15 $50

 

And if you placed one US trade each month over a year your costs would be:

  IG Example platform
Commissions per year £134 £144
FX charge per year £134 £446
Total dealing cost per year £267 £590

 

While investing in overseas equities can help increase the diversification of your portfolio, investors should also be aware of the added currency risk that comes with investing in shares denominated in a foreign currency.

However, there are a couple of ways that investors can buy overseas companies but reduce currency risk. This is something we’ll explain in a follow—up article, providing a couple of solutions that can be used to neutralise the effects of a strengthening domestic currency, a trend which reduced returns for UK investors who held investments in US companies over 2017 and the first quarter (Q1) of this year.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.