Global V Domestic Equities

By Jason Fittler

"I believe that it is time for Australian investors to start to increase the allocation of international shares in their equities portfolio. At present the best way to do this is through Listed Investment Companies (LIC) which invest in the international market companies such as Platinum Capital and Hunter Hall."

Most of us have the majority of our investments both within super and outside of super in Australian Equities, whether this is through buying direct shares of managed funds. This is a sound strategy and below I will discuss a number of reasons as to why, however, given that the world is shrinking and technology has allowed us to travel the world at the click of button we need to reassess how we invest and more importantly where we invest our money.

Investing in other countries is becoming easier and will be a normal part of business in the next 5-10 years. As such there is a strong argument to start looking to increase your exposure to international shares.

Australia is only around 2% of the world stock market.  Having most of your portfolio exposed only to Australia can mean that your portfolio is overweight Australia. Below’s chart shows the break up.
 
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The Australian market contains a limited opportunity set of investments. It is heavily weighted towards financial stocks, including real estate investment trusts (REITs) and resource stocks. Financial stocks account for approximately 42% of the market, with resources making up around 22%.
Many significant industries are under-represented or completely absent from the Australian market. For example:
    • aerospace
    • automobiles
    • microchip technology
    • consumer electronics
    • pharmaceuticals.

Different markets also provide access to different demographics. For example, investing in parts of Asia provides access to the rapidly growing middle class in China and other parts of Asia.

There is a significant home bias in the investment portfolios of Australian investors. This is not unique to Australia, but it is magnified due to Australia’s small impact on world markets. If a United States investor’s portfolio is biased towards home, the discrepancy in allocation is not so great given that the United States makes up about 40% of world market capitalisation.
There are a number of factors that lead to a home bias, including:
    • familiarity
    • access to information
    • taxation benefits.
The reasons against staying local include:
    • dangers of home bias
    • fewer opportunities at home.

Over the past decade or so, Australian shares have generated better returns at lower risk than their overseas counterparts. This is illustrated in the table below – not only did Australian companies have higher earnings growth, but investors were rewarded with higher dividend payout ratios, all at lower volatility. This is despite the Australian market being narrower and more concentrated than global markets.
 
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Why go Global?
There are a number of reasons why investors might want to consider increasing their asset allocation to international equities:
    • diversification across markets
    • more opportunities to add value
    • globalisation
    • increasing ease of access.

You only need to take a look at the performance of Japan over the past year. If you had a large portion of you investment tied up in Japan you would be disappointed with the results.

As the below chart shows Japan fell 14% over the last 12 months.
 
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Summary
I believe that it is time for Australian investors to start to increase the allocation of international shares in their equities portfolio. At present the best way to do this is through Listed Investment Companies (LIC) which invest in the international market companies such as Platinum Capital and Hunter Hall.

The Australian market is relatively small by world standards. It accounts for less than 3% of world share markets based on market capitalisation. Increasing the allocation to global shares provides greater diversification benefits as well as exposure to many more opportunities.

Investing in global markets provides exposure to different market returns. Investors are able to access the world’s leading companies, including many that are household names in Australia as well as overseas.

This is a long term strategy, there is no need to rush out and rebalance your portfolio today. Merely a need to be aware that as we move forward to be competive and chase the larger returns we need to start thinking global.

Call us to discuss how this can be done for you. Phone 07 4771 4577