Fixing Australia’s investment bias

We Australians love our country. With our laidback lifestyle, warm climate and unique landscape, why wouldn’t we?

So when it comes to investing, it may come as no surprise that many Australians prefer to invest in local companies. Home country bias, as it is known, is a tendency for investors to favour companies from their own countries over exposure to overseas markets.

Australian investors as a whole have 66.5% of their portfolios in the domestic sharemarket – in stark contrast to our share of global sharemarket capitalisation, which stands at just 2%1. This home country bias can result in a concentrated portfolio and potentially affect the time it takes you to reach your investment goals, as well as denying you the benefits of diversification.

In this article, we explore why you should diversify your portfolio, and how you can avoid a home country bias.

Global index weight reflected by country’s weight in the MSCI All Country World Index as of May 31, 2019. Investor holdings in domestic market sourced from the IMF, as of December 2014.

Sector exposure, and why it matters

Australian shares can be particularly attractive to local investors in part because we are familiar with the companies listed on our domestic market, some of which we may see and use in our daily lives e.g. A2 Milk and Commonwealth Bank.

Not only this, but local shares also offer investors a unique tax benefit. Australia is one of the few countries where companies can pay franked dividends, meaning that shareholders get a credit for tax the company has already paid on the profits that fund the dividends.

While these qualities certainly support the case to include Australian shares in your portfolio, having a concentrated portfolio of just Australian shares may not result in the best investment outcome.

As shown below, the two most prominent sectors in the top 200 ASX companies account for over half the market capitalisation of the index2 – namely Financials (28%) and Materials (24%).

Sector allocation

You can see the index is significantly underweight sectors such as Technology and Industrials, which comprise a mere 10% of the index.

In comparison, an index of broad global shares such as the Solactive GBS Developed Markets ex Australia Large & Mid Cap Index, which the recently-launched BGBL Global Shares ETF aims to track, shows vastly different results.

BGBL provides exposure to 1500 global companies across more than 20 developed market countries (excluding Australia) and has over 30% exposure to the Technology and Industrials sectors, as shown below.

Sector allocation

Why does this matter?

A portfolio that is invested solely in Australian shares risks being highly dependent on the performance of the Financials and Materials sectors, and missing out on higher returns that may be generated in other sectors.

Not only this, but if the Australian economy experiences a downturn that is worse than that of the international economy, investors with a portfolio heavily concentrated in Australian equities could suffer greater losses.

In short, there will be periods when the Australian sharemarket, or important sectors of it, underperform relative to international counterparts.

As an example, A200’s index has returned 8.49% p.a. over 5 years compared to BGBL’s index, which returned 11.02% p.a. over the same period to 30/04/20233.

Over other periods, of course, it may be possible that the Australian market outperforms global shares.

Benefits of diversification, and how to achieve it

Simply put, diversification is spreading your investments across multiple geographic regions, industry sectors and asset classes.

In a diversified investment portfolio, your investment risk is spread. This means that if one part of your portfolio underperforms over a period, it may be balanced out by gains in another, reducing the risk of a significant overall loss.

Allocating your investment funds across several major asset classes, including shares, fixed income and commodities, is one important way to diversify.

It’s also important to diversify within an asset class. Ideally, the equities component of your portfolio should include exposure to both domestic and global equities. The point here is not to choose between the two, but that having a diversified portfolio with an allocation to both Australian and global equities may result in the best long-term outcome.

Fortunately, it has never been easier to achieve this.

Investors looking to add international diversification to their Australian core equities portfolio may consider BGBL or its hedged counterpart – HGBL Global Shares Currency Hedged ETF .

In one ASX trade, both BGBL and HGBL provide exposure to companies from a broad range of global locations and across a wide range of sectors, many of which are under-represented in the Australian sharemarket.

The funds can be used in combination with other core allocations – to Australian shares (for example via the A200 Australia 200 ETF ), fixed income, and cash – as the building blocks of a robust, well-constructed portfolio.

Investors can choose the unhedged BGBL, or, for those seeking to minimise the impact of currency fluctuations on investment returns, the currency-hedged HGBL.

Management costs are a very low 0.08% p.a. for BGBL, and 0.11% p.a. for HGBL.

Key takeaway

While a predisposition to invest in Australian companies is understandable, diversification into global shares not only provides exposure to markets with potentially higher returns but also lowers your overall portfolio risk.

ETFs such as the Betashares Global Shares ETFs provide a convenient and cost-effective way to achieve this.

There are risks associated with BGBL, including market risk, international investment risk, and  country risk. Investment value can go up and down. An investment in the funds should only be made after considering your particular circumstances, including your tolerance for risk. For more information on risks please see the Product Disclosure Statement and Target Market Determination, available at www.betashares.com.au.

References:
1. Source: The world of global investing
2. Source: Betashares Australia 200 ETF
3. As at 30/04/2023

This article mentions the following funds

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Annabelle Dickson

Annabelle Dickson was previously a journalist at Financial Standard and prior to that at The Inside Investor and The Inside Adviser. She holds a Bachelor of Arts in Communication (Journalism) from The University of Technology Sydney.

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