Looking Beyond Australian Shares

‘Home Country Bias’ is an investment term that refers to the tendency for domestic investors to favour their own country’s share market, rather than investing in global share markets. 

In Australia, home country bias is often taken as a given. This article looks at the arguments for holding a significant portfolio of an investment portfolio in global shares – effectively challenging the tendency toward home country bias. 

There are clear reasons to be enthusiastic about investing in Australian markets from the benefit of franking credits to the ready access to information about local investments. There is a history of good returns from Australian shares, generally lower costs and ease of transactions and tax reporting (although it should be noted that it is becoming cheaper and easier to own global shares). 

That said, there are also good reasons to be cautious about too much exposure to the Australian market. The Australian share market has a significant concentration in a few larger companies. At the end of Feb 2023, BHP (10.37%), CBA (7.72%) and CSL (6.47%) accounted for about a quarter of the Australian market by market capitalisation.

The concentration of the Australian market is not just in the largest companies — the two largest market sectors, financials and materials, account for 50 per cent of the overall market. Such is the prominence of these two market sections, they are the only sectors in the Australian market with a weighting of more than 10 per cent of the overall market.

In contrast, global markets have five sectors with weightings of more than 10 per cent of the market, including information technology, financial, healthcare, industrials and consumer discretionary. This provides investors with better exposure to a variety of industries. 

The concentration in financials and materials of the Australian market is interesting. One of the arguments in favour of accessing global markets from Australia is that the Australian market don’t have as many cutting-edge opportunities, relying on the traditional asset classes of financial and materials, which are less likely to provide investors with innovative and fast-growing opportunities. 

Inside Australia’s Big Funds 

It’s worth considering the way some large portfolio managers use global equities in their portfolio as a further nudge in the direction of considering the appropriate weighting of global equities. 

At the end of December 2022, the Future Fund held 22 per cent of their portfolio assets in global equities, 16 per cent in developed markets and six per cent in emerging markets. Only 8.6 per cent of their portfolio was invested in Australian shares.

QSuper, the Queensland Government Superannuation fund, held 48.4 per cent of their balanced portfolio in what they described as “equities” at the end of March 2023. This saw 9.7 per cent of the fund in Australian shares, 31 per cent in global shares and 7.7 per cent in private equity.

It is not uncommon to find professionally managed funds, like the Future Fund and QSuper, with higher weighting to global than Australian shares.

Looking Beyond Australia 

Vanguard provide a publicly accessible comparison tool that compares the average annual returns from a variety of asset classes, from 1970 to the present (end of December 2022), a period of 52 years of data.

Over that 52-year period, an investment in Australian shares has returned 9.5 per cent per annum. To put it in dollar terms, $10,000 invested at the start of 1970 would have turned into $1.12 million. 

Over the same 52-year period, global shares had provided an average return of 9.7 per cent per annum, turning $10,000 into $1.23 million. 

It is important to note that this analysis does not include the value of franking credits. However it still shows the strong returns from global shares over an extended period. 

The diversification effect that comes from having two different asset classes both producing similar average returns but with different annual returns is worth considering in a portfolio. 

Shorter-term data also provides support for considering holding global shares. Looking at the 10-year returns for index funds to the end of February 2023, there is a significant performance advantage over this period for global compared to Australian shares.

The index fund based on the ASX300 (Australian shares) has provided an average annual return of 7.83 per cent per annum, whereas the global share fund based on the MSCI International Share index has provided a return of 13.69 per cent per annum over the same time period. 

In dollar terms $10,000 grew to $21,251 when invested in an Australian index fund over the 10 years to the end of February 2023, whereas $10,000 invested in the MSCI international fund grew to $36,076 over the same time. 

From a returns perspective, Australian markets provided an adequate return over the past 10 years. Investors with global shares, however, enjoyed an above-average period of returns. 

Conclusion 

The asset allocation decision in a portfolio is a crucial one – and not easy to make. 

Australians shares have, over longer periods of time, been great contributors to the portfolios of Australian investors – they offer franking credits, have provided attractive returns and, from an Australian perspective, are relatively easy to research and invest in. 

However, the strong recent (10-year) and longer-term (52-year) returns from global shares make an argument for portfolios to include material exposure to global shares. The additional diversification that comes from holding global shares as an extra asset class in a portfolio and the different market sectors a portfolio is exposed to as well as the greater variety of companies.

A single bet on a share market that is around 2 per cent of the world’s share markets might ignore the possibilities that there are investment opportunities, in brands, innovation and emerging technologies, elsewhere in the world.

While, after a great decade of returns from global shares, it might not be the time for a large-scale switch into global shares, a review of portfolio asset allocations with a view to slowly increasing global share exposure might be prudent.