While it’s true that there’s no place like home, when it comes to investing there are costs
involved in being too chained to your own patch.

Australians and New Zealanders, like investors everywhere, tend to have a home bias in
their portfolios. And there can be rational reasons for this in the tax advantages of
dividend imputation or merely their familiarity with local stocks.

However, too large a home bias may have undesirable consequences, in leaving
investors with concentrated exposures to individual companies and sectors and in turn
missing out on the opportunities from exposure to sectors not well represented in the
local market. The concentration trade-off in Australia is magnified by the large market
share of a handful of companies.

Highlighting the degree of potentially lost opportunity, stocks of the roughly 18,000
companies trading outside Australia represent about 98% of the world’s more than $120
trillion equity market.

Yet, it is not uncommon for some local investors to have a 50% allocation to Australia. In
other words, half of their equity portfolios are in a market that represents just 2% of the
global market. In the case of New Zealand investors with a similar home bias, the
concentration is even more pronounced.

To put this in context, a portfolio with a 50% allocation to Australia has just five stocks
(BHP Billiton, CSL and three of the big four banks) holding a weight roughly equivalent to
all the stocks outside of Australia and the US. Just to be clear, this means that just five
stocks in such a portfolio will have more weight than 46 markets with more than 15,500
companies!

When Australians and New Zealanders invest outside their home markets, they can
capture equity returns from thousands of companies around the globe and potentially
offset weak performance in one market with stronger returns elsewhere. In other words,
holding a globally diversified portfolio positions investors to capture returns wherever
they occur.

This material is issued by DFA Australia Limited (incorporated in Australia, AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. This material does not give any recommendation or opinion to acquire any financial product or any financial advice product, and is not financial advice to you or any other person. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and for the Dimensional Wholesale Trusts the target market determination (TMD) that have been made for each financial product or financial advice product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

Article by
Warwick Schneller, PhD
Senior Investment Strategist and Vice President
Dimensional

 

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