Are your clients limited to the ASX?

_{By guest writer Robin Bowerman, Market Strategy and Communications at Vanguard Investments Australia}

Australians are intrepid travellers. It has become a rite of passage for Aussies to head off overseas to explore foreign climes. Whether a gap year after school or university, taking on a career opportunity or following a romantic connection – as a nation we are up for the challenge of long haul flights to experience other countries.

Yet as investors we often suffer from a bad case of what the investment industry calls home country bias. Now being biased about Australia as a great place to live is entirely understandable, but from an investment standpoint it can mean investors are missing out on what the world has to offer their portfolios.

Like others around the globe, Australian investors generally concentrate their portfolios in local investments: ASX listed stocks and managed funds, Aussie bonds, and local property investments generally make up a large component of investment portfolios.

For years investors have had access to investment products that provide exposure to a range of global asset classes. Yet familiarity with large, listed Australian companies that pay high dividends has kept investors from stepping out into the broader investing world – of which Australia represents around two per cent*.

There are various vehicles available to investors which allow broad access to a range of international markets. Many ETFs, for example, allow broad international diversification through a single trade. By investing in a global index, investors don’t have to pick and choose a particular market - the fund will provide exposure to a range of different countries, thus maximising diversification.

What’s holding investors back from diversifying their portfolios?

There are three key reasons. The first – not unique to Australian investors - is that investors are often more optimistic about their domestic market’s performance relative to global markets, and more trusting of familiar domestic brands. The second is that currency risk can be daunting.

The third is a uniquely Australian reason - franking credits. Even if investors recognise the importance of global diversification, and how to access it, many simply don’t see how global equities can compete against what is essentially the extra yield that Australian shares receive from franking.

However, rather than think of global asset classes as inferior to Australian equities because they might not consistently generate similar after-tax returns, investors can focus on the other benefits global diversification can bring.

Benefits of a diversified portfolio

It reduces the impact local market conditions have on portfolio performance. This is particularly important in our market due to the connections between the local banking sector, property market and the economy.

It also reduces sector concentration. The financial sector dominates the Australian market, making up over a third of the value of the entire ASX 200**. International diversification provides a straightforward way to reduce this concentration, spreading risk across a much wider range of sectors.

Global diversification also reduces security concentration. Apple, for example, is about 1.5 per cent of total market cap* – and so even the largest stock in the world won’t dominate the performance of a broadly diversified global index.

One thing is certain – diversification, both across and within asset classes, is a powerful tool to protect a portfolio against volatility and the inevitable ups and downs of the share market.

So while investors still call Australia home, their portfolio will benefit from being more of an international traveller.

Did you know international shares are available to gear into using approved platforms? To find out more or to discuss how we can work with you and your clients, please contact your Leveraged Relationship Manager, call us on 1300 307 807 or check out our Acceptable Investments List for International Shares.

^{* MSCI ACWI IMI INDEX data
**ASX 200 data}

^{Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). This information is correct as at 03.03.18 and is for general information purposes only. It is intended for AFS Licence Holders or authorised representatives of AFS Licence Holders only. It is not to be distributed or provided to any other person.}