Australian investors may believe they know Australia best.
Accordingly, they are liable to put the bulk of their investments in stocks and bonds of Australia-based companies and in Australian government fixed interest securities.
Yet this strategy has some holes. “Home bias”(*1) can limit your investment opportunities and constrain your ability to benefit from diversification.
Consider these revealing numbers:
– Stocks of the roughly 21,000 companies trading outside Australia represent around 98% of the world’s more than $120 trillion equity market (see Exhibit 1).
EXHIBIT 1
Wealth of Nations
Percentage of World Equity Market Capitalisation as at 31 December 2021
– The investment-grade bonds in the Bloomberg Global Aggregate Bond Index are valued at more than $94 trillion—and most of this debt is issued outside Australia (see Exhibit 2) and in currencies other than the Australian dollar.
EXHIBIT 2
Foreign Legion
Percentage of World Investment-Grade Bond Market as at 31 December 2021
Global Ups and Downs
When Australians invest outside Australia, they can capture equity returns from thousands of companies around the globe and potentially offset weak performance in one market with stronger returns elsewhere.
Returns in 2022(*2) offer a useful example of this phenomenon: The Australian stock market tumbled 7.1% (through June), but non-Australian developed markets like the UK (–3.6%) and Hong Kong (2.6%) performed much better.
And, in two examples from emerging markets, Chile soared 15.2% and Turkey gained 6.3%.
Similarly, in fixed interest markets, both yields and total returns typically vary across the globe and often do not move in lockstep, which is no surprise.
Bonds issued in different countries and currencies can offer a range of yields and expected returns.
The Paradox of Size
A country’s size, population or gross domestic product doesn’t necessarily tell us much about the investment opportunities in that country.
Japan, for instance, is relatively small in landmass but accounts for 6% of the world’s equity market value – representing more than 2,500 companies, including familiar names like Toyota and Sony – as well as 13% of the investment-grade bond market.
Even a tiny country like Switzerland is home to publicly traded giants like Nestlé and two of the world’s biggest pharmaceutical firms.
By looking outside their home market, investors can expand their choices and opportunities for higher expected returns.
A global approach can also enhance diversification, which may help reduce portfolio risk and volatility.
This isn’t guaranteed to produce strong returns every year, but it can deliver more reliable outcomes over time, helping investors stay on track toward achieving their long-term goals.
(*1) For more information on home bias, see the following: “Home Bias,” Corporate Finance Institute, September 18, 2020; Eduard Gaar, David Scherer, and Dirk Schiereck,“The Home Bias and the Local Bias: A Survey,” Management Review Quarterly 72 (November 2020): 21–57; and “The Randomness of Global Stock Returns” (Dimensional Fund Advisors, June 2019).
(*2)MSCI country index performance, year to date as at 30 June 2022. MSCI data © MSCI 2022, all rights reserved.
DISCLOSURES
This information is intended for educational purposes. Named securities may be held in accounts managed by Dimensional.
The securities identified do not represent all securities purchased or sold for client accounts. It should not be assumed that an investment in the securities identified was or would be profitable. These materials are not, and should not be construed as, a recommendation to purchase or sell the security identified or any other securities.
Past performance is not a guarantee of future results. Diversification neither assures a profit nor guarantees against loss in a declining market.
AUSTRALIA
This material is issued by DFA Australia Limited (AFS Licence No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, 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 target market determination that has been made for each financial product either issued or distributed by DFA Australia Limited prior to proceeding with any investment. Go to dimensional.com/funds to access a copy of the relevant target market determination. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.
