There is no doubt that Australian investors love building a portfolio based around local shares.
This explains why most mum and dad investors have majority of their investment capital in Telstra, Qantas, BHP, CBA, Westpac or Macquarie Bank shares.
But have you ever considered or wondered what returns you could generate if your portfolio had some shares of the leading technology companies like, Facebook, Amazon, Netflix or Google?
You may not realise it, but by holding and buying mostly Australian shares, you may be limiting your investment potential due to what is known as ‘home country bias‘.
What is home country bias?
Home country bias is the tendency for investors to hold a significant portion of their portfolio in domestic shares, thereby limiting their investment opportunity.
While home country bias is not unique to Australia, research findings show that Australian investors have a stronger home country bias than most other developed countries. In Australia, some 66% of investor holdings are in domestic shares, according to Vanguard research from 2016.
So, why is there a high level of home country bias in Australia?
There are 5 key reasons we’ve identified:
1. Difficulty in buying and selling international shares.
Until now, it has been quite difficult to invest in international shares because few brokers have offered access to international markets and those that do provide a very limited number of markets. For investors wanting to trade multiple offshore markets, this often forced them through a complex process of establishing accounts with multiple brokers. This has been a significant hurdle for investors wanting to trade international shares.
2. High-cost trading
Australian brokers are renowned for charging high commissions and expensive platform fees – especially for international markets. These costs directly affect your bottom line profits.
3. Familiarity and investing in what you know
This is understandable as investors are more familiar with local companies like CSL, AMP, Rio Tinto than they are with international shares like Amazon, Facebook, TenCent, Geely Automobile, China Steel, Komatsu, Tesla or Apple.
4. Tax and dividend treatment for local shares
Australian investors love their dividends and they love investing in companies that provide franked dividends that avoid double taxation.
5. Inertia and a bit of laziness
Some investors are content in investing in local shares and don’t want to put in the time and effort to invest in international shares
How is home country bias limiting your investment potential?
If like most Australian investors you are only holding shares in domestic companies, you are limiting yourself to a tiny fraction of the global market. As you may well know, Australia represents less than 3% of the total global market capitalisation (source: World Bank, 2017).
This means that people that invest only in Australia are missing out on the opportunities presented by companies that account for more than 97% of global market capitalisation. These people are limiting the expansion of their investment portfolios and ultimately restricting their profit potential.
We are currently in an age of the most impressive technological advances the world has ever seen. International companies are consistently delivering technologies responsible for share price gains unheard of in Australia. With access to international markets now easier and cheaper than ever before, can your portfolio afford to keep missing out on these opportunities?
If you continue to allow home country bias to dominate your investment decisions, you are restricting the diversification of your investment portfolio and losing out on the associated benefits of risk reduction. This is because you are participating only in a very small section of the overall market with an overweight exposure to any adverse conditions that may afflict the local market.
To be fair, during a resource boom, there is often no better market to be investing in than Australia. But money flows to where it generates the best returns and right now, the opportunities outside the banking and resource sector are too great to ignore.
In our opinion, if you reduce your home country bias you can:
- Access a much wider and bigger market outside Australia
- Diversify your portfolio thereby lowering your risk
- Potentially achieve your investment goals much faster
This article was contributed by Alex Douglas, Managing Director of Monex Securities Australia (AFSL: 363 972).
The content of this article is given for general information only. As general information, no consideration or evaluation is given to the investment objectives or financial situation of any particular person. Trading and investing involve substantial financial risk. All readers of this article should make their own evaluation of the merits and suitability of any financial products and/or advice or seek specific personal advice as to the appropriateness of engaging in any activity referred to in this article in light of their own particular financial circumstances and objectives.
