“A global share fund manager’s opportunity set, on the other hand, is vast. [International] fund managers can pick the best names from each sector globally, widening their potential investment options.”
Stuart James, Sydney-based associate director at Aberdeen Asset Management, says despite the strong arguments for investing offshore, Australia’s home-town favouritism is still stubbornly adhered to by local investors and advisers.
“If anything, I’m seeing people slightly more sceptical about investing offshore; there’s probably even more home-country bias at the moment from Australian investors,” James says.
And, based on the rather dismal returns from international shares over the past decade, he says, “you can’t really blame them”.
However, James says investors should also be aware that by favouring the Australian market they are concentrating their risk.
“Australia’s a bit like an emerging market – not in terms of living here, but the stockmarket has very emerging market characteristics in that it’s dominated by resource stocks,” he says.
“So the Australian market has had a very similar return profile to emerging markets over the last four or five years because China’s grown strongly and the resource sector has done extremely well.”
While it has been a successful strategy, James warns that “playing the resources” story via the ASX offers only a very narrow channel of returns, and remains vulnerable to a single factor – namely a slow-down in Chinese growth.
“If China wobbles, Australia will hurt,” he says.
“While I believe the long-term Chinese growth story, there will be speed humps along the way. So investors do need to diversify offshore.”
James says, for instance, that the focus on Australian shares will see local investors being significantly under-exposed to the industrial sector. James cites the world’s biggest manufacturer of Robotics, the Japan-based FANUC, and the French firm Schneider Electric, as examples of top-end industrial stocks not available in the Australian market.
“You’re also missing out on IT – Apple, Samsung, they’re all based offshore,” he says.
“And I don’t think you can really leverage the true story in emerging markets [via the ASX].”
James says while Australian resource stocks benefit from growing emerging market demand, truly global investors can also reap the rewards more directly.
“There’s also a domestic demand story within emerging markets. Owning an emerging market bank is a really good proxy for that growth story, as indeed are retailers,” he says.
Tim Dunbar, head of equities for the US-based Principal Global Investors, agrees Australian investors need to be wary of putting all their bets on the home market. Dunbar, recently on tour in Australia with Principal, says while home investment bias is a factor in most countries, investors in some jurisdictions have been turning their gaze outwards.
“We had been seeing a trend that was occurring before the crisis – and is starting to pick up again – for investors to move beyond their home-country bias.
They are looking to diversify a bit,” Dunbar says.
“It depends a little bit on the country. It certainly has been the case in the US where we’re seeing some of the more sophisticated clients looking to weightings that more mirror the global index.”
He says while the trend can partly be explained by investors becoming more savvy about where they invest, the inexorable globalisation of markets has prompted the shift of emphasis.
“A lot of companies are global companies now,” Dunbar says. “[US investors] have also seen a fair bit of change in currency, which hasn’t been a positive thing for the US investor. Those assets that have been outside the US have certainly acted as a diversifier in several different ways.”
Morningstar’s Douglas says the firm has been pushing the international equities angle for some time and is currently advising clients to go underweight Australian shares relative to international stocks.
Like James, however, Douglas admits this message is a “hard sell”.
“We’re growing more confident global equities will be the place to be over the next few years,” he says.
“We’re saying to advisers, ‘don’t look back on the last 10 years to pick what’s going to happen next [in global equities] – things change.”
If the collapse of Lehman Brothers could be described as a seismic jolt that shook the world to its financial foundations, it was against a background of slower-moving tectonic forces. Even before the GFC shock, the continental drift of financial power from the developed West to the emerging East was a fully-formed theory. It’s difficult to say if the crisis has accelerated that trend; it certainly hasn’t halted it.
Aberdeen’s James says the US market as a proportion of the commonly-used global equities benchmark, the MSCI All Countries, now sits at about 46 per cent of the index, down from 52 per cent a couple of years ago.
“The [MSCI All Countries] index has roughly 13 per cent in emerging markets these days, which is slowly increasing,” he says.
The shift East, though, has hardly been a smooth process, and the GFC put paid to one popular hypothesis that was gaining ground before the crisis hit. Justine Gorman, Standard and Poor’s (S&P) fund analyst, says the advent of the crisis proved that the theory that the East was “decoupling” from the West was “blown out of the water”.
“When we saw the banks in the West starting to collapse, and the US markets collapse too, we saw emerging markets go down with a thud,” Gorman says.
“People were thinking they had to pull their money out of emerging markets because they were higher risk.
