Australian institutions’ prevailing home-country equity bias was based on a series of lucky breaks for the domestic market and was not worth the concentration risks to which it exposed investors, said Roger Urwin, Towers Watson’s global head of investment content.
According to Urwin, Australian investors’ home-country bias was not appropriate because it prevented them from capturing the broad array of geographies and mandate styles on offer, and the dominance of resources and financials in the local market also exposed them to substantial concentration risk.
He was speaking at the Association of Super Funds of Australia 2010 conference last week.
“The beliefs in Australia are undercooked. I think this is an issue where Australians should get out more,” he said.
He said that, on the surface, the historic and prospective performances of the Australian market supported this bias: according to MSCI data, the total real return from the Australian market between 1975 and 2009 was 8.8 per cent annually, while the world market delivered an average of 6.9 per cent each year.
But this return could be deconstructed to show the Australian market’s outperformance was due to a series of “one-off” breaks and was only marginally more repeatable than the global market, Urwin argued.
He said the annual repeatable return of the local market, calculated as dividend and book value growth, was 5.5 per cent compared to the world’s 5 per cent. But its one-off returns, derived from price/book valuations and other metrics, delivered an average of 3.3 per cent each year while the global market gained an average of 1.9 per cent annually from similar drivers.
“Should funds have a home-country bias? Absolutely yes. Should it be as large as it is now, like 60-40? Absolutely no.”
He said a 40-60 split between Australian and global markets would be more balanced.
Speaking in a separate plenary session, Michael Power, strategist at Investec Asset Management, said Australian investors were not fully capitalising on the nation’s economic links with the powerhouse emerging markets of Asia.
He argued that Australian portfolios, in aggregate, did not invest heavily enough in emerging markets, whose growth would help fund the retirement needs of the nation’s ageing demographic.
“Your biggest risk in the next decade will not be that your funds underperform chosen benchmarks, but that your benchmarks will underperform global reality,” Power said.
For investors, this global reality was the rise of emerging markets, a phenomenon not captured by market indexes. Power said 85 per cent of global economic growth would come from emerging markets in the next decade, but these markets were currently given a mere 15 per cent weighting by the MSCI.
But this would change. The All Country World Index, which Power suggested was the most appropriate benchmark for global equity investors, would be a “fluid index” and over time include more stocks from emerging markets as they met the capitalisation and liquidity requirements set by MSCI.