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Chapter 1: What is home bias and why is it significant for investors?
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I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
Hey team, hope you're all well. Today I want to talk about why we shouldn't let our home bias be our downfall when it comes to investing.
Chapter 2: How do different countries exhibit home bias in investing?
Now, wherever you go in the world, it is very common for investors everywhere to have a home bias because people tend to anchor their portfolio with what they know, and that is usually their local market. So Kiwis often have a healthy exposure to New Zealand shares.
The Australians usually start with what's listed on the ASX, the Australian Stock Exchange, and Americans are renowned for not really looking very far past their own borders. That is all natural because, as humans, we gravitate to what we know best, and that is often what's closest to home.
That can also feel like a much safer approach, especially for newer investors who are having their first experience with buying shares or investing in shares. People in New Zealand are familiar with the likes of Genesis Energy, Sky TV, Air New Zealand. We use their products, we buy their services, and it feels safer. But it is not safer, especially for us. It is much riskier.
Chapter 3: What are the risks of concentrating investments in a local market?
Being concentrated in a small market like ours exposes you to much more risk than spreading your capital across dozens of countries across the world. One of the broadest global share market indices is what they call the MSCI ACWI, Investable Market Index. In the industry, we call that the MISCI ACWI.
acwi stands for all country world index so this is basically a proxy for world shares the whole world and this index covers 47 different share markets around the world unsurprisingly the united states is the most dominant region it has a weighting in this index of 63 World's biggest economy, world's biggest share market, makes sense. Japan is 5.5%. The UK is 3.3%. Germany's 2%.
Bunch of European countries are also around that level. Emerging markets as a group.
Chapter 4: What is the MSCI ACWI and why is it important for global investing?
Now that group includes the likes of China and India. That group is 11.3%. Australia, just 1.6%. Get this, New Zealand, 0.05%. Teeny tiny. Now, that doesn't mean we shouldn't own any New Zealand shares at all in our portfolio. We have some fantastic businesses, we have some excellent leaders, and we should proudly support those by entrusting them with our capital.
We also shouldn't forget that we get very favourable tax treatment for investing in our local market. No capital gains tax, no bright line test of any kind is applied to your New Zealand shares, as long as you're not a trader, and most of us aren't. Dividend payments as well, which are higher than average compared to many other regions, they come mostly tax paid because of our imputation regime.
Chapter 5: How does New Zealand's investment landscape compare globally?
And what that means... is that when our companies on our market pay tax on their profits, they accrue imputation tax credits, and they can attach those tax credits to the dividend that they pass on to shareholders, and that means those shareholders, the investors, don't pay tax a second time.
Now, apart from Australia and across the Tasman, they call these franking credits, same thing, franking credits over there, imputation credits here. I can't think of anywhere else that does this. There might be one or two other countries, but New Zealand and Australia are the main two. And those positives suggest that you can still have a modest allocation to local shares.
But I guess the point I'm trying to make is that we shouldn't have a dominant allocation to New Zealand shares. As a rule of thumb, and this is just my own personal rule of thumb, but it is in line with what we as a firm would suggest to many of our clients, I think people should have, let's say, two thirds of their share portfolio outside of New Zealand.
Now, I could easily argue that it should be more than that.
unless you really need those imputed dividends but that is really between you and your investment advisor we're all different we have different objectives different income needs and a different risk profile so it's really hard to generalize but i guess the point i'm trying to make is that you want to have a healthy exposure to non-new zealand companies
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Chapter 6: What are the tax advantages of investing in New Zealand shares?
Now, one investor I used to know would justify his overexposure to New Zealand shares by pointing out to me that he owned a whole lot of exporters. He thought that if he owned the likes of Fisher & Paykel Healthcare, Main Freight, Scales, those sorts of companies that export a lot of products overseas, he had this covered.
Now, I understood his logic, it made some sense, but I still disagreed with the strategy. Despite selling products across the world, local businesses are still tied to local investor sentiment, policy decisions, and the health of the local economy, to a degree. So that's not to say his approach didn't work, because it did for a while, it actually worked very well.
That was back in the 2010s, and in that decade, we actually saw New Zealand shares outpace global shares, in seven out of those 10 years. So 70% of the time for that decade, New Zealand shares did better. I haven't seen this investor in a while, but I do hope he changed tack because the 2020s have been very different. We're six calendar years in and the local market is O from six.
Chapter 7: Why should investors diversify beyond New Zealand markets?
So over that period, since the start of this decade, so since the end of 2019, beginning of 2020, New Zealand shares, including dividends, are up 16%. Not a lot really, is it? Over six years. World shares, get this, including dividends and in New Zealand dollar terms, have increased 157%. 16%, 157%. Now, if you do that in local currency terms, things don't really change that much.
If you ignore dividends, same story, the principles still apply. New Zealand shares have underperformed dramatically, as has the housing market, as has local commercial property. New Zealand just hasn't been the place to be this decade. Who knows how the rest of this decade will play out, or the next. Your guess is as good as mine. New Zealand might catch up, New Zealand might outperform.
Predicting returns in the future isn't really the point I'm trying to make today. I guess I'm trying to say that while American investors can sort of get away with having that home bias, we can't. Their market is is more than 60% of global share market indices. So if they've got a home bias, it's not really gonna hurt them that much. For us, our market is 0.05% of world share market.
So we really do have to think more globally. We are a great country, but we're still very small and very vulnerable. We export a handful of goods to a narrow group of customers, household debt, government debt still very high, and we are increasingly susceptible to natural disasters.
Most of us are already invested in our own country via the businesses we work in, the communities we contribute to. If we're lucky enough to own a house, then that is a local exposure. So there's no need to double down on all of that when it comes to your KiwiSaver account or your investment portfolio. It has never been easier or cheaper to diversify your investments and hedge your bets.
So I think investors would be very, very wise to make use of that opportunity. Thanks for listening team. That's all for today. We'll talk again soon.
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