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Home is not where the returns are

13/06/2019 / by admin

Despite representing only 2 per cent of the world’s gross domestic product, n self-managed superannuation fund investors on average have almost 70 per cent of their investment portfolios in n-focused assets.
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The preference for investors to allocate the majority of their capital within domestic markets is exhibited throughout the world, however ns’ love affair with local shares is one of the strongest in the world.

This can partially be explained by the unique and favourable franking imputation credits, which are particularly beneficial for investors in a low tax environment.

Such a benefit is not available in many overseas equity markets. Despite this, it is imperative that ns look outside their own market to achieve sufficient diversification within their investment portfolios.

There are many reasons why n investors should consider lessening the home bias within their portfolios; not the least because of the lack of diversification this represents within their portfolio.

The n market is concentrated predominantly around banks and mining companies, with the financials and materials sectors accounting for more than 55 per cent of the largest 300 companies listed on the ASX.

Further, many ns largest investment exposure is property through their principal residence and/or investment properties. The n property market is fundamentally tied to the banking sector, given the large concentration of retail bank assets held within residential mortgages.

This factor further reduces the diversification of portfolios with large exposures to both n property and the financial sector.

Another reason n investors should consider offshore investment is there are opportunities available overseas that are simply not able to be accessed through our domestic marketplace.

An example of this is the technology sector, which accounts for less than 1 per cent of the ASX 300. Globally this sector has provided incredible growth to investors, a trajectory that will have been missed by n investors adopting a purely domestic portfolio of equities.

Many developed markets continue to find themselves in a prolonged bull market, buoyed by record low interest rates and an increasing appetite to take risk.

is one of these markets, with equity investors enjoying years of stellar returns as valuations are stretched to record levels.

With this in mind, it is vital that investors continue to explore opportunities abroad in regions such as Asia and emerging markets, where valuations appear more favourable on both absolute and relative terms.

Until recently the n dollar/American dollar exchange rate has been tightly range bound, until the n dollar broke through the $0.80 barrier.

The recent surge in the n dollar re-emphasises the need for ns to look at deploying capital offshore while the local dollar is strong.

While currency markets are notoriously hard to predict, many analysts believe the recent levels the n dollar has been trading at is unstainable over the long term.

The n dollar’s strength paired with recent US Federal Reserve meeting minutes pointing to more interest rate rises and increasing strength in the US economy, reinforces the argument ns should be looking to expand their portfolios offshore.

However, with any opportunities it is important to consider the risks involved and whether it’s right for you.

Daryl Dixon is the executive chairman of Dixon Advisory

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