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There’s a big world of opportunity out there when it comes to buying stocks, but Australian investors continue to show an unusually heavy bias toward homegrown companies.
Unfortunately, that preference could be costing us more than we realise, according to Gemma Dale, SMSF and Investor Behaviour director at NAB.
That’s partly because there’s been a substantial rise in global tech firms in the last decade – as seen in the US Nasdaq index, which holds companies such as Facebook, Google, Apple and Amazon.
With the technology sector making up a relatively small market capitalisation on the ASX, it’s a trend that Australian investors have largely missed out on in the last decade.
“It has lost people a lot over the last 10 years,” Dale told Your Money Live. “If you look at what the NASDAQ has done over the last 10 years versus the ASX, it would make you cry if you had the standard asset allocation, it’s hurt people a lot.”
While the Nasdaq has risen by over 370 per cent in the last 10 years, the ASX200 – an index of our top 200 companies – has largely tracked gone sideways.
Why do we have a home bias?
Just over 10 years ago, there were few viable options available for investors that were interested in buying overseas stocks, Dale explains.
With exchange traded funds (ETFs) still relatively unheard of, investors usually had to go through a managed fund, which often had high fees and delivered low returns.
However, that’s changing today with a range of cheaper and easier options coming to the market. And there’s also a greater awareness around the performance of offshore companies, particularly among younger generations.
Dale says there was a 30 per cent increase in the number of NAB investors directly buying global stocks in 2018 – with most people buying in their late 20s or 30s (Gen-Y).
“[Younger investors] are holding a few more interesting and exciting names in terms of Australian companies, but they’re also much more likely to be investing offshore,” said Dale.
While around 90 per cent of international stocks purchased in Australia are listed in the US, there’s also a growing demand for stocks across Asia, the UK and Germany.
Why invest offshore?
Diversification is the name of the game when it comes to investing, but that’s something Australia’s stock market distinctly lacks, according to Dale.
While the portfolios of US investors hold around 60 per cent in local stocks, Wall Street has a much greater spread of assets and sectors.
“If we look at self managed super funds… we know that they have something like 40 per cent of their portfolio in Australian equities or Australian listed securities… 25 to 30 per cent in cash, and their international equities allocation is, according to the ATO, about one per cent,” says Dale.
While that one per cent doesn’t include products like ETF’s or managed funds – Dale says the number would still be around just 10 per cent.
“We’ve got quite a concentrated market and we’re very heavily invested in financials, very heavily invested in resources,” says Dale. “[Australian investors] aren’t really represented particularly in technology – that’s the big one where Australian investors are massively underweight.”
Buying Australian shares is thought to be the safer option for local investors, but having exposure to the global market is widely considered a better bet for higher capital returns.
So that growth than we’ve seen in international investing is a good illustration of Australian investors understanding that there’s a wealth of opportunity out there and they do need to expand beyond the ASX.
Watch the full interview with Gemma Dale for more.