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Think globally when it comes to investing

By Simon Bradley, Wealth Management Adviser at Jarden in Tauranga.

As humans we tend to stick to what we know. We like the familiarity of products and brands that we trust and feel comfortable with. When it comes to investing, people exhibit behaviour that is no different.

’Home country bias’ refers to the unconscious behavioural instinct that results in investors overweighting asset allocation to their local region. This bias means investors can be exposed to high geographical concentration risk and potentially rely on a small subset of companies to generate their returns.

Let’s take New Zealand as an example. In our equity market, the largest 10 companies make up over 60% of the listed market in terms of size. Compare this to the MSCI All Country World Index (ACWI), and the top 10 stocks make up approximately 18%.

For New Zealand retail investors, home country bias is real. According to a Morningstar KiwiSaver report published in 2023, the average KiwiSaver investor has 37% of their assets exposed locally, and 63% internationally. Compare that to the NZ Super Fund which has 15% of its assets exposed to New Zealand versus 85% of assets invested offshore.

New Zealand has traditionally been a market where companies pay their shareholders a healthy share of profits in the form of dividends. In 2023, when interest rates moved sharply higher globally, New Zealand became less attractive to foreign investors who could get returns of 5% or more from investing in US government bonds. As a result, the New Zealand equity market experienced heavy foreign outflows as those investors sought returns closer to home with less perceived risk-taking.

 


 

There are of course two sides to every argument. Investing globally isn’t without risks.

In buying offshore shares, you are introducing currency risk as well as increasing the geopolitical risk you are exposing your investments to.

While a strong New Zealand dollar is good when buying offshore shares, it will diminish offshore returns when repatriating your investment back into New Zealand dollars. It’s very difficult to successfully predict the international flows of capital and currency movements. It is however possible to buy New Zealand dollar hedged funds to help mitigate this currency risk.

Offshore investing can also increase the tax complexity of an investor’s portfolio. It’s important to seek tax advice when you are considering making offshore investments.

As New Zealanders, we are patriotic people who are famed for our ingenuity and ability to think outside the box. There is perhaps a sense from local investors that we desire our best and brightest companies to perform on the global stage and by investing capital into those companies, that we’re along for the ride.

Whilst it feels comfortable to invest in companies well known to us as New Zealanders, it’s a big wide world out there and limiting yourself to only investing in New Zealand can also limit expected returns.

To take the example of the NASDAQ 100, the US stock exchange where most of the world’s technology giants are listed, over the past 5 years the NASDAQ 100 index has delivered a total return of 160% whereas the NZX 50 Index has returned just 15%.

As history has taught us, markets do inevitably get derailed by geopolitical events, terrorism, and pandemics. These types of events can prompt investors to question their investment strategy. Rather than reacting to market movements, any changes to your investment strategy should typically only be made as a result of changes to your own personal circumstances.

A well-balanced diversified portfolio not only invests across different asset classes but also places importance on where those assets are listed and what geographical exposure they have.

Disclaimer:
This research has been prepared by Jarden Wealth Limited (Jarden) which holds a licence issued by the Financial Markets Authority to provide a financial advice service. The information in this research solely relates to the companies and investment opportunities specified within. The nature and scope of any financial advice included within that research is limited to generic and non-personalised commentary about that investment only, such as the performance and the investment outlook of the company concerned. Any such commentary does not take into account any individual’s particular financial situation, objectives, goals or appetite for risk. We recommend that you seek financial advice that is specific to your personal circumstances before making any investment decision or taking any action. No fees, expenses, or other amounts will be payable for the provision of any financial advice in this research report. However, if you act on any information or advice contained in this research report, a brokerage fee (and other fees such as an administration and custody fee) may be payable to Jarden. For fees payable for brokerage and other services provided by Jarden, information on our complaints and dispute resolution process, and the duties applicable to us for providing financial advice, please see our publicly available disclosure statement, https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.

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