INVESTORS with an outlook of more than four years should increase their stock exposure at the expense of bonds or cash, according to advice from State Street Global Advisors.
INVESTORS with an outlook of more than four years should increase their stock exposure at the expense of bonds or cash, according to advice from State Street Global Advisors.
In a report on the Australian market, State Street chief investment officer Lochiel Crafter warned that this investment needed to be done in a balanced way.
“Australian investors are putting their money at unnecessary risk by being too skewed towards domestic equities,” Mr Crafter says.
The average Australian balanced portfolio holds 64 per cent in equities, 39 per cent of which are in Australian stocks, despite the fact that Australia represents only 2 per cent of the global market.
Mr Crafter believes the ‘home bias’ – the tendency of investors to weight investments close to home differentially in the portfolio regardless of the risk-return characteristics or potential impact – is bad news for investors in the long term.
“As a result of this bias there is as much invested in the top four Australian companies as is invested cumulatively in all the companies in every other country in the MSCI World Developed Market Index, except the United States,” Mr Crafter says.
“The only investor that doesn’t need to diversify is the investor who can predict the future perfectly. Deviations from a fully diversified portfolio can only be justified on the basis of additional returns or lower risk than the market is expecting or currently pricing.
“Our analysis suggests that the impact of franking credits is to give the domestic investor a 1.1 per cent return incentive to hold more Australian equities in their portfolio.”
Given this advantage, State Street believes the optimal equity portfolio would be 16 per cent Australian equities and 48 per cent global equities.
Another justification for the home bias is foreign currency risk.
Mr Crafter says it is a risk that can easily be managed through currency hedging.
“Another deterrent to global investing is compliance risk. Like currency risk, compliance risk can be easily and inexpensively managed and in most cases is assumed by the underlying manager and custodian,” he says.
Another explanation given in the report is that the home bias is purely behavioural.
“There have been a number of academic studies that suggest that there is a tendency of investors to bias their investments towards assets that are closer to home,” Mr Crafter says in the report.
“The key to the difference between the optimum portfolio and one biased toward Australian equites is far removed from risk-return expectations, rather it lies in the foundations of human nature and our comfort with what is familiar.”
WA oil and gas wins hearts
STOCKBROKERS continue to anticipate major events to unfold in the Perth Basin, north of Perth.
“After being condemned by many industry pundits for years, the Perth basin has witnessed a major revival in exploration interest over the past 12 months,” according to Paterson Ord Minnett’s most recent weekly report.
DJ Carmichael senior analyst Peter Strachan has been another analyst watching the development unfolding at the Perth Basin over the past year.
The discovery of the onshore Hovea oil field last October followed by the Cliff Head oil discovery offshore had been the catalyst for the activity spurt.
With the spudding of the Jingemia-1 wildcat last month, about five kilometres south-west of Hovea-1, the exciting 2002-03 Perth Basin exploration campaign has essentially kicked off.
Over the next six months up to nine wildcat and appraisal wells are likely to attract the pundits, the broker says.
Companies to note over Christmas are: Bounty Oil; Norwest Energy; Voyager Energy; Australian Worldwide Exploration; Roc Oil; Hardman Resources; Arc Energy; Victoria Petroleum; Pancontinental Oil & Gas; and Origin Energy.
In a report on the Australian market, State Street chief investment officer Lochiel Crafter warned that this investment needed to be done in a balanced way.
“Australian investors are putting their money at unnecessary risk by being too skewed towards domestic equities,” Mr Crafter says.
The average Australian balanced portfolio holds 64 per cent in equities, 39 per cent of which are in Australian stocks, despite the fact that Australia represents only 2 per cent of the global market.
Mr Crafter believes the ‘home bias’ – the tendency of investors to weight investments close to home differentially in the portfolio regardless of the risk-return characteristics or potential impact – is bad news for investors in the long term.
“As a result of this bias there is as much invested in the top four Australian companies as is invested cumulatively in all the companies in every other country in the MSCI World Developed Market Index, except the United States,” Mr Crafter says.
“The only investor that doesn’t need to diversify is the investor who can predict the future perfectly. Deviations from a fully diversified portfolio can only be justified on the basis of additional returns or lower risk than the market is expecting or currently pricing.
“Our analysis suggests that the impact of franking credits is to give the domestic investor a 1.1 per cent return incentive to hold more Australian equities in their portfolio.”
Given this advantage, State Street believes the optimal equity portfolio would be 16 per cent Australian equities and 48 per cent global equities.
Another justification for the home bias is foreign currency risk.
Mr Crafter says it is a risk that can easily be managed through currency hedging.
“Another deterrent to global investing is compliance risk. Like currency risk, compliance risk can be easily and inexpensively managed and in most cases is assumed by the underlying manager and custodian,” he says.
Another explanation given in the report is that the home bias is purely behavioural.
“There have been a number of academic studies that suggest that there is a tendency of investors to bias their investments towards assets that are closer to home,” Mr Crafter says in the report.
“The key to the difference between the optimum portfolio and one biased toward Australian equites is far removed from risk-return expectations, rather it lies in the foundations of human nature and our comfort with what is familiar.”
WA oil and gas wins hearts
STOCKBROKERS continue to anticipate major events to unfold in the Perth Basin, north of Perth.
“After being condemned by many industry pundits for years, the Perth basin has witnessed a major revival in exploration interest over the past 12 months,” according to Paterson Ord Minnett’s most recent weekly report.
DJ Carmichael senior analyst Peter Strachan has been another analyst watching the development unfolding at the Perth Basin over the past year.
The discovery of the onshore Hovea oil field last October followed by the Cliff Head oil discovery offshore had been the catalyst for the activity spurt.
With the spudding of the Jingemia-1 wildcat last month, about five kilometres south-west of Hovea-1, the exciting 2002-03 Perth Basin exploration campaign has essentially kicked off.
Over the next six months up to nine wildcat and appraisal wells are likely to attract the pundits, the broker says.
Companies to note over Christmas are: Bounty Oil; Norwest Energy; Voyager Energy; Australian Worldwide Exploration; Roc Oil; Hardman Resources; Arc Energy; Victoria Petroleum; Pancontinental Oil & Gas; and Origin Energy.
