Diversification and home bias have been hot topics for Australian investors in recent years. In an increasingly globalised equity market, investors have come to realise that Australian shares represent less than 2% of the available investment opportunity. Naturally, Australian investors show a home bias, in that they know the companies on their home exchange better, and they like to transact in their home currency without exposure to currency risk (foreign exchange risk).
In Australia, the home bias is amplified by the dividend imputation system, in which franking credits can add another 1% a year to investors’ returns. In particular, the huge demand from Australia’s growing ranks of self-managed superannuation funds (SMSFs) for franked dividend income – which is extremely tax-effective in their hands, particularly when an SMSF moves into pension phase – creates heavy preference for local stocks, although the attractiveness of franking credits has recently been threatened politically.
But more recently, it has become much more widely understood that Australian investors without some exposure to global shares are hindering their portfolios unnecessarily.