Wherever you go in the world, it’s very common for investors to have a home bias.
People tend to anchor their portfolio with what they know, which is the local market.
Kiwis will often have a healthy exposure to New Zealand shares, Australians usually start with what’s on the ASX, and Americans are renowned for not looking past their own borders.
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That’s natural, because we tend to gravitate to what we know best, and that’s often what’s closer to home.
That can also feel like a safer approach, especially for newer investors.
People are familiar with Genesis Energy, Sky TV or Air New Zealand.
It’s not safer though, it’s much riskier.
Being concentrated in a small market like ours exposes you to much more risk than spreading your capital across dozens of countries.
One of the broadest global sharemarket indices is the MSCI ACWI Investable Market Index.
ACWI stands for All Country World Index, and this covers 47 different sharemarkets across the world.
Unsurprisingly, the United States is the most dominant region with a weighting of 63 per cent.
Japan is 5.5 per cent, the UK is 3.3 per cent, Germany is 2.0 per cent and the emerging markets group (which includes China and India) is 11.3 per cent.
Australia is 1.6 per cent, while New Zealand is 0.05 per cent.
That doesn’t mean we shouldn’t own any New Zealand shares at all in our portfolio.
We have some fantastic companies and some excellent leaders, so we should proudly support those by entrusting them with our capital.
We also shouldn’t forget that we get favourable tax treatment for investing in local shares.
No capital gains tax or bright line test of any kind is applied to your New Zealand shares, provided you’re not a trader.
Dividend payments, which are higher than average compared to many other countries, also come (mostly) tax paid because of our imputation regime.
When our companies pay tax on their profits, they accrue these imputation tax credits.
They can attach these to the dividends they pay to shareholders, to ensure investors don’t pay tax a second time.
Apart from Australia (which calls these franking credits), I can’t think of anywhere else where this happens.
Those positives suggest a modest allocation to domestic shares, but certainly not a dominant one.
As a rule of thumb, I think investors should have at least two thirds of their share portfolio outside of New Zealand.
I could easily argue it should be more than that, unless you really need those imputed dividends.
That’s between you and your investment adviser though.
One investor I used to know would justify his overexposure to New Zealand shares by pointing out that he owned a substantial number of exporters.
He believed that if he owned the likes of Fisher & Paykel Healthcare, Mainfreight and Scales, he had this covered.
I understood his logic, but I disagreed with his strategy.
Despite selling products across the world, domestic businesses are still tied to local investor sentiment, policy decisions and the health of the economy.
That’s not to say this approach didn’t work, because it did (for a while).
This was back in the 2010s, a decade that saw New Zealand shares outpaced world shares in seven of those ten years.
I haven’t seen him in a while, but I do hope he changed tack because the 2020s has been very different.
Six calendar years into this decade, and the local market is 0 from 6.
New Zealand shares are up 16 per cent over that period, while world shares (in NZ dollar terms) have increased 157 per cent.
Who knows how the rest of this decade or the next will play out, but predicting returns isn’t really the point.
American investors can get away with having a home bias, but we can’t.
We’re a great country, but we’re also small and vulnerable.
We export a handful of goods to a narrow group of customers, household (not to mention government) debt is high and we’re increasingly susceptible to natural disasters.
We’re already invested in Aotearoa via the businesses we work in, the communities we contribute to and the house we might be lucky enough to own.
There’s no need to double down on all that when it comes to your KiwiSaver account or investment portfolio.
It’s never been easier to diversify your investments and hedge your bets, so investors would be wise to make use of that opportunity.
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Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.
Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.