Jarden Wealth Weekly: Think globally when it comes to investing

The Nasdaq100 has had returns almost ten times better than the local sharemarket in the past 12 months. Photo / AP

OPINION

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. And when it comes to investing, people exhibit the same behaviour.

“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.

In our New Zealand equity market, the largest 10 companies make up over 60 per cent 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 per cent.

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 per cent of their assets exposed locally, and 63 per cent internationally.

Compare that to the NZ Super Fund which has 15 per cent of its assets exposed to New Zealand versus 85 per cent 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 per cent 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.

Geopolitical 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. In the past 12 months the Nasdaq 100 index has returned 43 per cent whereas the NZX 50 Index has returned just 4 per cent.

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.

Simon Bradley is a wealth management adviser at Jarden in Auckland.

Jarden Securities Ltd is an NZX firm. A financial advice disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.

Full disclaimer available at: https://www.jarden.co.nz/wealth-sales-and-research-disclaimer