As Australian investors I think we're all mindful of how small our economy is relative to the rest of the world, and how concentrated our economy is on a few key sectors - resources and financials. Home bias may not be recommended for most investors, but at least if you're a US investor your home bias still gives you an enormous diversity of businesses to invest in.
I'm trying to tidy up some of my legacy investments (i.e. why hold Telstra, BHP, NAB and WBC if I also hold VAS?). I'm also trying to increase my international exposure - but finding it psychologically hard to quit my positions in direct shares (whether they are in losing or winning positions).
For some perspective I thought I'd use the Vanguard tool to do a comparison of VGS (MCSI World ex Aus) and VAS (S&P 300) and the results were rather sobering. So I thought I might share it for those who aren't familiar with this stuff:
https://tool.vanguardinvestments.com.au/mstar/au/fundcompare.htm?site_code=ret##target=fct&selectedFund0=F00000UPZO&selectedFund1=F000002TI7Just in case the link doesn't work:
Portfolio top 10 holdings - % of assets
VGS - 10.76%
VAS - 45.65
Also, top 10 holdings for VGS are Apple, Microsoft, Amazon, Johnson & Johnson, Facebook, Exxon, JP Morgan, Alphabet (Google) and Nestle
Top 10 holdings for VAS are CBA, WBA, ANZ, NAB, BHP, CSL, Telstra, Wesfarmers, Woolworths, Macquarie
VGS seems rather tech heavy, but they are globally dominant companies - furthermore there is so much more diversification given the top 10 companies only account for 10%. Whereas the only Australian company in the top 10 of VAS that gets me excited is CSL, and the top 10 accounts for half of the entire fund.
Buying unhedged international funds used to make me very nervous given the currency volatility - but I'm starting to terms with the fact that over the long run, currency risk evens out*.
So I'm now coming to the conclusion that being so concentrated in Australia is the real risk - particularly if a significant part of our market is profitable due to the never ending leveraging of residential real estate. I guess I don't feel as confident that the companies making up the Top 10 of VAS (and top half of the fund by value) will be as successful at creating value, driving innovation, and growing profits as much as the companies in the Top 10 of VGS.
Thoughts?
* Currency risk, i.e. Possible bad scenario. You buy VGS when the dollar is at USD 0.60, then the dollar climbs to parity USD 1. The value of your investment declines, which sucks, but to compensate, your dividends get a boost. Then the dollar floats back down to the 'average' eventually . I appreciate there are further complexities here as well that I don't quite understand. Like the way the Australian market and currency is a risk on asset class as viewed by international investors.