Author Topic: Australian Shares v International - Portfolio allocation  (Read 2229 times)

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Australian Shares v International - Portfolio allocation
« on: September 10, 2016, 03:50:08 AM »
Hi Australian investing mustachians!

I'm curious to hear how others have allocated their investments across Australian and International shares/investments.

Considerations
It's widely accepted that Australia's economy is said to comprise 3% of the world economy. And the Australian economy is dominated by resources and banks, and lacking many of the enterprises that make many of the goods and services we use on a daily basis (tech, consumer applicances, manufacturing, pharma, beer, auto, etc - everything!)

Home bias means that most Australian's investment portfolios with a high level of concentration in the ASX.  Diversification suggests you should not concentrate your long term investments on a few punts (unless of course they are brilliant investments that outperform). Even the default mix offered by most managed index funds have a strong home bias.

Add the fact that Australian's have such a strong commitment to home ownership and the average investment portfolio gets even more concentrated.

Canadians are probably in a similar situation here, although not sure how their proximity to the US affects them.

I've started thinking about this after looking at where my super is at the moment. My net worth is currently allocated around 70% Australian and 30% International. I'm looking to shift this to a greater international focus over time. Unhedged, as all the articles I've read suggest that the cost of hedging is an added drag that doesn't justify the natural rebalancing that occurs over time.

Of course, if you diversify to an international focus, and Australia's enviable record of 25 years without a technical recession continues for the rest of your life, and Australia's vast reserves of mineral resources continues to earn endless rivers of foreign export income (at the expense of improved productivity) you've probably made the wrong bet.  On the other hand, if Australia's property boom comes to a halt, our high levels of indebtedness finds us with our pants down, and the painful deleveraging other economies have undertaken gives them competitive advantage over the next few decades, then having extensive overseas investments will soften the decline of our banana republic and it's pacific peso.

Anyway, I've said enough - just wondering what % breakdown between Aus/International others you've settled on. And why.

Any thoughts, provocations, considerations, further reading recommendations are most welcome.

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Re: Australian Shares v International - Portfolio allocation
« Reply #1 on: September 10, 2016, 03:52:39 AM »
I thought this was a reasonably good article. Why try explaining things with words when you can use graphs?

http://www.moneymanagement.com.au/features/editorial/asset-allocation-%E2%80%93-making-choices-add

marty998

  • Walrus Stache
  • *******
  • Posts: 6715
  • Location: Sydney, Oz
Re: Australian Shares v International - Portfolio allocation
« Reply #2 on: September 10, 2016, 04:55:59 AM »
There is quite a bit of international flavours to the large cap stocks, for example, just off the top of my head:

The Big 4 banks + AMP have exposures to NZ, China, Vietnam, the Pacific and Indonesia. CSL, QBE, Ramsay, Computershare and BHP all have large exposures to the US. Additionally BHP as well as RIO have mining activity in all economies. Westfield, BT Investments and IAG (I think?) have large British exposures. Oh, and how could I forget the News Corp gift we gave the world (no longer listed in Aus though).

Where we fall down is tech stocks. We don't have an Amazon, Google, Ten Cent, Baidu, Ali Baba, Apple or Facebook. Telstra doesn't count. And Atlasssian had to get out of Australia to get going.

I currently have nil international exposure. Plainly this is not an appropriate choice. I should jump back in, but I'm a little uncomfortable about currency volatility. As you say, hedging is a drag on performance too.

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Re: Australian Shares v International - Portfolio allocation
« Reply #3 on: September 12, 2016, 07:44:36 AM »
Yes, good points.

I have Resmed myself, and for my own analysis I consider it a US stock (it does pay dividends in US dollars), and some others that have extensive international exposure - Cochlear, IMF Bentham. 

But still, what would you consider your ideal ratio of Australia:International, given that you think nil exposure isn't appropriate?

I was uncomfortable about currency.  The best time to be comfortable about currency was when the Dow was low and the Aussie was above US$1 for that brief period after GFC.  But supposedly, it all evens out over time.  Low Aussie dollar means foreign dividends are worth more?  I ended up closing my eyes and just going with the vanguard fund that had an unhedged international component.


faramund

  • Bristles
  • ***
  • Posts: 331
Re: Australian Shares v International - Portfolio allocation
« Reply #4 on: September 13, 2016, 01:51:38 AM »
About 2/3rds of my shares are in my super fund, and they're about 50/50 domestic/foreign. The 1/3rd I have outside super is all domestic - but I do have in mind, that if my outside super gets as big as my in super, I'll look at some of the Vanguard global indexes.

marty998

  • Walrus Stache
  • *******
  • Posts: 6715
  • Location: Sydney, Oz
Re: Australian Shares v International - Portfolio allocation
« Reply #5 on: September 13, 2016, 03:20:05 PM »
If I knew the answer to the allocation question I would have implemented it by now :D

Honestly, I have no idea what is appropriate. If you believe Australia's 25 years of economic growth without a recession is due to end, then the appropriate allocation is 100% to International.

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Re: Australian Shares v International - Portfolio allocation
« Reply #6 on: September 13, 2016, 04:42:46 PM »
Fair enough, this is an investment conundrum that is familiar to me.

There's the understanding that you should have a certain type of investment or allocation in an asset class, in this case international, and that allocation should be anywhere from 0.1% to 100%. 

But uncertainty leads you to inadvertently commit to a 0% allocation, even when at the very least a 10-25% allocation would allow you to get your feet wet without breaking the bank.

It's similar to people who want to invest in equities, but stash cash instead.  I have a friend who knows the risks of cash and wants to invest but just can't pull the trigger, so he stays out of it entirely.

Notch

  • 5 O'Clock Shadow
  • *
  • Posts: 93
  • Age: 30
  • Location: Australia
Re: Australian Shares v International - Portfolio allocation
« Reply #7 on: September 14, 2016, 06:11:39 AM »
I use 45:45:10 VAS, VGS, VGB. The Australian shares are preferentially held in super as they have the highest yield.

The strategy is basically an adaptation of Warren Buffett's advice for passive investing.  The equal split between Australian and international was a pretty arbitrary decision.
« Last Edit: September 14, 2016, 06:15:28 AM by Notch »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1943
Re: Australian Shares v International - Portfolio allocation
« Reply #8 on: September 15, 2016, 01:24:11 AM »
Currently in super I have a high growth fund which splits evenly between international and Aussie.

Outside of super I have 50% Aussie (VAS), 25% International (VGS) & 25% Australian Bonds (VAF).

I also don't know the ideal allocation but logically I think it probably should be 100% international stocks and dump the Aussie stocks. I think I will adjust my allocation over time to 40% VAS, 40% VGS & 20% VAF.

Aussie stocks though tend to pay really good dividends with positive tax implications.

Eucalyptus

  • Bristles
  • ***
  • Posts: 359
  • Location: South Australia
Re: Australian Shares v International - Portfolio allocation
« Reply #9 on: September 15, 2016, 04:10:42 AM »
This is a really good article from Vanguard that helps to break down the role and effect of home bias in assett allocation.

Note in particular, figure 11, which gives a great summary of how to take each of the different biases into account and adjust your domestic/foreign ratio

https://pressroom.vanguard.com/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf