Australia is not good enough to get the spread
It’s a basic principle of wise investing: Spread your share investments around the world, to spread your risk.
But proposed tax changes will increase taxes on overseas share investments beyond Australia. So should we stick with Australasia?
Firstly, here’s hoping the government will change its proposals. If not, returns will be reduced not only for direct investors with more than $50,000 of overseas shares but also thousands of people with investments of any size in many funds that include international shares.
Given that investors in New Zealand shares benefit from dividend imputation, they already have a tax advantage. The proposals are unfair — to say nothing of horribly complex.
Also, they discourage international diversification — doing a huge disservice to people trying to make the most of their savings.
Diversification beyond Australia helps investors in four ways:
Company domination of the market.
The biggest listed company in New Zealand, Telecom, makes up roughly a fifth of total market capitalisation (the value of all shares). And the top ten companies make up about two-thirds of market cap.
Australia’s biggest listed company, BHP Billiton, makes up roughly a tenth, and the top ten a bit less than half of market cap.
But the world’s two biggest companies, Exxon Mobil and GE, each make up less than 2 per cent, and the top ten about 10 per cent of total market cap.
If you invest in a world share fund, the performance is much less dependent on the fortunes of a few companies.
Frequency of losses.
Looking at quarter years in the last 30 years, the New Zealand market fell 33 per cent of the time and the Australian market 30 per cent. The world market fell only 21 per cent of the time.
By investing in many different economies, you benefit from gains in one country offsetting losses in another.
How much the markets move together.
The share market that moves most closely to the New Zealand market is, predictably, Australia.
Over the last 30 years, the New Zealand and Australian markets moved in the same direction — either both gained or both lost — in 81 per cent of the quarters.
But the New Zealand and world markets moved in the same direction only 64 per cent of the time.
If you have some shares in New Zealand and some in a world fund, there’s a good chance that if one market falls you will be comforted by a rise in the other one.
Compared with world share markets, the New Zealand market is way under-represented in information technology and energy, and way over-represented in telecommunications and utilities.
A 50:50 split of Aussie and Kiwi shares improves your industry spread. But Australia is also weak on IT and energy. And you would still end up heavy on telecommunications, and also on materials.
If the industries in which you have big holdings perform badly, or those in which you have small holdings perform well, you won’t do as well as in a worldwide share fund. It’s silly to take that risk.
Remember: In most cases in investment, if you take higher risk on average you should get higher returns. But the higher risk from not diversifying is not rewarded with higher returns.
Where does all this leave investors wondering whether to keep investing beyond Australia?
Hoping for fair treatment from the government. And if we don’t get it, pushing for changes to the law or changes to the government.
But also, I hope, not rushing to bring money back to Australasia. Tax disadvantages might well be more than offset by diversification advantages — although it would be much better if we don’t end up having to test that.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.