ASX Shares Why ASX shares in a diversified passive portfolio?

I'm curious as to why people when they get a diversified passive portfolio seem to have a lot of Australian shares in the mix for example it's not uncommon to see people having up to 50% Australian.
For example 50% vgs and 50% vas or something like that.

To be honest I'm not sure I understand this because that's quite a huge weighting on Australia.
Yes I get it that we live in Australia but that would seem to indicate if people are buying 30% or more Australian shares (not uncommon) they are really betting quite heavily on the Australian stock market out performing the US and the rest of the world.

A diversified whole world etf like vgs or iwld will have about 60% US stocks but it will also pick up the ASX as well as UK, HK and other markets. At the end of the Day Australia is only 2% of the world share market. I can understand why diversified portfolios might wait the US heavily because that's where a lot of the top companies are. But in terms of the world Australia doesn't really have many top companies.

Does anyone have any explanation why people would weight Australia more than about 2% in a diversified passive portfolio?

 

How many ASX listed companies have overseas operations and what income or return to Australian shareholders) do they generate?

I don't know to any great detail but home based investing isn't just an Oz thing.

 

Because it depends what you are trying to 'diversify' away from.

Although the ausssie market only represents 2% of the global market, for many Australians it represents 100% of thier life. Ie one might consider themselves an Australian citizen rather than a global citizen, and what happens in the rest of the world is off less relevance to them.

Secondly there is currency risk, third is franking credits, fourth is that many Australian companies to have an overseas presence anyway (BHP, CSL etc etc), fifth is the question of whether overseas exposure is even necessary (Thornhill argues the importance is over stated).

I don't think there is anything wrong with being entirely invested in Australia, my main gripe is the concentration of the Australian Index.

 

People invest more heavily in their local economy because they understand it better through the media and just through living in that economy. Most of their spending is in the local currency so it may seem to also remove fx risk (but this is a furphy).

 

Though the concentration is also what increases the amount of franking credits, which changes the numbers especially for super or someone on a low marginal rate of tax.

While yes, you could sell low yielding shares and get income that way, some people prefer 'set and forget' and just pick up the dividends every couple of months.

Have seen stats that say over the last 30 years, returns on Australian shares and US shares are pretty close.

 

Cut an pasted from another thread:

Because it depends what you are trying to 'diversify' away from.

Although the ausssie market only represents 2% of the global market, for many Australians it represents 100% of thier life. Ie one might consider themselves an Australian citizen rather than a global citizen, and what happens in the rest of the world is off less relevance to them.

Secondly there is currency risk, third is franking credits, fourth is that many Australian companies to have an overseas presence anyway (BHP, CSL etc etc), fifth is the question of whether overseas exposure is even necessary (Thornhill argues the importance is over stated).

I don't think there is anything wrong with being entirely invested in Australia, my main gripe is the concentration of the Australian Index.

 

1. It flattens out Currency risk - if you make 15% return but the $AUD changes by 10% you've only got 5% (though it could go the opposite way). Only having half the portfolio overseas means any short term currency hit will be less damaging especially if it's in the first year of investing.
2. Dividends are high, if you like that
3. Tax benefits (franking)
4. Overvaluation of US indexes due to extreme global inflows from passive investing and pension funds and the faster recovery that US stocks had after March 2020 (money printing and stimulus that is now ending)
5. Local bullishness due to the state of the world at the moment making Australian industries a good bet

 

I'm thinking it has a lot to do with the higher dividend payouts and franking credits. If you are debt recycling, getting good payouts seems important for paying the interest.

Also, most people on this forum have all their leveraged properties in Australia, a country that houses approximately 0.3% of the world's population. I'd say that is arguably a lot less diversified than just buying 100% VAS.

 

Tell me more about 5.

 

Yeah well there's that to I mean people who are waeighting Australia heavily in shares as well as having investment properties here are pretty much going hard core on Australia

 

Adding to the other points-

Over the last 100+ years it has been the best or near best performing market in real terms. Check the elroy dimson credit Suisse reports.

We have low corruption

Capitalist without extensive history of too many shenanigans (Babcock and brown, alan bond etc. Noted)

Arguably one of the best diversifier indexes for USA market. They are heavy tech, we are heavy financials and resources.

Likely the best commodities play as an overall index. What other developed country has so many resources companies amongst their largest?

I weight it 25% in my portfolio. Massively overweight in global market weight terms but I believe it strengthens the overall portfolio due to its unique benefits.

 

Developed market expected return adjusted for risk is the same. When accounting for tax, implementation cost, currency effects, sector diversification you may choose to overweight AU. Similar to Canada market, 20-40% of equities exposure is typically weighted to AU home market by major asset allocators (Vanguard, State Street, Major super funds etc)

There are also product related benefits, IWLD for example which is currently 73% US market (too high a weight for comfort for many) recently changed to ESG mandate. Having to exit a sole position, or being subject to uncontrollable tax events (rebalance, distribution) in single exposure vehicle is another consideration.

The “market portfolio”, which is global equities held at cap weight is a reasonable approach but not for many.

 

Basically the commodity and food crisis. It's not my theory and I don't know if it will play out, but if it does cause an Australian exports boom that's what has helped us in the past.

 

Best bloody country in the world to live in!

 

Bloody oath!

 

There is a Vanguard paper on this topic, attributes a big part of it to the appeal of franking credits:

https://static.vgcontent.info/crp/i...nd_the_impact_of_home_country_equity_bias.pdf

 

Yep - franking credits and currency risk. If you retire in Australia, a large part of your spending will be dependent on Australian dollar risk. Most of our food and service industry (labour) etc cost increases will be denominated in Aussie roubles, so it makes sense for much on one's investment exposure to match that. Franking, when combined with some decent dividend yields compared to similarly developed markets, turns a sensible idea into a pretty attractive one.

I'm far more comfortable with equity risk than I am with forex risk. IME forex can be a disaster... as much as it can go wonderfully. But it's a 50/50 bet compared with equity risk, where the long term odds are more weighted to your favour.

But I agree, ETFs like VAS have a problem with concentration risk that calls into question its true benefit as an index fund, so some further diversification is still warranted if you want a diversified investment. But from an Australian property investor's point of view, it's a big step up in diversification already, so this seems like more of an academic point to make. This calls to mind Charlie Munger's thoughts on diversification...

 

Technically, the index fund just follows the reference index. If you think the index isn't diversified enough, blame the S&P or asx, not vanguard?

 

Macquarie.




Now throw in CSL, BHP, Rio Tinto, James Hardy, Ramsay and a few others.

 

Chicken is sold world wide too !