Global Equities

The Benefit of Global Breadth - The Other 98% of the world

QS Investors
Regardless of where they live, investors have a significant opportunity to diversify their equity portfolio outside of their home market. Despite the opportunity, investors typically maintain a significant “home bias”, ie, higher allocations to their home country than the market capitalisation weight these represent in a global equity index. 

This article examines how a portfolio predominantly allocated to Australian equities (proxied by the MSCI Australia Index) stands to benefit from a greater breadth of global opportunities (proxied by the MSCI World Index).

Global equities provide exposure to a diverse range of countries, sectors and industries which can serve as a hedge against specific country, sector or industry risk. Australian equities are highly concentrated at both the sector and individual security level. The Financials and Materials sectors alone constitute nearly 60% of the Australian equity market compared with 20% globally (Chart 1). Diversifying exposure globally provides investors the opportunity to participate in regional markets which are performing differently, thereby further diversifying sources of risk and return.

Chart 1: Sector concentration MSCI Australia vs MSCI World

Source: Bloomberg, based on GICS classification as of May 31,2019.

Within Australia, the top 10 stocks1 comprise over 50% of the market capitalisation weighted index, while the largest four banks2 are nearly 31% of the benchmark. Furthermore, the top five stocks comprise more than a third of the index while the bottom third of the index is comprised of 55 stocks (see chart 2).

Chart 2: Stock concentration in MSCI Australia

Source: Bloomberg, June 2019

Anchoring stock selection and portfolio construction purely to the Australian equity index increases overall risk exposure, leaving investors overly reliant on a handful of return drivers, in addition to further limiting access to diversifying opportunities.

Due to the concentrated nature of the Australian equity market, over the trailing 10-year period Australian equities have realised over 30% more volatility and on average over 60% greater drawdowns (Chart 3).

Chart 3: Trailing 10-year average drawdown risk

Source: eVestment, monthly returns. 10-year trailing period as of May 31, 2019.

An allocation to global equities would have significantly improved both risk and return over the trailing 10-year period as shown in Chart 4). A portfolio comprised of 75% Global Equities and 25% Australian equities would have realised 30% less risk over this period compared to a portfolio comprised of 100% Australian equities.

Source: World (MSCI World Index), Australia (MSCI Australia Index). Chart based on monthly trailing returns, eVestment. As of May 31, 2019.

1 The top 10 stocks include Commonwealth Bank of Australia, BHP Group, Westpac Banking Corp, CSL Ltd, Australia and NZ Banking Group, National Australia Bank Ltd, Wesfarmers Ltd, Woolworths Group Ltd, Macquarie Group Ltd and Transurban Group. Source: MSCI Australia Index, Bloomberg as of May 31, 2019. 

2 Includes Commonwealth Bank of Australia, Westpac Banking Corp, Australia and NZ Banking Group, National Australia Bank Ltd and Macquarie Group. Source: MSCI Australia Index, Bloomberg as of May 31, 2019.

Issued by Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) which is part of the Global Legg Mason Inc. group. Any reference to ‘Legg Mason Australia’ is a reference to Legg Mason Asset Management Australia Limited. The information in this article is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information does not constitute specific investment advice and does not include recommendations on any particular securities. This article has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Legg Mason does not guarantee any rate of return or the return of capital invested. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested. Past performance is not an indicator of future performance. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change.