Investment Insights

The Price of Staying Home

QS Investors
November 2019
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”, I.E., higher allocations to their home country than the market capitalisation weight these represent in a global equity index.

Australian investors have tended to build portfolios that are highly concentrated in the domestic equity market. The Australian market has on average represented roughly only three percent of the MSCI World market cap weighted index.

This piece 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 Sector Diversification

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.

Australia's Concentration Risk

The Australian economy and listed equity market are dominated by a few sectors such as Financials and Materials which constitute nearly 60% of the index compared with a 20% participation in the global market. These sectors are heavily represented in the top holdings within the MSCI Australia Index, with the largest top 10 stocks comprising over 50% of the Index.

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

Drawdown Benefits of International Diversification

Anchoring stock selection and portfolio construction purely to the Australian equity index increases overall risk exposure. By leaving investors reliant on only a handful of return drivers, Australian indices expose investors to higher volatility and more frequent drawdowns than better diversified global indices.

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.

Chart 4: 10-year Risk vs Return Portfolio Characteristics

Performance Cost of Home Bias

In addition to the increase in volatility in drawdowns experienced by the home bias investor, there has been substantial opportunity cost associated with lack of global index exposure.

Even in those calendar years where the MSCI Australia Index has outpaced the MSCI World Index based on total return, the vast majority of top performing stocks were based outside of Australia, underscoring the opportunity a global manager has to potentially add additional alpha to a purely (or largely) domestic Australia portfolio.

The chart below highlights the opportunity cost of foregoing exposure to the global equity universe. In all years since 2009, nearly 100% of the top 50 performing stocks in the MSCI World Index were domiciled outside of the Australian market. 

Chart 5: Percentage of Top 50 Stocks that are Non-Australian

Source: QS Investors, Bloomberg. Indices: MSCI Australia, MSCI World ex Australia.

Global Equities & The Opportunity for Alpha

The scope and diversity of the global equity market makes fertile ground for active managers. Data on Alpha by international managers bears this out.

The below chart shows that both the median and top quartile Active managers earned significantly more Alpha for their clients as compared with those constrained to the U.S. market. 

Chart 6: Global vs Domestic Manager 10 Year Excess Returns

Source: As of December 31, 2018 over 10 year trailing returns. Source: S&P 500 Index, MSCI ACWI Index. Based on Global Large Cap Core eVestmentPeer Group and US Large Cap Core eVestmentPeer group. ¹Median fee 49bps based on eVestmentLarge Cap Core Peer Median Group for SMA assuming $100M mandate. ²Median fee 59bps based on eVestmentGlobal Large Cap Core Peer Median Group for SMA assuming $100M mandate.


The global income drought means investors no longer have the luxury of staying home. With Australia comprising only 2% of global equity markets, investors would be foolish to constrain themselves to the domestic market alone. 

That said, all investing demands diligence; it must be done right or not at all. Thus, a consistent and thoughtful approach is required. QS Investors takes pride in providing clients a systematic and rigorous process with which to engage the global equity market.

Learn more about our Funds managed by QS Investors:

Legg Mason Asset Management Australia Limited (ABN 76 004 835 849 AFSL 240827) 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. Legg Mason Australia is the responsible entity of the Legg Mason QS Investors Global Equity Fund (ARSN 122 100 207) (Fund) and the Legg Mason QS Investors Global Responsible Investment Fund (ARSN 631 941 172). QS Investors, LLC. (QS Investors) is the fund manager of the Fund. Before making an investment decision you should read the Product Disclosure Statement (PDS) for the Fund carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting Legg Mason Australia on 1800 679 541 or at www.leggmason. This product has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Neither Legg Mason Australia, nor any of its related parties, guarantees the performance or the return of capital invested.

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