Home, Home On the Range

I watched the British Open golf last week. When the players were about to commence their round, the Announcer would introduce the player’s country first followed by the player’s name, so “from Australia, Steve Moriarty”. The crowd duly applauded.

I wondered why it was necessary to state their country since they were playing as individuals. 

Geography I suspect helps give each of us an identity and a base. But in investing we really don’t need a base. However, studies show most investors place the bulk of their funds in the local market wherever that may be. Australians adhere to this ‘rule’, in both stock markets and property markets as investors. I have found broadly speaking property investors by and large stick to their own city or state. There are a small number of people who invest in other states and an ever smaller cohort who invest overseas (usually the wealthy). 

With stocks, we are encouraged to hold a globally diversified portfolio and many of us do via our superannuation.  

But still the bulk of our funds remain within our local market. Does global investing beat local investing? It does depend somewhat on the characteristics of your country. For example, those with the most stable returns have a high level of corporate governance, an independent rule of law, free movement of capital and democracy all helping to make an investor comfortable that the country wont run away with their money. 

There are other variables to consider such as currency fluctuations, but these tend to ebb and flow over time so for the long term investor, there is relatively little currency risk (and it can be hedged if you want).

The success of our Well 2 strategy is based on having a global approach and not allowing home bias to dictate our asset allocation (but we are bias in Well 3!). We simply prefer to go where it is cheap. Our success can be partly attributed to having access to global markets thanks to globalisation. 

Over the past 12 months, we have highlighted that globalisation is changing (shrinking really) and so will there will need to be a reduction in our global approach? We think there will be more volatility in global markets and as such we will need to be a little more active or dynamic in our approach. We also think commodities will do well and as such will afford us opportunities to buy in overseas markets such as the US, Canada and those ‘friendly’ countries with a large tilt towards mining and agriculture.

However, it wont be all smooth sailing. Where we might need to raise the criteria is in emerging markets even though they are very cheap and out of favour in comparison to the United States. Some may turn more inward and become hostile to foreign investors and that is something we will continue to monitor. 

We are in a period of flux, where the final destination is somewhat unknown, but we continue to believe that there are, and will be, opportunities in global markets over the next decade.