Adviser-to-client template: Investing internationally to avoid home bias

For financial advisers to use with clients. This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.

To use, simply copy, paste and edit as needed.

Dear Client,

With ever-changing market conditions characterising much of the last few years, both in Australia and globally, I thought I’d take a moment to explain why Morningstar, our investment manager, chooses to build portfolios that invest both at home and away. Specifically, on the steps they take to mitigate ‘home bias’, a common behavioural pitfall in investing that can lead to a concentrated portfolio.

Home bias refers to an investing pattern where the investor favours domestic equities in their portfolios, without considering the benefits of foreign equities to adequately diversify. In Australia, our market accounts for just 2% of the global equity market. For Australian investors with 30%, 40% or even 50% of their portfolios invested in the local market, this presents a concentration risk, locking investors out of both diversification opportunities and potential returns.

This also means that if the Australian market underperforms global markets, as it has done recently, your portfolio returns would be impacted, and, therefore, your investment goals could also be impacted.

Another possible outcome of bias to Australian equities is overexposure to local sectors such as mining (materials) and banks (financials), which together make up 50% of the S&P/ASX200 index. Allocating a larger proportion of your portfolio to global equities allows you in invest in regions and sectors where there are opportunities that can’t be found in the Australian market. By having the flexibility to invest into both developed and emerging markets, as well as sectors in specific countries, portfolios can have greater diversification and increase the chance of potential positive returns.

Happily, the Morningstar team have invested with this risk in mind. With a preference for a larger allocation to international equities over Australian equities, your portfolio is positioned to withstand these domestic market lags. Currently, the team also have an overweight allocation to international equities, further hedging against domestic market underperformance.

Your portfolio is performing as we expect it to and is well placed for the coming months and years. If you have any questions about your financial plan, we’re always happy to discuss.

I hope you’ve found this update helpful, and please don’t hesitate to reach out with any questions.

Regards,

Adviser

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: Investing internationally to avoid home bias

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