22 August 2012
John Carran, Senior Economist at Gareth Morgan Investments
In its 7 August edition, the New Zealand Herald published an article I wrote on why investing overseas is a sensible strategy for most New Zealand savers. The main thrust of the piece was that investing overseas diversifies your investments and that should give you better risk-adjusted returns over time. You can read the full article here.
At Gareth Morgan Investments our growth portfolios are invested predominantly in global companies. Investing in these companies gives our clients a stake in fast-growing parts of the global economy, while also achieving a high degree of diversification.
We hold few New Zealand shares. The New Zealand share market has delivered relatively good returns over the past five years. However, this outperformance isn’t a normal state of affairs over longer time horizons. For instance, since 1988 the New Zealand share market has underperformed compared to the US share market, as the chart below demonstrates.
The New Zealand share market is relatively heavily concentrated in telecommunications, construction and transportation and has few companies with significant exposure to fast-growing offshore markets. That means it offers little in the way of diversification and faces an uphill battle to sustain returns that consistently match those of larger world markets.
We are reluctant to hold New Zealand shares because few meet our liquidity requirements; that is, we cannot buy and sell local shares in the volumes and within the timeframes we think is prudent when managing people’s savings.
In a subsequent Herald article, Brian Gaynor of Milford Asset Management raised tax advantages as a rationale for holding a decent proportion of New Zealand shares. Tax is one consideration among several when making an investment decisions. But if tax were the only consideration it would probably lead to over-investment in property, something that sank a lot of finance companies over the past five years. The tax advantages of New Zealand shares are generally not so great as to outweigh the diversification and return benefits of investing in overseas shares.
A well-diversified portfolio of highly-liquid overseas shares is a prudent way to manage people’s wealth. It may not always produce the headline returns available from a concentrated Australasian portfolio; but the long-term risk-adjusted return from a global portfolio is likely to exceed the concentrated portfolio.
Any opinions in this article are the author's own. They are of a general nature and should not be treated as a recommendation or guidance to any individual. Everyone's financial circumstances are different, and readers should seek specific financial advice appropriate for their circumstances before making an investment decision.