Nick White, global director of portfolio construction research at Mercer has called on fund managers to do more in factoring in the dividend imputation benefits available to Australian investors when making stock selections for global equity portfolios.
White believes that if such analysis becomes more common superannuation funds will be able to strike a more finely tuned and easier to justify balance between global and domestic equities.
“Strategies such as these exist but they are rare,” said White. “Should innovation in this space gather pace, the home bias would likely fall more quickly in years to come.”
White favours a smaller home bias, as the high concentrations to mining and financial services in the ASX create a high tail risk for investors.
The situation has been exacerbated by a lack of research.
“Trading off very tangible tax benefits against less tangible diversification benefits means the tax benefits tend to dominate the portfolio construction process,” he said.
Research on such tailored global equity portfolios has already been applied by some managers.
State Street Global Advisors (SSGA), for example, has created a quantitative framework that measures the relative benefits of global and domestic equities. This factors in the optimal diversification of industry sectors, currency risk, inflation hedging and dividend imputation.
Olivia Engel, head of active quantitative equity Asia Pacific, SSGA, notes that the average Australian institutional investor has an equity mix of 55 per cent domestic and 45 per cent international, but that from the framework it has created the optimal allocation for risk-adjusted return should be approximately 70 per cent international and 30 per cent domestic.
Engel says that this figure is based on the assumption that the total equity portfolio will not be hedged. She adds that a 70 per cent international equity holding will lead to a level of currency exposure over the long term that reduces risk from diversification.
Engel sees one of the main barriers to implementation of such a 70/30 portfolio as peer risk, and that if domestic inflation is high, then a higher domestic equity allocation makes sense.
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