Investors may unintentionally be getting a muddled stake in offshore market events because of the international funding and operations of local stocks in a concentrated market, Morningstar portfolio manager Nimalan Govender says.

Govender will speak at the Investment Magazine Equities Summit on September 11 at the Crown Towers Melbourne, on the topic of how asset owners can build more robust portfolios when the 112 options for MySuper balanced defaults are inevitably creating a peer risk and perpetuating a home bias in the highly concentrated Australian market.

It is more important than ever for investors to understand the underlying stocks in their portfolios thoroughly, Govender says, because long-term trends such as the opening up of capital markets, diversification of operations, and the increasing ability to take capital from offshore have made the concept of home bias more complicated.

Banking stocks are reliant on international funding, for example, leaving investors more exposed to offshore market events than they may think.

“It leaves us with a very interesting dilemma,” Govender says. “While you might have a home bias, when you break it down into the cost structure, revenue structure and earnings line, you might not have as big a home bias as you think.

“You might think you are holding Australian companies in Australian dollars, then find the Australian dollar behaves differently from other developed markets,” Govender says. “And the companies you are investing in have offshore exposure, they’re not totally driven by domestic circumstances but by a range of factors.

“When any of these factors takes a turn for the negative, you find company share prices adjusting accordingly, and out of kilter to what you expect.”

Govender is a portfolio manager within Morningstar’s equity and property team, responsible for co-managing direct listed equity strategies, including the International Shares Fund, Australian Shares Fund and Emerging Markets Fund.

He says the flow of money into exchange-traded funds has resulted in investors giving away true international diversification and masking it in the Australian equities part of their portfolio, which is not “clean international exposure”.

“That’s what you get with passive investing,” Govender says. “You pay away the granularity required to clearly define whether you’re invested in Australia-driven companies or simply Australia-listed companies.

“You have to do the work to understand the company and to understand the true exposures –domestic versus offshore – otherwise you have a very dirty view of the exposure you have.”

Equities Summit

Ben Hurley is a journalist and editor with more than a decade of experience in the industry. He has written for The Australian Financial Review, Business Review Weekly, The Guardian and a range of specialised and industry publications.