Home country bias - Time to do something about it? - The webinar will begin shortly - Russell ...
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Home country bias – Time
to do something about it?
12 May 2021
10.00am – 10.45am
The webinar will begin
shortly
Symon Parish
Senior Director, Head of Multi-Asset, APAC
Matthew Arnold, CFA, CAIA
Director, New Zealand
/ 1Team New Zealand has delivered…
Cumulative performance NZ shares and global shares 2001 – Apr 2021
1000%
Growth of $100,000 NZ
800% Shares
Since 2001 $915,000
600% • NZ shares 11.5% p.a.
• Global shares 4.0% p.a.
400%
200%
Global
shares
0% $220,000
-200%
NZ Shares Global Shares
Source: Morningstar Direct, S&P/NZX 50 with ICs . MSCI ACWI NR in NZD. 1 Jan 2001 – 30 Apr 2021. Index returns do not include fees or taxes. Past performance is no guarantee of
future results.
/ 2Just how big is the home country bias?
Average NZ exposure of different investors
International vs. domestic exposure by investor type
KiwiSaver Russell Balanced Fund Average Russell client NZ Super Fund
International Domestic International Domestic International Domestic International Domestic
47% 28% 27% 14%
Retail Institutional
Source: Russell Investments, Morningstar, NZ Super fund website. Estimated KiwiSaver Asset Allocation and Average Russell Investments includes all risk profiles. Data as of 31
March 2021, except NZ Super June 2020.
/ 3NZ Managed Funds…
Some (modest) evidence of reduction in home bias…
International vs. domestic exposure in New Zealand managed funds
100%
90%
80%
• Modest
Domestic assets reduction, i.e.
70%
increase in
60%
Axis Title
international
50% 63% 57%
40%
• Note, does
not capture
30%
37% 43% ‘offshore’
20% International assets
funds
10%
0%
2014 2015 2016 2017 2018 2019 2020
Source: Reserve Bank of New Zealand, Managed fund statistics, 2014 – 2020. .
/ 4KiwiSaver…
Some more evidence of reduction in home bias…
2012 Q4 2021 Q1
NZ Fixed (inc. cash) International fixed NZ Fixed (inc. cash) International fixed
NZ Unlisted Property NZ Listed Property NZ Unlisted Property NZ Listed Property
International listed property NZ Shares International listed property NZ Shares
Australian Shares International Shares Australian Shares International Shares
International allocation: 42% International allocation: 53%
Source: Morningstar KiwiSaver Survey, as of December 2012 and March 2021.
/ 5Why do (NZ) investors have a home bias?
… is it ‘rational’?
> Investors typically start from 100% domestic (i.e. savings account, property
investments etc.)…
> Familiarity bias – buy what you know…
> Liabilities in NZD (even though international assets can be hedged)
> Product availability – products or services that offer access to NZ securities,
managed/researched by local teams are (still) more readily available
> Historically higher costs for international investing
> Cash, fixed income allocations tend to be domestic focused
> NZ dividends benefit from imputation credits which can ‘add’ c. 1.3% to after
tax return for taxable investors, while cap gains are typically not taxed*
> Research suggests 7% - 11% ‘overweight’ in NZ shares is ‘rational’ relative to
weight if there was no tax advantage**
*S&P/NZX 50 TR versus TR with imputation credits, 10 years ending 30 Apr 2021. **The potential effect of taxes on the equity home bias in New Zealand PIEs, S McDowell, J
Lee, A Marsden (2021)
/ 6Is home bias a feature globally?
Average home vs. total equity (pension funds)
Estimated pension fund allocation to domestic equities relative to market cap weight (2018)
70%
60%
50%
40%
30%
20%
10%
0%
US UK Japan Canada Australia
Domestic exposure FTSE All World Index weight
Source: FTSE Russell, Willis Towers Watson, as of Dec 2018.
/ 7Has it paid off to have a home bias?
Yes for shares? Hmmmm…. For fixed interest
Outperformance of NZ Shares vs. global (hedged and unhedged) 2010 – 2021 • 9/10 NZD
year-to-date April • 8/10 NZD-H
20% 16%
12% 13%
9% 9% 10%
10% 6% 8% 7% 6% 6% 6%
3% 4% 2% 2% 3%
0%
-1%
-10% -6%
-10%
-12% -12%
-20%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 YTD
Domestic shares - global shares unhedged Domestic shares - global shares NZDH
Outperformance of NZ fixed interest vs. global (hedged) 2010 – 2021 year-to-
date April
• 5/10 NZD-H
5% 4%
3%
2%
1%
0%
0%
0%
-2% -2%
-5% -3% -3% -3%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 YTD
Domestic bonds - global bonds
Source: Morningstar Direct. Domestic shares: S&P/NZX 50 index GR including imputation credits. Global shares: MSCI ACWI NR index, MSCI ACWI NR - NZDH index. Global bonds:
Bloomberg Barclays Global Aggregate NZDH index. Domestic bonds: S&P/NZX NZ Composite Invest Grade. YTD ending 30 April 2021. In NZD. Past performance is no guarantee of
future results.
/ 8How about when risk is considered?
… generally, yes…
Risk-return characteristics (Trailing 10 year period ending 20 Apr 2021)
12%
• NZ Shares
have been
10% Domestic shares
‘lower’ risk
8% Global shares NZDH and
generated
Return
Global shares unhedged
6% higher
Global bonds
returns
4%
Domestic bonds
2%
0%
0% 2% 4% 6% 8% 10% 12% 14%
Risk
Domestic shares Global shares unhedged Global shares NZDH Global bonds Domestic bonds
Source: Morningstar Direct. Domestic shares: S&P/NZX 50 index GR including imputation credits. Global shares: MSCI ACWI NR index, MSCI ACWI NR - NZDH index. Global
bonds: Bloomberg Barclays global aggregate NZDH index. Domestic bonds: S&P/NZX NZ Composite Invest Grade. Currency: NZD, Data as at 30 April 2021. Past performance is
no guarantee of future results.
/ 9Performance attribution of the NZX50
FPH and ATM have dominated….
Cumulative return ending 30 April 2021 (top 3 contributors) 1. Fisher & Paykel
Healthcare
100% 2. A2 Milk
90% 3. Meridian Energy
1. Fisher & Paykel
80% Healthcare
44%
70% 2. Meridian Energy • More than 1/3
60% 3. Mainfreight of total
1. Fisher & Paykel market return
50%
Healthcare 94% attributed to 2
40%
2. Mainfreight 46% stocks, ATM
30% 56%
and FPH
3. Fletcher Building 52%
• What
20%
50%
happens
54%
10% 19% when it goes
50% wrong (very
0%
1 Year (Total return) 3 Years (Total return) 5 Years (Total return) wrong…
ATM?)
Other Top 3
Source: Factset, performance attribution, total cumulative return of S&P/NZX 50 TR with top 3 contributors. Ending 30 April 2021. Some rounding errors, for illustrative purposes only.
Past performance is no guarantee of future results.
/ 10But, it’s a world of opportunities…
Investment grade fixed income Global equities
United States
Japan United States
China Japan
France
China
United Kingdom
United Kingdom
Germany
Italy France
Canada Other
Other
NZ$ 92 trillion opportunity set NZ$ 89 trillion opportunity set
+ Global high yield ~ NZ$ 4 trillion + Global small caps ~ NZ$ 12 trillion
+ EMD local currency ~ NZ$ 4 trillion + Frontier markets~ NZ$ 110 billion
+ EMD hard currency ~ NZ$ 6 trillion
NZ fixed income ~ $130 billion NZ shares ~ $165 billion
Source: Fixed income opportunity set represented by Bloomberg Barclays Global Aggregate, Global High Yield, Global EM local and hard currency indices. Global equities represented
by MSCI ACWI, MSCI ACWI IMI, MSCI Frontier Markets. NZ assets represented by S&P/NZX 50 and Bloomberg 0+ NZBond Composite. As of 31 March 2021.
/ 11Local market sectors vs. international
Sector weights Global, NZ and Australia
Communication Services
Consumer Discretionary
Consumer Staples
Energy
Financials Australian banks
Health Care Fisher & Paykel
Healthcare
Industrials
Information Technology US / Asia
technology
Materials
Real Estate
Utilities NZ Utilities
0% 5% 10% 15% 20% 25% 30% 35%
Australia New Zealand shares Global shares
Source: MSCI and S&P. Sector weights as of 31 March 2021 for the MSCI ACWI, S&P/NZX 50 and the S&P/ASX 200.
/ 12Local market concentration
S&P/NZX 50
Market cap in top 10 names
Market cap
Top holdings Weight Sector
(NZD m$)
Fisher & Paykel Health Care 18,215 14.3% Health Care
Auckland International Airport 9,321 7.3% Industrials
Spark 8,168 6.4% Communication Services
Meridian Energy 6,663 5.2% Utilities
40% a2 Milk 6,302 4.9% Consumer Staples
Ryman Healthcare Group 6,251 4.9% Health Care
Mainfreight Limited 5,780 4.5% Industrials
60%
Fletcher Building 5,745 4.5% Materials
Contact Energy 5,280 4.1% Utilities
Infratil 5,071 4.0% Utilities
Characteristics
Number of constituents 50
Top 10 market cap Total market cap $127.4 B.
Largest $18.5 B.
Other Average $3.2 B.
Coverage of New Zealand market
cap c. 90%
Source: MSCI, Market capitalisation as of 31 March 2021 for S&P/NZX50
/ 13Australia market concentration
S&P/ASX 200
Market cap in top 10 names
Market cap
Top holdings Weight Sector
(AUD m$)
Commonwealth Bank Australia 152,750 8.0% Financials
BHP Group 133,447 7.0% Materials
CSL 120,415 6.3% Health Care
Westpac Banking Group 89,550 4.7% Financials
45% National Australia Bank 85,725 4.5% Financials
ANZ Banking Group 80,187 4.2% Financials
55%
Wesfarmers 59,719 3.1% Consumer Discretionary
Macquarie Group 51,979 2.7% Financials
Woolworths Group 51,715 2.7% Consumer Staples
Rio Tinto 41,112 2.2% Materials
Characteristics
Number of constituents 200
Top 10 market cap Total market cap $1.9 T.
Largest 152.8 B.
Other Average 10.3 B.
Coverage of Australian market cap c. 90%
Source: S&P, Market capitalisation as of 31 March 2021 for S&P/ASX200
/ 14Global market concentration
MSCI ACWI
Market cap in top 10 names Top holdings
Market cap
Weight Sector
(USD b$)
Apple 2,077 3.4% Information Technology
Microsoft 1,693 2.7% Information Technology
14% Amazon.com 1,320 2.1% Consumer Discretionary
Facebook 708 1.1% Communication Services
Alphabet A 620 1.0% Communication Services
Alphabet C 614 1.0% Communication Services
Taiwan Semiconductor 507 0.8% Information Technology
Tesla 507 0.8% Consumer Discretionary
JP Morgan Change & Co. 464 0.8% Financials
Tencent Holdings 451 0.7% Communication Services
86%
Characteristics
Number of constituents 2,978
Total market cap $61.9 T.
Top 10 market cap Largest $2.1 T.
Average $20.7 B.
Other Coverage of global market cap c. 85%
Source: MSCI, Market capitalisation as of 31 March 2021 for MSCI ACWI (NR)
/ 15Income opportunities around the world…
Cash and fixed tends to be local, but better income globally…
(Pre-tax) Dividend yields (global high dividend shares) and yields (fixed income)
5%
4.5% 4.4% 4.3%
4.1%
4%
3.6%
3.3%
3% 2.9%
2.1%
2%
NZ CPI = 1.5%
1.1% 1.1% 1.0%
1%
0.4%
0%
Europe Global Emerging Asia EM Hard EM Local US S&P/NZX NZ Corp Global IG NZ Govt 3 mth TD
High Markets Pacific Currency Currency 50 Bonds Bonds Bonds
Yield Bonds Bonds
Bonds
Source: MSCI, S&P, Bloomberg, Stats NZ. Dividend yields of MSCI High Dividend indices, Europe, EM, Asia Pacific and US. Yield to worst of Bloomberg Barclays Global High Yield,
EM Hard Currency Aggregate and EM Local Currency Government and S&P NZX 50, NZ Government Fixed Interest and NZ Corporate Fixed Interest. 3 month average term deposit
rate, BNZ, Westpac, ANZ and ASB. As of 30 Apr 2021.
/ 16Increase in international exposure?
Diversification benefits…
Correlation matrix
1 2 3 4 5 6 7 8 9 10 11
1 - Global bonds 1.0
2 - NZ fixed Interest 0.6 1.0
3 - Global shares -0.1 0.0 1.0
4 - Global shares – NZDH 0.0 -0.3 0.6 1.0
5 - Emerging markets 0.0 -0.1 0.7 0.6 1.0
6 - NZ shares 0.1 0.0 0.5 0.7 0.5 1.0
7 - Australian shares 0.1 -0.1 0.7 0.7 0.8 0.7 1.0
8 - Global real estate securities 0.3 0.0 0.4 0.8 0.5 0.6 0.7 1.0
9 - Global infrastructure 0.2 -0.1 0.5 0.8 0.6 0.7 0.7 0.9 1.0
10 – Commodities -0.2 0.0 0.4 0.1 0.4 0.0 0.4 0.0 0.1 1.0
11 – Gold 0.2 0.5 0.1 -0.4 0.1 -0.2 0.0 -0.4 -0.3 0.4 1.0
Source: MorningStar direct. Domestic shares: S&P/NZX 50 index GR including imputation credits. Global shares: MSCI ACWI NR index, MSCI ACWI NR -
NZDH index. Global bonds: Bloomberg Barclays Global Aggregate NZDH index. Domestic bonds: S&P/NZX NZ Composite Invest Grade. Emerging markets:
MSCI EM NR. Australian shares: S&P/ASX200. Global real estate: EPRA FTSE EPRA NAREIT Developed NR NZDH. Global Infrastructure: S&P Global
Infrastructure NZDH. Commodities: Bloomberg Commodity PR. Gold: LBMA Gold Price PM. April 2005 – March 2021 in NZD.
/ 17Is Peer Risk relevant?
> Extent of home bias is v. important issue for many investors (opportunity set,
risk-return, risk factors, income generation etc.)
> Those in the business of comparing their returns to others (which, let’s face it,
is almost everyone), then ‘peer relativity’ becomes an issue…
> What is peer relativity?
i. My KiwiSaver did better than yours
ii. Wealth manager A is ‘better’ than wealth manager B
iii. Superannuation scheme of company X beat scheme of company Y
iv. Press article calling out one investor relative to another
> Should investors think about how others invest when they build their asset
allocations? Does it really matter how others are doing?
/ 18Impact of Changing Home Country Bias
Reducing Home Country Bias Increasing Home Country Bias
Source: Russell Investments. Impact of changing allocation to NZ equities based on Russell Investments Conditional Markets Forecasts. For illustrative purposes only.
/ 19Increase in international equity exposure?
Valuation characteristics…
Forward P/E (x) P/B (x)
40
3.5
35
3
30
25 2.5
20 2
15 1.5
10 1
5
0.5
0
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
NZX50 MSCI World ASX200
NZX50 MSCI World ASX200
Dividend Yield (%)
10 > NZ has historically traded at a discount
9
8 to both global and Australia
7
6
5
> Currently ‘expensive’, particularly given
4
3
the market profile (i.e. defensive, yield-
2
1
oriented names)
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Bloomberg, Forward price-to-earnings ratio, forward dividend yield and price-to-book
NZX50 MSCI World ASX200 ratio. From 2005 -2021
/ 20Massive decline in yields…
… has been strong tailwind for rate sensitive stocks
NZ Health Care and Utilities – Yield sensitive sectors make up half of the market
NZ Equity Market - Yield Sensitivity
8% 50%
45%
7%
40%
6%
35%
5%
30%
4% 25%
20%
3%
15%
2%
10%
1%
5%
0% 0%
1-Feb-12
1-Feb-00
1-Feb-02
1-Feb-04
1-Feb-06
1-Feb-08
1-Feb-10
1-Feb-14
1-Feb-16
1-Feb-18
1-Feb-20
1-Oct-00
1-Jun-01
1-Oct-02
1-Oct-04
1-Oct-06
1-Oct-08
1-Oct-10
1-Oct-12
1-Oct-14
1-Oct-16
1-Oct-18
1-Oct-20
1-Jun-99
1-Jun-03
1-Jun-05
1-Jun-07
1-Jun-09
1-Jun-11
1-Jun-13
1-Jun-15
1-Jun-17
1-Jun-19
NZ 10y Bond Yield (LHS) Health Care Utilities Total 'Long Duration' Sectors
Source: Bloomberg, NZ 10 Yr government bond yield, Health Care and Utilities weights in NZ share market. 1999 – 2021. Past performance is no guarantee of future results.
/ 21The flying Kiwi?!?!?
Need to consider FX when considering international…
NZD Nominal Trade Weighted Index 1999 - 2021
90
85
80
75
70
65
60
55
50
45
40
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: Reserve Bank of New Zealand, 1999-2021.Past performance is no guarantee of future results.
/ 22Is it time to ditch the home country bias?
> There is rationale for ‘some’ home bias in fixed interest and equities (in
particular), however many local investors have too much risk in NZ…
> But…..It’s a big world of investment opportunities…
> Concentrated NZ market is not (at all) representative of the global economy
today…
> Expensive relative to history (as is everything) but also relative to global
markets
> Highly exposed to the results of a handful of companies, great if everything is
working, v. difficult if not…
> Limited fixed interest market – income-oriented investors have many global
choices
/ 23Disclaimer
The information contained in this publication was prepared by Russell Investment Group Limited on the basis of information available at the time
of preparation. This publication provides general information only and should not be relied upon in making an investment decision. Before acting
on any information, you should consider the appropriateness of the information provided and the nature of the relevant Russell Investments’
fund having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the
relevant Product Disclosure Statement or Information Memorandum prior to making an investment decision about a Russell Investments’ fund.
Accordingly, Russell Investment Group Limited and their directors will not be liable (to the maximum extent permitted by law) for any loss or
damage arising as a result of reliance being placed on any of the information contained in this publication. None of Russell Investment Group
Limited, any member of the Russell Investments group of companies, their directors or any other person guarantees the repayment of your
capital or the return of income. All investments are subject to risks. Significant risks are outlined in the Product Disclosure Statements or the
Information Memorandum for the applicable Russell Investments’ fund. Past performance is not a reliable indicator of future performance. The
Product Disclosure Statements or the Information Memorandum for the Russell Investments’ funds (as applicable) are available by contacting
Russell Investment Group Limited on 09 357 6633 or 0800 357 6633. Source for MSCI data: MSCI. The MSCI information may only be used for
your internal use, may not be reproduced or disseminated in any form and may not be used to create any financial instruments or products or
any indices. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of
this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI
information (collectively, the MSCI Parties.) expressly disclaims all warranties (including, without limitation, any warranties of originality,
accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information.
Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive,
consequential (including, without limitation, lost profits) or any other damages.
Copyright © 2021 Russell Investments. All rights reserved. This information contained in this publication is proprietary and may not be
reproduced, transferred, or distributed in any form without prior written permission from Russell Investments
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