![\"\"](\"http:\/\/internal.clientcommunity.com.au\/uploaded\/level\/1882\/images\/Investment-insights_v2.jpg\")
<\/p>\n<\/p>\n
It can It can be hard to shake the instinct to stick with what you know. \u2018Home bias\u2019 \u2013 the phenomenon of investors disproportionately overweighting investments in their domestic equity markets, despite the easy availability of more geographically diversified options \u2013 is pervasive globally. In 2015, Anil Mishra, of the University of Western Sydney, conducted a survey that identified dozens of studies attesting to the prevalence of this homing instinct.1<\/sup><\/p>\n And for Australian investors, home bias has worked out well in recent years. A dollar invested in the MSCI Australia Index 15 years ago (in January 2002) would now be worth A$3.05 vs A$1.88 for an equivalent investment in the MSCI ACWI Index.2<\/sup> On this basis, domestically-focused Australian investors could be justified in scoffing at advice to abandon the comforts of home base for distant shores. If it ain\u2019t broke, don\u2019t fix it.<\/p>\n But this would be a premature conclusion. No matter how well a domestically-focused approach has worked for Australian investors in the past, today it presents significant risks relative to a more globally-diversified approach.<\/p>\n Most simply, a focus on Australian equities limits investors to a tiny subset of the opportunities available globally. To illustrate the extent to which this is the case, the market cap of the MSCI Australia index is US$991 billion, just 2.4% of the market cap of US$40.0 trillion for MSCI ACWI.3<\/sup><\/p>\n The Australian market also presents significant concentration risk, at both the stock and industry sector level. The top 10 companies by market cap make up 55% of the total market cap of MSCI Australia, and features five banks and two mining companies.3<\/sup> This concentration is also a factor across the broader Australian market, with financials and materials companies making up c.56% of total market cap.3<\/sup><\/p>\n This introduces a substantial amount of risk into domestically-focused Australian equity portfolios. If just these two sectors (financials and materials) experience headwinds, the effect on portfolio performance could be profound.<\/p>\n It is also important to work out what (relative to the global opportunity set) is missing from an Australia-only portfolio in terms of sector exposure. A domestically-focused approach means that Australian investors miss out on exposure to the fastest growing, most dynamic sectors of the global economy, such as information technology and healthcare. Information technology and healthcare stocks represent 28% of MSCI ACWI market cap.4<\/sup> Of MSCI Australia they represent around 7% (with information technology at a paltry 0.5%).3<\/sup><\/p>\n Consequently, emphasising an allocation to Australian stocks at the expense of global diversification will mean that Australian investors will not benefit from the gains made by these dynamic companies. The impact of this can be significant \u2013 in 2015, the so called \u2018FANG\u2019 companies (Facebook, Amazon, Netflix, Google) averaged an 83% gain in US dollar terms, in a year which the wider S&P 500 was flat.5<\/sup><\/p>\n A stock we hold in our Intermede Global Equities Fund which helps highlight the scale of the potential opportunity away from Australian shores is Alibaba Group, the leading internet\/e-commerce business in China. Alibaba operates consumer-to-consumer (Taobao), business-to-consumer (Tmall), and business-to-business (alibaba.com) web portals, which collectively capture approximately 77%6<\/sup> of online revenues in China. Alibaba Group also owns and operates a rapidly growing cloud computing business, Alibaba Cloud, and is entitled to 37.5%7<\/sup> of the pre-tax profits of Ant Financial, the private entity controlled by Alibaba founder, Jack Ma, which owns China\u2019s leading online payments platform, Alipay. The financial characteristics of the business are formidable when measured on revenue growth (2016 revenue growth rate of 54%8<\/sup>), cash flow (Q4 2016 free cash flow of US$4.9 billion8<\/sup>), and margins (64% reported operating profit margin for ecommerce operations, Q4 20168<\/sup>). Alibaba is also the leading e-commerce play in south-east Asia through its holding in Lazada. We see a continued multi-year growth opportunity for Alibaba, and believe the valuation is compelling, given the potential for substantial profit growth and abundant free cash flow generation.9<\/sup><\/p>\n In conclusion, reduced risk, an expanded opportunity set, and the ability of active managers to add value given a global opportunity set, combine to suggest that Australian investors could potentially benefit from taking a global approach to their equity allocation.\u00a0<\/p>\n If you would like to discuss anything in this article, please call us on |PHONE|.<\/p>\n \u00a0<\/p>\nAlibaba<\/strong><\/h3>\n