We often get asked the question ‘What are the diversification benefits of global income investing?’ A lot of our clients invest domestically, and Aussie has been great for yield. As a lot of people know, its high yield, franking credits have a lot of appeal to retirees and low tax, and also they know the companies. They bank with ANZ, they bank with CBA, they understand RIO. The problem with all this is home bias. All of the investment egg are in one domestic basket. So what’s the solution?
Well, I just want to spend a couple of minutes going through the benefits of global shares – and the key message is really diversification.
Diversification reduces risk, but importantly it’s for income and also for return. So if we just focus on income, with reference to the chart, Australia is just not diversified. If you look at the left hand chart, the domestic chart, the top six stocks are paying well over 50% of yield and they are all banks and resources. Two industries – big exposure to specific risks. If you think about things like the Royal Commission, a commodity downturn, you’re really going to see challenge in your income, and for a retiree that means challenges to their lifestyle. The hidden double whammy that isn’t always talked about is that if your income is at risk it’s often accompanied by a drawdown in return and underperformance of the company. So you get hit on the income side, and also get hit on the capital side.
If you compare that to the global chart, the top six pay less than 10%. Yes, there’s a bank, there’s also an energy company, exposure to tech, and so you’re getting countries and sectors that just can’t get access to with a domestic equity portfolio.
Really interestingly a lot of our clients say they don’t know the global companies, but in reality I’d argue they’re all household names. In just the top six on this chart, many of us use Microsoft at work, we have an Apple phone, but it’s the less obvious things – Johnson & Johnson is in the top 10, they actually make the contact lenses I’m wearing. So it’s not always obvious companies, but they are all around us every day.
The diversification definitely decreases risk, but also you have access to global growth opportunities. In 2021 the ASX did pretty well by anyone’s standard – it returned nearly 20%. But global was up nearly 30% in Aussies dollar terms.
So there’s clearly a lot of benefits to diversifying with a global allocation and we think this is really important, especially when you’re investing for income.
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