Exposure to global equities is fundamentally important for diversification.
Date: May 4, 2012 Author: George Boubouras
Keywords: Equities, Diversification, Asset allocation, Portfolio construction
Exposure to global equities is fundamentally important for diversification.
The standard moderate investor profile in Australia typically has a 50% strategic equity weighting in their asset allocation. Of this, 20% is recommended as international equities. There are currency issues of course and a combination of hedged and unhedged through a cycle is also recommended, this will clearly depend on the long-term fair value of the AUD.
Of the many reasons to have exposure to global equities, one stand-out is the relatively small size of the Australian equity market compared with global markets. Ultimately, when looking for exposure to global equities, Australian-based investors need to understand whether they need to have the same weighting to large material/resource companies in their global portfolios given, they already have the leveraged exposure in their domestic equity weighting.
For example, the three largest material/resource companies globally are BHP, Vale and Rio. When building an international equity portfolio an investor should not simply invest in the same type of earnings exposure when locally Australia already has an index with a large weighting to both BHP and Rio. Diversify into other sectors.
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