If you lived on Mars, would you invest in F&P Healthcare?

It’s said that Asset Allocation is the most important decision in investing.  For those who don’t know, Asset Allocation or “AA” is the process by which Chief investment Officers of investment managers and/or private wealth advisers look to balance risk and return by apportioning an investment portfolio’s assets across the three main asset classes:  equities, fixed-income, and cash.  (Alternatives may be a fourth but that’s for another day.)   Each have different levels of risk and return, so each will behave differently over time, as will different combinations thereof.  Given it’s the end of the quarter and we are now (amazingly!) halfway through the year, I thought it would be a great time to see what AA looks like and what it has delivered so far this year.

To quote John C Bogle, Diversification means bonds and it doesn’t need to mean anything more than that.  “If you are perfectly comfortable with risk, you’d put your asset allocation into a 100 percent stock portfolio and keep it there until you die, because historically, that’s the kind of asset that has produced the best returns over the longest period of time.”

Bogle founded Vanguard in 1976.  According to Wikipedia, Vanguard is now the world’s largest provider of mutual/investment funds and the second-largest provider of Exchange Traded Funds (ETFs) after BlackRock.  The purpose of his doing so was to mimic the S&P500 (established in 1957) on the basis that most mutual funds, over time, did not beat or outperform the index before fees.  It’s also worth noting that Vanguard predominantly invests in the USA.

The New Zealand private wealth advice market has structured itself around ‘model portfolios’ which ascertain client’s needs and risk appetites and delivers them a myriad of portfolio construction ideas including, but not exhaustive to, “Conservative, Moderate, Balanced, Growth and Aggressive” AAs.  For the first half of this year, Morningstar data on cumulative KiwiSaver returns for the six months to 31 May 2023, shows these AAs or strategies have generated returns of 2.53%, 2.42%, 3.59%, 3.86% and 4.33% respectively. which compared rather unfavourably to both the New Zealand cash rate of 5.8% (also known in the investing world as the risk free rate) and many New Zealand corporate bond yields of more than 7%.  These AAs have delivered rather pedestrian results to date.

To think that some of these strategies tell investors to have up to 10% of their investments in New Zealand listed property seems well off the mark.  We all understand the home country bias of owning shares in companies close to home and that you have an association with them, but does that still hold true?  I have a similar association with my iPhone, my Nike sneakers, Microsoft, Amazon, and many other global companies.  So do I really need so much locally according to traditional AA models?  If you wanted to own say a 15-stock portfolio, surely it should be the best 15 businesses you can find and unequivocally most of those are in America.

If you look at the NZX returns over a decent period, it’s really been about five companies : Infratil, Ebos, Fisher and Paykel Healthcare, Mainfreight and Xero.   Those names are our “Amazons”, “Googles” “Microsofts” etc etc.

The problem pending is that as our Fund Management Industry attracts more capital (thanks to a very successful KiwiSaver) and as it compounds there is more money chasing these ‘market darlings’ resulting in most of them being arguably somewhat overpriced.  Australia has the same problem (especially in the Tech sector).  To address the imbalance in Australia, we have seen the formation of literally dozens of funds investing offshore over the past five years and with great success.

At Hobson Wealth we are over time moving our AA towards streamlined Conservative, Balanced and Growth portfolios albeit remaining somewhat heavy in Fixed Income (at present) – we will take 7% plus yields and with our capital back in five years all day long thank you!  We have also created a portfolio called ‘Mars’ – it’s based off the idea that if you were sitting on Mars and had the inclination to invest on “Earth” what would that AA look like or what would a truly unrestrained global investment portfolio actually look like:  no disrespect to anyone but I suspect that New Zealand might get an allocation to a house in Queenstown but not too much more.

I suspect most people reading this have a home in New Zealand, a business perhaps and possibly some of those wonderful luxuries like a boat or a holiday house.  Add that into your ‘country’ diversification list when you are thinking ‘Asset Allocation’.

The point is that the USA accounts for a touch more than 40% of the value of all listed equities, New Zealand and Australia are about 0.7%.  So why, in the wealth and funds management industry, do we invest so much locally?  We aren’t arguing to sell all your New Zealand and Australian shares, there are some real gems there and some favourites of ours but just thinking about things from a worldwide perspective.

If Asset Allocation is indeed the most important thing in investing, then maybe you should have a serious re-think about what your investment philosophy and geographical splits look like.