What the index shows us domestic bias in client portfolios 

Australia accounts for around 1.8 per cent of the S&P World Index and a far larger share of the portfolios built here.

Access has never been less of an excuse, with exchange traded funds putting the S&P 500 and broad global exposure in front of self-directed investors at low cost, and the stronger run in global and US equities over the past decade has pulled flows offshore.

Trading volumes and assets in globally focused products listed on the ASX have grown alongside it, which S&P DJI reads as the local market diversifying its geographic allocation rather than walking away from home. 

Sean Freer, Director, Global Exchange Indices at S&P Dow Jones Indices, sees movement without resolution. “I would think that home bias has slightly decreased in the past 10 years,” he says. “But it is still widespread among domestic investors.” 

The carrot 

Franking is the defence that holds up best. S&P DJI calculates franking credit adjusted indices at 0 and 15 per cent tax rates, with daily and annual reinvestment, to measure what the credits are worth.

Over rolling five and 10-year periods since 2005, the tax-exempt version has outperformed the S&P/ASX 200 Total Return by around 1.5 per cent a year on average. The 15 per cent version has added about 0.6 per cent. Reinvested, that advantage compounds. “That is quite an attractive carrot, I’d say, for Australians to maintain a home bias,” notes Freer.  

The size of that carrot is case by case. It depends on the client’s marginal rate and the structure holding the asset, it is worth nothing to an investor taxed offshore, and Freer expects the prospect of tax change to keep some investors closer to home than they might otherwise sit. 

What a home-only portfolio misses

The cost of that comfort shows up sector by sector. Information technology runs to about 2 per cent of the S&P/ASX 200 across nine companies, against an IT weight above 35 per cent in the S&P 500. It is arguably the case that the American figure understates the exposure, because Alphabet and Meta sit in communication services while Amazon and Tesla are classified in consumer sectors.

Korea, Taiwan and China carry significant technology exposure of their own. A portfolio held entirely at home holds very little of the trend now reshaping earnings across every other sector. 

The case for looking offshore does not rest on which market wins next year. “Even when the Australian market is outperforming US or global equities, if you do allocate to those other markets as well, it does lower your portfolio volatility, for example, and then it’s potentially better diversified for the next cycle,” Freer says. 

Geography is only the first decision, and the index toolkit now runs to factor families, low volatility, value, momentum, quality and dividend, and to combinations of them, each behaving differently through the cycle.

Value has tended to do better when rates are rising, low volatility earns its place when markets fall, and the choice belongs with the client’s objective rather than with the index. That same menu is what makes a staged shift possible, so a portfolio built at home over 30 years does not have to move in a single trade. 

Currency 

Currency is the objection that usually follows, treated as a risk that staying home removes, which it is not. Australian exporters earn in US dollars and other currencies, and domestic producers pay for foreign inputs, so currency moves through local earnings whether or not a portfolio owns an offshore asset.  

For investors without a firm view on the Australian dollar, Freer points out that hedged versions of offshore index products exist, which remove much of the currency movement from the result. 

There is, of course, a counter argument to the diversification case. Franking sets a hurdle an offshore allocation has to clear before it improves the after-tax outcome.

That hurdle is around 1.5 per cent a year for a tax-exempt investor and closer to 0.6 per cent at a 15 per cent tax rate. The currency decision attached to it can also add or subtract more in a single year than the underlying market does. 

Clients can buy an ETF that mirrors an index such as S&P 500 themselves in a few clicks, which puts the adviser’s contribution in the work around it, the analysis of risk and volatility, the tax position and the sequencing of a shift out of holdings built over decades. That is the part a client cannot do alone, and it is where the home bias conversation is more nuanced than the numbers alone suggest.