The role of Australian equities and the impact of home country equity bias

23 January 2013 | Asset allocation

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Australian investors have long held a large allocation to domestic equities, encouraged in part by the introduction of the dividend imputation system in 1987 and the Superannuation Guarantee system in 1992.

Australia's home country equity bias remains significant compared with many other countries such as the U.S. and U.K. This is despite the view that Australian equities account for only 3.5% of the global equity market (as represented by MSCI World Index in Australian dollars).

In this paper we explore the potential pros and cons for Australian investors' high average domestic equity allocation. Specifically, we show the benefits of global equity diversification based, in part, through minimum-variance portfolio analysis. While we acknowledge that dividend imputation benefits and transaction costs can provide some rationale for home country bias, our research also underscores the expected diversification and risk-mitigation benefits by allocating more significantly beyond the Australian equity market.

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