Tech boom provides valuable lessons

The founding principal of AQR Capital Management, the new international equities alliance partner of BT Financial Group, feels the ‘tech bubble’ experienced by world equity markets during the late 90s has reinforced some valuable investment theories and philosophies people should be applying to their current portfolios.

According to Clifford Asness, one theory the boom highlighted was that international diversification is a positive attribute for investment portfolios.

He said during the ‘tech bubble’ many investors in the US felt there was no point in having an internationally diversified portfolio because their local market was outperforming every other market in the world.

Asness believes this way of thinking reflected an attitude that was too focused on the short term.

“If you start looking at a longer perspective, five year and 10 year periods, every market we’ve looked at home markets [in isolation] preformed considerably worse than a diversified portfolio,” Asness said.

Given the current state of the Australian share market, he thought this was a point local investors should take heed of.

“Unless you have a strong view your country is better than the rest of the world, your starting point should be global. Even if it’s just a little safer and there’s not a great benefit, a little safer is a little safer,” Asness said.

However, he warned that investors should not look to international diversification to protect them from stock market crashes, as historically all markets tend to have a correlation of around one when a crash occurs.

Another academic theory adopted during the ‘tech boom’ was that allocating funds to companies that were paying dividends meant investors were sacrificing capital growth in their portfolios.

Asness said history has completely disproved this theory, probably because the theorem was based on an assumption that dividend policy is made totally independent from investment policy.

“Reality for 130 years in the US has been that when companies pay a lot of dividends they have grown faster over the next five and certainly over the next 10 years. When companies have not paid dividends … they’ve grown very poorly and this holds up in every country we’ve looked at,” Asness said.

On a positive note for local investors, the AQR Capital Management founding principal said he did not think the recent strength of the Australian equity market constituted a bubble.

“Australia is one of our least favourite equity markets in the world. It’s fairly expensive versus the world on a few different measures that we use. I would not call it a ‘bubble’ though,” Asness said.

“A ‘bubble’ should be reserved for really irrationally priced markets … I would say the Australian market is going to make less than it has made over the prior 10 to 20 years because it is priced to more aggressive levels and will throw up less return, but I think ‘bubble’ would be an exaggeration,” he explained.