Are Aussie equities the Hungry Jack’s option?

When I moved to Australia six months ago I was delighted to be leaving a politically fragmented Europe, a country facing both external threats from terrorists, and internal threats from the stupidity of its collective politicians and population.  

I was heading south to a country famous for relentless growth, the geographical equivalent of ‘significant personal space (As a person with Nordic heritage this is a very good thing)’ and open friendly people.  And for the most part the stereotypes have not been too far from the truth – 6 months in and my family is absolutely loving our new home (although my kids have been surprised by how many kangaroos sleep beside the roads….)

Professionally what I have found interesting is how these characteristics pull through into the wealth management industry – for the most part people haven’t had to look abroad for growth, everything is a long way away and people tend to trust things made at home. It’s no surprise that there are 508 funds in the Australian Equities Sector  - more than in the entire Global, American and Europe Sectors combined. 

Of course, it only takes a trip to Hungry Jacks to understand the problem with these numbers – Loads of people eat there, sure its filling but the output is far from outstanding. The Australian Equities Sector suffers from exactly the same problem. There are hundreds of funds in it (excluding wraps)– and the quality of most funds are average - you probably won’t lose any money…but the chances are that the fund isn’t going to be a growth engine either.  The sector has only returned 14 per cent on average over the last three years and 21 per cent over five. Significantly less than all the international sectors.

That said, even here on the world’s oldest continent, the depressingly relentless feed of news from Trump’s love of Twitter, Terrorists love of planes, North Korea’s Love of Nuclear weapons and India and Chinas distinct lack of love for each other, cant be ignored – In fact according to the State Department there are seven different active global scenarios/issues which have the potential to escalate into a global conflicts. To some extent these events only cause people to bunker down – take cover - and in investing terms, reduce risk.  More often than not, that means sticking with what you know…  Of course, global Armageddon aside, that’s where people would make their second mistake (Fear not I won’t launch into a conversation around Risk and Return)

Using FE Analytics I examined the volatility of the above sectors and found that 

eight out of the 10 sectors analysed provide better returns at less risk than the Australian Equities sectors.  To put a cherry on this cake I examined the Sharpe ratio of the various sectors and once again the rewards seem to sit offshore. While this may not surprise some, it is suprising that so much money still remains tied up in the Australian Equities.

Now I’m not saying that people should get out of Australia, or even that the grass is greener, because having just moved from Europe, I can tell you that you need to kiss a lot of frogs to find a prince.  I’m also not saying that you should immediately jump into ETFs.  But maybe next time you are thinking about your asset allocation, maybe pause to consider if there is an unconscious patriotic prejudice.   

In the meantime, I personally feel decidedly underweight Australian – I’m going to head outside, light a BBQ, send smug photos back to England while simultaneously investing in Bennelong’s Concentrated Australian Equity fund which has returned 144 per cent  over 5 years – yes, that will do nicely.