Transcript Quarterly Annual Investor Review Superannuation 30

Investment news
The risks of ‘Australia biased’ portfolios
March 2013
Written by Michael Karagianis, Senior Investment Strategist, MLC
“Portfolios that concentrate on Australian investments can have hidden risks.”
In recent years, many Australian investors have responded to global uncertainty by focusing on local
assets. They often have ‘Australia biased’ portfolios which are a mix of Australian property, Australian
shares and Australian bank term deposits (see chart 1).
While these assets may seem far removed and insulated from the troubles of the global economy, these
investors may in fact be significantly increasing their investment risk.
Chart 1: Australian households focus on domestic assets
Source: Reserve Bank of Australia and Australian Bureau of Statistics.
Note: Australian household asset allocation at 30 September 2012
The risk of a more concentrated share market
The structure of the Australian share market has changed considerably in recent years. The Resources
sector is now a large part of the market, as this sector has had a decade of very strong performance due
to the mining boom. This sector is currently 25% of the Australian market – double what it was in
March 2000.
Australia’s share market is increasingly influenced by China’s economy. A prolonged downturn in the
Chinese economy is an extreme scenario, but it’s certainly possible. If this happened, it would have
painful consequences for the Resources sector and the whole Australian share market.
For retirees, the concentrated structure of our share market may now also be out of line with their needs.
Retirees need predictable income streams to maintain their lifestyle and insulate against the effect of
future inflation. For them, focusing on shares with predictable earnings and less volatility may be
appropriate – and these features aren’t typical of Resources companies.
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The danger of ‘common factor’ risks
The greater dependence of the Australian economy on China also means there is a ‘common factor’ risk’
for many Australian investments. A common factor risk is a theme or event which could affect a range of
investments. A seemingly well-diversified Australia biased portfolio of shares, property, cash and hybrids
has a common factor thread, as it’s exposed to the likely negative effects of a prolonged slump in China.
The most obvious impact of a sustained Chinese downturn would probably be a sharp slump in the
Australian mining sector. However, it could also result in a tougher profit environment for companies in
other sectors, which could impact the share market more broadly.
In this scenario, a likely increase in Australian unemployment would also have an adverse effect on the
housing market, perhaps leading to lower housing prices and rental incomes. As residential property is a
big part of many Australians’ assets, this could damage their wealth.
If a prolonged Chinese slump led to a sharp downturn in our economy, interest rates and bank deposit
rates in Australia would also fall.
Diversification can help manage portfolio risk
These risks mean investors need to look beyond Australia for diversification opportunities.
For example, including international shares in an Australia-only portfolio can improve its risk
diversification because many offshore markets have less exposure to the Resources and Financial
sectors (see chart 2). Diversifying into international currency could also reduce portfolio risk in
circumstances when the Australian dollar weakens, which is likely in a prolonged Chinese slump.
For Australian investors, the best guard against the uncertain global environment is to fully understand
the nature of the risks in their portfolio and then include genuinely diversified investments. If you invest in
an MLC diversified portfolio such as MLC Horizon, these risks are managed for you.
Chart 2: Financial and mining companies dominate the Australian market
Important information
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National Australia Bank group of companies, 105–153 Miller Street, North Sydney 2060.
This communication contains general information and may constitute general advice. Any advice in this communication has been prepared without
taking account of individual objectives, financial situation or needs. It should not be relied upon as a substitute for financial or other specialist
advice.
Before making any decisions on the basis of this communication, you should consider the appropriateness of its content having regard to your
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