Do you mean small cap Australian stocks? In the Canadian index (which was also 80% banks + resource stocks) that puts you into the land of some truly speculative companies - no earnings, natural resource plays etc.
The over-weighting of the Australian equity market in banks and mining companies is an issue. It certainly makes me uncomfortable. I try to push back against it somewhat by overweighting a small companies index fund.
If you mean globally, I question whether underweighting the super tech stocks - MSFT, Alphabet, Meta, Apple, TSMC, NVidia - can really be compensated for by owning small cap stocks. You would actually probably have underperformed by *even more* in recent years, than just by being overweight Australia.
I really think the right level of Australian concentration is around 20%. So still c 6x the weighting in the global index.
Yes Australian stocks have a high dividend payout : due to sectors perhaps, also due to dividend franking. But I think the distortions to sector weighting are large. A 40% Australian stocks is really underdiversified (In a Canadian context, that's something like nearly 4% in *one bank*; and over 12% in oil sands stocks). Plus you have REITs etc.
The counterargument is the long run correlations with the global developed market index are high, so it won't matter so much.
However I note, as I always do, that most Australians (who post here) probably own a property in Australia. They have a job that pays in AUD, and there may be some state pension rights in AUD. That's a lot of exposure to the currency.
As Andrew9999 has pointed out, however, Purchasing Power Parity doesn't seem to hold that well. Australian Dollar moves up and down v say USD and does so for decadal periods. The theoretically correct way to address that is to hold global equity portfolios that are currency-hedged. However those have higher expense ratios - it should not be much, but I haven't seen anyone post on the impact of that.
I think Andrew9999 also pointed out that the prices of Australian stocks seem to adjust for the franking. There's no free win there.
I shrug. For a Canadian or a Brit, I am sure global diversification is better. I happen to modestly overweight Japan on value reasons - it's the only major stockmarket that has looked cheap (but it has done so for, literally, decades).
Statistics: Posted by Valuethinker — Mon Jun 10, 2024 4:59 am — Replies 16 — Views 2490