Investors ignoring diversification principles
Australian and global investors are not as diversified as they think they are ac-cording to Bruce Coleman, chief of MLC Investment Management.
Australian and global investors are not as diversified as they think they are ac-cording to Bruce Coleman, chief of MLC Investment Management.
Coleman says the proliferation of index funds, home country bias and a pack men-tality in the industry have created a situation where investment portfolios are be-coming more risky.
“People haven’t dug down to what diversification really is,” Coleman says.
“For example, the average Australian retail or super fund investor is likely to have more money invested in News Corporation than in the entire Japanese and UK stockmarkets combined,” Coleman says.
He says one reason why investors are “apparently ignoring the basic principles of diversification” is the global trend towards index funds.
“This increases the demand for large capitalisation index stocks. At the same time there are index distortions in many markets due, in part, to the mismatch between a company’s “free float” percentage and the percentage at which the company is rep-resented in the index.”
Coleman says this constrained supply in combination with increasing demand has led to an increasingly concentrated world equity market.
“There is also a home country bias noticeable in most countries. The average UK pension fund holds around 70 per cent of their total portfolios in UK equities and UK bonds. Australian figures are similar,” Coleman says.
Thirdly, Coleman says fund managers, asset consultants, super funds and financial planners are all under peer pressure to do the same thing.
“Everybody is aware of the advice their competitors are giving and no one likes to stray too far from the pack,” Coleman says.
“So you will end up getting not dissimilar advice wherever you go.”
However, in five years time Coleman says the situation should improve as inves-tors begin to realise how under diversified their current portfolios are.
He says the change will also be driven by a further concentration of the Australian market, the possible creation of global stock exchanges and the primary listing off-shore of many Australian companies.
AUTHOR
David Chaplin
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