For some time now, I have been questioning why diversified portfolios in Australia typically hold almost half of their equity exposure in Australian shares and slightly more than half in international shares.
For example, AustralianSuper’s Balanced portfolio has approximately 25% allocated to Australian equities and around 34% to international equities, while UniSuper’s Growth portfolio holds roughly 31% in Australian equities and 42% in international equities. These examples go on and on when you look at diversified portfolios offered by industry super funds, ETF providers, and fund managers across Australia.
Over the past three decades, industry super funds have gradually reduced their “home bias” towards Australian equities in favour of international equities. However, despite this shift, the allocation to Australian equities remains relatively high.
Australia is such a small market
The Australian share market accounts for only around 2% of the global share market, which begs the question: why do most Australians still have about half of their equity exposure invested domestically? From a market-capitalisation perspective alone, this does not make much sense. It represents a very overweight and concentrated position when viewed on a global scale.
Interestingly, when you look at diversified share portfolios in other countries, they do not typically allocate anywhere near half of their equity exposure to their home market. Most are far closer to global market-capitalisation weightings.
Historical performance
Over the past 10 years, the Australian share market has underperformed the global share market by approximately 2% – 3% per annum, which is a meaningful gap. This underperformance is largely attributable to Australia’s limited exposure to fast-growing sectors such as technology, as well as significantly slower earnings growth compared to international peers.
However, if you extend the timeframe, the picture changes. Over the past 30 years, returns have been relatively similar, averaging around 8.0% – 8.5% per annum for both Australian and international equities.
Of course, it is very easy to look backwards and comment on past performance. With hindsight, we all have perfect 20/20 vision about how portfolios could have been constructed. Rather than focusing solely on historical returns, the more important question is whether there are structural benefits to the Australian share market that justify such a large domestic allocation for Australian investors.
The main factors often cited in favour of Australian equities are:
- Franking credits
- No currency risk
- Reduced portfolio volatility
- Higher dividend yields
- Different industry and sector exposure
- Comfort and home bias
Let’s explore each of these in more detail.
Franking credits
The tax impact of franking credits is certainly real and quantifiable. In many respects, they represent a form of a “risk-free alpha” for Australian investors. However, I believe their benefits are sometimes overstated.
Australian dividend yields are currently at their lowest level since Covid, sitting at approximately 3.5% for the ASX 200. Importantly, franking credits only apply to the income component of a portfolio’s total return, and their value varies depending on the tax rate of the investor.
For example, for shareholders on a 0% tax rate, such as a super account in pension/retirement phase, franking credits effectively add an additional 30% to dividend income. For shareholders on a 47% tax rate, the benefit is closer to 17%.
Based on a 3.5% dividend yield:
- A 0% tax-rate investor would receive an after-tax yield of approximately 4.55%
- A 47% tax-rate investor would receive an after-tax yield of approximately 4.09%
This means franking credits are effectively adding around 0.6%–1.0% per annum to returns. This is meaningful, but it is not transformational.
No currency risk
Investing in Australian shares using Australian dollars removes direct currency risk. This provides protection against domestic inflation and erosion of purchasing power within Australia.
Currency risk can, of course, be hedged when investing internationally, and most ETF providers offer hedged options. However, hedging introduces its own set of challenges.
If you hedge international shares, you are effectively betting that the Australian dollar will rise relative to other currencies. If you remain unhedged, you are betting that it will fall. In our experience, predicting currency movements is extremely difficult, arguably even harder than stock-picking, and most stock pickers already fail to outperform the market over time.
Over the past 25 years, the average returns from hedged and unhedged global equities have been broadly similar. The difference largely comes down to timing. Ultimately, currency exposure can either help or hurt portfolio returns depending on how exchange rates move.
Since the 2010s, the depreciation of the Australian dollar has supported unhedged strategies. Many investors have favoured unhedged exposures as the AUD tends to behave as a “risk-on” currency, while the USD often acts as a “risk-off” currency during periods of market stress.
However, with the AUD now hovering around US$0.70, interest-rate paths potentially diverging and Australia possibly pausing or hiking while the US is more likely to cut, further AUD appreciation cannot be ruled out. This could favour hedged strategies going forward.
Hedging can change how much of a fund’s return comes through as capital growth versus taxable distributions. Depending on the tax election the managed fund or ETF has made, hedging gains and losses may be brought to account each year (including unrealised movements), rather than only when positions are closed. The result is that distributions can be wiped out in some years or inflated in others, making them lumpy and often tax inefficient.
Portfolios that generate a higher proportion of returns from capital growth tend to outperform over time due to more favourable tax treatment and superior compounding. From this perspective, hedging-related income can be inefficient.
Here is how we think about hedging: we only focus on the entry point for new capital. If we are investing new money and the AUD is materially undervalued (for example, trading well below US$0.70), we will typically hedge the new investment; otherwise, we will leave it unhedged. But, over the long run, we do not think currency risk has a material impact on portfolio returns, and it is often overstated.
Reduced volatility
The Australian share market has historically been perceived as relatively stable and low volatility. However, this perception has changed in recent years.
Over the past 10 years, the standard deviation of Australian shares has been slightly higher than that of global shares, approximately 18% versus 17.5%. As shown in the chart below, Australian shares have experienced larger peaks and troughs in rolling one-year volatility compared to US and global markets.
Based on this data, the Australian share market has actually been more volatile than the global share market in recent years. This is somewhat surprising given Australia’s heavy exposure to banks and miners, which are often considered more defensive industries.
That said, because Australian and international shares are not perfectly correlated, combining them in a portfolio has been shown to slightly reduce overall volatility . This diversification benefit is one reason many fund managers prefer spreading equity exposure across regions.
While volatility is important, particularly for investors approaching retirement, minor short-term volatility differences should matter less for well-informed long-term investors. For those able to tolerate market fluctuations, the primary focus should be to maximise long-term after-tax returns, even if that means accepting slightly higher volatility along the way.
Higher dividend yields
The Australian share market has long been known for its relatively high dividend yields. As noted earlier, the ASX 200 currently yields around 3.5%, which is below its long-term average of approximately 4.5%. By comparison, the MSCI World ex-Australia index yields closer to 1.5%.
Historically, roughly half of total Australian share market returns have come from dividends. With dividend yields now compressed, the Australian market will need to generate stronger capital growth to maintain historical returns.
Under current economic conditions and given the structure of the Australian market, this may prove challenging. Australian banks delivered strong returns in 2024 (up approximately 31%), while miners had a strong 2025 (up around 41%). Looking ahead, it is difficult to identify where outsized returns will come from in 2026 to drive above-average capital growth.
We do acknowledge that higher income means we need less capital growth to achieve a benchmark return. However, for most long-term investors in the accumulation phase, receiving a greater proportion of returns as income is not ideal from a tax perspective. Income is taxed annually, often at higher marginal rates, whereas capital growth is taxed only when realised, if at all.
This tax drag reduces the compounding effect of returns over time. Investors focused on building wealth are generally better served by portfolios tilted towards capital growth rather than income. From this perspective, Australia’s high dividend yield can actually be a disadvantage for wealth accumulators.
Different industry and sector exposure
Australian banks and miners (financials and materials) make up more than 50% of the Australian share market. In contrast, the global share market is dominated by technology (around 24%), followed by financials, healthcare, industrials, and consumer discretionary sectors, each comprising roughly 11%–15%.
Global equities offer broader diversification across both industries and individual companies.
It could be argued that Australian shares provide diversification within a portfolio due to their unique sector composition. However, similar diversification benefits can also be achieved through exposure to other regions such as the UK, Europe, Japan, or emerging markets.
In an era defined by technological advancement, it is reasonable to question whether portfolios should have their largest sector exposure to the industry experiencing the strongest structural growth, namely technology.
Comfort and home bias
Australians often believe they have a better understanding of domestic companies. We all know someone who works at BHP or CBA, and these companies feature prominently in the media.
While familiarity may increase comfort, it does not necessarily translate into superior investment outcomes. Most investors do not possess enough insight to consistently select individual Australian stocks that outperform the market, and neither do most professional fund managers.
There is a clear behavioural home bias that is not grounded in evidence-based decision-making. Removing emotion and familiarity from the equation and allowing data to guide portfolio construction is far more likely to lead to better long-term outcomes.
Our conclusion
Australian equity exposure has been declining gradually in diversified portfolios over recent decades. Franking credits provide a genuine, risk-free benefit for Australian investors, and investing domestically removes direct currency risk. However, currency exposure can just as easily enhance returns when exchange rates move favourably.
The Australian share market has become more volatile than global markets over the past 5–10 years, although overall portfolio volatility can be reduced by spreading exposure across both Australian and international equities.
Australia remains a concentrated market with limited sector and company diversification. Its lack of exposure to high-growth sectors has contributed to weaker earnings growth and relative underperformance over the past two decades.
It would be unfair to say we are against investing in the Australian market, or even taking an overweight position. Like any market, it comes down to our assessment of likely medium to long-term returns. If we thought the Australian market was cheap (which we currently do not), we would be comfortable being overweight.
Ultimately, investors need to be clear about what they want from their portfolios. Investors in retirement who prioritise income may prefer a higher allocation to Australian shares. Conversely, high-income earning investors in the accumulation phase, focused on long-term after-tax compounding, may be better served by a greater allocation to global equities.
To be clear, we are not suggesting people abandon existing Australian market exposure, particularly where doing so would trigger significant CGT. The point of this blog is to encourage investors to think more critically about where they direct future investment dollars.
Thanks for providing these evidence-based, holistic insights which is helping me to master the game of building wealth (this is running through my brain after listening to so many podcasts :D)
This is a great blog post and provides considerable food for thought.
I am definitely guilty of home-country bias, but looking at these charts and statistics provides some good context.
It’s worth noting that home-country bias is a behavioural factor, but it is arguably helpful to an Australian investor. If it is a particularly volatile market, it may help an investor to stay the course if they are more comfortable investing in Australian shares. Investing overseas may cause an investor to sell at the worst possible time because they don’t trust the market. Whereas they may have more confidence if they know and understand CBA and BHP.
Investing in shares can all become a bit confusing (for me anyway), and when constructing a share portfolio it helps to clearly define what the goal is.
At a most basic level:
– It is extremely difficult to beat the share market consistently over the long term
– Shares as an asset class consistently beat cash over the long term
– Therefore you want to provide as much exposure to shares without taking on unnecessary risk.
An undeniable thing I have taken from this blog is that franking credits provide 0.6-1% of outperformance for Australian investors. It is great to see that in context, because I knew that franking credits provided some benefit, but it’s good to quantifiably see how much.
The other factors are arguably more subjective, particularly when viewed within the context of “investing is 20/20 in hindsight, but it’s far harder to predict the future”.
For instance, when investing overseas are currency fluctuations any better than a 50/50 punt?
They may go up and may go down, but you are wading into murky waters by attempting to predict this. In the same way as it’s near-impossible to beat the sharemarket, it is equally difficult to beat currency traders. You are exposing yourself to this risk when investing overseas.
It’s all a bit confusing for me, particularly as someone who can get stuck in the weeds and fail to see the big picture – but this blog post provides some great context.
I am looking at shifting my assets from predominantly property-based to mainly share-based, so this is all great food for thought. (Although this doesn’t take into account the Bitcoin exposure, which is 80% of my net worth and heavily geared).
I think, when selecting ETFs, I will go with:
33% Australian
33% US
33% World ex-US
And plan to hold for a decade-plus, just to minimize regret and maintain my sanity!
Thanks for providing such a thought-provoking blog post.
Thanks for taking the time to write such a thoughtful comment.
You have nailed the big picture: most of the “win” comes from getting the asset allocation right, keeping costs low, and then actually sticking with it through the ugly patches. Home-country bias is a behavioural quirk, but as you said, if it helps you stay the course then over the very long run, it should be fine.
And yes, portfolio construction (and making those trade-offs around Aussie vs global, hedged vs unhedged, risk, taxes, franking, etc.) looks simple on a pie chart, but it takes a lot of knowledge and experience to do well in the real world.
Hi, I had a question in regards to franking credits. The article seems to be saying that franking credits are more valuable to investors on a lower tax rate. Is this the case?
My understanding is that franking credits provide equal value to all investors. If an investor is on a 0% tax rate then they get the full 30% franking credit as a refund. If an investor is on the top marginal rate it reduces their tax rate from 47% to 17%, but it still provides a 30% tax benefit.
The difference between the two is that the tax refund is increased for the 0% tax rate investor, but the tax payable is reduced for the 47% tax rate investor. They are still improving each taxpayers’ position by the amount of the franking credit.
Am I missing something? This would affect the 0.6%-1% calculation mentioned in the article.
Thanks in advance for any assistance you can provide me.
Cheers
It is true that the tax credit is identical – the franking credit attached to the dividend is the same regardless of who receives it.
But the after-tax return is not identical, because it depends on the investor’s tax rate.
Example: fully franked dividend yield of 5% (30% company tax). The franking credit is 2.14% (5% × 30/70), so the grossed-up income is 7.14%.
Nil taxable income: franking credits are refunded → after-tax income return 7.14% (5% + 2.14%).
Top marginal rate (47%): pays 17% top-up tax on the grossed-up amount → after-tax income return about 3.8%.
Same credits, different outcomes depending on tax position.
Hi Stuart
Thanks for getting back to me so promptly.
That does make more sense, perhaps I should think of it through the lens of who benefits most from negative gearing.
Although in the case of negative gearing, the person on the top marginal tax rate receives the most benefit, whereas the person on 0% tax rate receives the least benefit. (because negative gearing REDUCES taxable income).
With franking credits, the person on the top marginal rate receives the least benefit, and the person on 0% receives the most benefit. (because grossed up dividends INCREASE taxable income)
Appreciate you clarifying this, and keep up the great work!
Cheers
Yes, that is correct.
Thanks for your informative podcasts and blog. Looking forward to the release of your new book.
In the podcast, Campbell indicates that you are happy to be overweight or underweight the Australian market depending on relative valuations etc.
But, what is your approximate target allocation to Australian equities assuming that both Australian and international equities are both approximately fairly priced (generally an unlikely scenario). I recognise that this is likely to be different depending on investor’s age and other factors.
Thanks for the kind words and question.
Strictly on a market-cap basis, Australia represents only around 2% of global developed markets, so a purist’s answer would be a very small allocation. In practice, though, we think the “neutral” allocation depends heavily on the individual: age, stage of life, income sources, other assets held, franking credit utility, and currency exposure all matter. Putting valuation considerations aside, our allocations to Australian equities for most clients would sit somewhere between 10% and 30% of the total portfolio. Where a particular client lands within that range comes down to their circumstances rather than a single “right” number.
Thanks
Thanks, Stuart, for your focus on this Australian investing consideration, but also on all of your content.
This consideration, Aus to Global allocation, is a recurring issue for me as I develop my portfolios. Here’s where I stand:
My portfolio outside of super has one of its goal as providing “passive” income, so as to make my work optional, and beyond my consumption to also provide a cashflow source for further investing. For this reason, I have decided to use the conventional 40:60 allocation split outside of super. With the option of redirecting future cashflow to the international exposure to force a gradual reallocation drift if I decide further “passive” income is of less importance.
The consideration inside of super, for me, is more difficult. I have so far sided with the arguments for a home bias, similar again to the conventional 40:60 split, because of many of the exact reasons you have described in this article, but primarily because of my exercises in researching a risk-adjusted approach (or MPT approach) to an Australian portfolio and being convinced that the best answer sits somewhere between 20-40% but probably closer to 40%.
It hasn’t sat easy with me, however. And your arguments are powerful.
I now am willing to explore a lower than 40% Aus allocation, but the question now becomes what evidence or reasoning do I use to decide on the allocation.
As you’ve answered with the commenter above, that may be individualised.
But, I feel I’m more likely to fit something closer to an “optimised” answer rather than “practical” answer.
My assets outside of super are substantial enough that I will not strictly require super as being necessary to fund my ongoing needs or future retirement. Therefore, I consider super as an exercise in maximising future capital for whatever utility I decide to use it from preservation age.
Therefore, if you say that the “optimal” split is 2:98, I would be willing to adopt this. I construct my portfolios broader than just developed large cap markets, so this 98% gets further split into developed small cap and emerging (and perhaps much smaller allocations to Gold and BTC and long-maturity bonds, which are asset types I have been exploring in my own portfolio outside super more recently).
If I were to do this, I do consider currency exposure as a risk to be managed. My current model would be to predominantly use unhedged products, but to switch to a hedged product when the AUD:USD exchange rate drops to the 25th percentile or below of historical averages (data I have found would suggest this threshold may be around 0.65-0.66 AUD to USD).
However, I’m cautious of constructing a portfolio, like this, that is so unlike any of the more conventional constructions used by the vast majority of others in the industry, like super premixed options and diversified ETFs, for fear that I’m going to have an aberrant outcome.
If I have a question, it’s – is there an absolute minimum for Aus exposure that you would advise or professionally use? Say, like the 10% you’ve responded to here? Is a 2:98 split only a theoretical allocation in super that you simply wouldn’t translate into a practical application?
Thanks for such a thoughtful comment, Michael.
The absolute minimum Australian allocation I would use is probably around 2%, reflecting Australia’s approximate market-cap weighting within global developed share markets.
In my view, the Australian market’s return characteristics (more income = greater tax drag) and current valuation do not make it more attractive than other developed markets. Therefore, I do not see a strong investment case for materially overweighting Australia, particularly if the objective is simply to maximise long-term capital.
But, like you, I acknowledge that this is contrary to the traditional approach, so maybe 10% min is the best approach.
It is also important to assess your asset allocation across your total portfolio – we do not treat super and non-super independently. If 40% of your substantial non-super portfolio is invested in Australia, you may already have a meaningful allocation.
The main risk (with having a lower than traditional allocation to Australia) is not necessarily a worse long-term outcome, but significant tracking error compared with conventional portfolios, particularly during periods when Australian shares outperform. You would need to be comfortable maintaining the strategy through those periods.
That said, this is not a permanent stance. We may become much more attracted to Australian shares if they become relatively cheap compared with other markets, particularly if we believe valuations are likely to revert towards their long-term mean. In other words, our current allocation reflects today’s relative valuations and expected returns, not a fixed view that Australian shares should always be underweight.
Thanks again, Stuart, they are very helpful points.
You’re right, if my super were 2:98, my adjusted Aus allocation across both of my portfolios would still be well within a conventional range (approx. 27% for my balances right now).
The tracking error issue (periods of Aus out-performance making a 2:98 portfolio lag poorly) wouldn’t be a problem for me, as I can be rusted-on to a well thought-out construction and hold long. I consider that relavent to my current 40:60 construction, where I’ve been watching that substantial 40% lag in capital appreciation, but believe in the approach because of, one, the income component of the return which has its use case, and two, knowing different markets move at different times (dot-com to GFC was Aus > US, post GFC has been US > Aus).
But I am bothered by the currency exposure and it’s impact on increasing volatility (at least when viewing my super balance in isolation) and perhaps affecting the timing of sales after preservation age, if applicable.
Do you have a comment on my proposed hedging strategy (any new international purchases made when AUD/USD slips below 25th percentile of historical averages, buy hedged, e.g. buy VGAD instead of VGS but all pre-existing VGS units keep holding unhedged)?
I guess the idea is that if a future sale date occurs, the currency will be unknown but may statistically be closer to the 50th percentile (the mean) than too far either side. So the hedging of a purchase when the FX is <25th percentile gives you a fairly sizeable statistical advantage that the sale price is going to be at a higher FX (provide currency appreciation).
On the other hand, I've been thinking that the size of this advantage (statistically) will need to be large, because it needs to overcome the hedging premium cost that will cause a margin of fee drag across the multi-decade (almost lifelong) holding period of these hedged shares. So, can I model out these opposing effects (currency uplift vs. fee drag) for percentiles 20th, 15th, etc. to find where the bet is likely to pay off?
Or perhaps it'll be apparent that there simply will not be any advantage to hedging, as on a long enough time frame the effect of the currency difference compared to the price appreciation (which is affected by hedging) will approach zero.
It also may be a mute point. The hedged shares are always going to make up a small allocation, because my starting balance is already entirely unhedged, and because future contributions will only have hedging at an approximate 1:3 ratio, so the hedging will never be more than 25% and probably much, much less. In which case, one, your bet on hedging into an FX advantage has a very small effect on your overall portfolio, and, two, you could be selective with your future sale events to chose parcels of international shares (according to their base cost and the subsequent FX effect) that better suit considerations around their differences in price appreciation (and tax).
Thanks, Michael. Did you see my recent blog on hedging – it explains how we approach it – which is similar to what you have outlined. https://prosolution.com.au/should-you-hedge-your-international-share-portfolio/
I think this article wants to argue for a much smaller Australian allocation, but without being prescriptive.
I think there are irrefutable reasons for that.
I think the most compelling one is diversification, and equal-weighing your equity exposure. If you over-allocate a 2% sharemarket to 40% in your portfolio, you obviously create a relative degree of concentration risk, in companies (CBA, BHP), sectors (financials, mining), and country (Aus), and under-allocate to bigger markets and companies (US, tech). This skews the outcome of the portfolio to have greater dependency on the performances of a smaller subset of companies, in particular the ASX20.
Is this a problem? Somewhat. You still have incredible diversification. The Australian market has proven to be an historical performer with quality companies – as you’ve mentioned, the 30 year data is comparable with other developed markets (including US), and I’ve looked back at even longer historical data dating back to 1900 and using rolling 30-year averages and the Australian market has demonstrated remarkably consistent and world-leading (or matching) performances.
Which brings me to one of my main issues with how others analyse the Aus market. Recency bias (2010s to present) draws people to under-appreciate the longer term performance of the Aus market, and chase the recent returns of the US market. The cyclical and anti-cyclical nature of markets, and mean reversion theory, would suggest there is greater wisdom in allocating long in your portfolio by having a more even allocation between the two.
This also leads into the other benefit of an Aus allocation closer to 40%, which is optimising for the highest risk-adjusted return (according to MPT), as you’ve outlined here when discussing how the volatility across an entire portfolio can be reduced by having a more even allocation between Aus and international. That reduced volatility is not only driven by the contrasting performances of Aus vs. INT’L markets, but also by the drifting FX and how half (or near-half) of the portfolio can be augmented or diminished by how the currencies are exchanged during “risk-on” and “risk-off” phases and the complicated macroeconomic factors that determine that.
It’s this MPT approach, I believe, that is the central tenet underpinning why almost all conventional Australian portfolios (e.g. diversified ETFs, super pre-mixed options, robo advisors, many financial advisors) allocate to the domestic market between 20-40% and often much closer to 40% (because that is where the data points to the greater risk-adjusted return).
MPT isn’t about achieving the absolute maximum long-term return, as you know, it’s about smoothing out that journey (and keeping invested by minimising behavioural inputs).
Which leads to – so what is the difference between an MPT approach and a more “aggressive growth” approach? Well, with historical data already showing that the Aus market is not an inferior performer, perhaps little, empirically.
So why the negativity toward the Aus market (recency bias aside). Two things:
I think it’s the accountant’s perspective of tax inefficiencies, which comes through in this article. The higher dividend yield of Aus companies exposing more of it’s return to the investor’s marginal income tax rate (which are high in this country).
This is where I think franking credits are under-appreciated. It’s been described as it’s net benefit (~0.6-1.0%), and minimised. But that is the uplift to the income component of the return, boosting a 3-4% to a 4-5% yield and offsetting a substantial amount of the tax drag. Is the tax drag still present, yes, but that is what has been minimalised. And that is what shows up in the long-term growth data comparing Aus to other international developed markets; the total return of the Aus index often averages a fraction of 1% lower than other markets but then it is almost equalised when you account for franking credits. Small? Maybe in isolation, but it is making up for any differences in performances.
I think the argument for tax drag of Aus shares is overblown, and I never like to make investing decisions based too heavily on accounting concepts and risk that adage of “letting the tax tail wag the investing dog”.
The second bias against the Australian market is considering valuations. People point to higher than average P/E ratios, particularly among the banks which make up a heavy component of the index.
I don’t think the feeling of stretched valuations is isolated to Aus large caps. Across developed markets, particularly US, valuations are running high.
What do you do about that? Chasing better values would mean focusing on softer markets, which currently might include small caps and emerging markets, or switch your developed/large cap exposure to a value-style approach. In the former example, you’re choosing to overallocate to more volatile, “riskier,” higher fee markets. In the later example, you’re taking on factor-based investing and narrowing your exposure with an active (or “smart-beta”) bent. Maybe you’re right, and in the short-medium term you achieve a superior outcome as values mean-revert. The cycles of differing performing asset types means that your tilts will vacillate, they’ll also have periods of underperformance. So are you set for the long-term with these allocations, or are you timing the market and re-weighing your allocations. Sounds hard!
The cycles of markets that have been dominated by growth-style investing or momentum show that valuating companies or markets is frought with errors and missing the returns. It doesn’t feel right to buy a seemingly expensive share of CBA in 2026, but what will that mean as I continue to hold that into 2056?!
I believe you can tilt within your Aus allocation, meaningfully, which makes sense if it’s going to be an over-allocated market in your portfolio. There are strategies to tilt away from the Aus large cap – such as, an equal-weighted index, or an ex-20 index, or a quality index. I prefer a tilt that is entirely different to the large caps and complements my broad index exposure, and has historical data of outperformance – this includes a mid-cap index (passive market cap weighted), small caps (quality or multi-factor, select actives), and Soul Patts.
So, where do I stand? I’m not advocating for a 40% allocation any more than a 2% allocation (though, admittingly, I want to highlight the reasons why you should consider the former as I think this article is biased toward the latter). As an investor driven perhaps most strongly by broad, even allocations in a portfolio, and achieving the best long-term returns with a high tolerance for volatility, I’m most attracted to a 2% allocation. But, I think an investor should consider what yield they want from their portfolio, now and into the future (when they might wish to minimise selling and CG events), and take an overweight Aus allocation to achieve that. And I think most investors, where behavioural psychology is proven to be a primary driver of outcomes, should toe the line closer to MPT than farther away.
I think there is no right answer. It lies between 2% and 40% (and neither side of that, there are good arguments why you shouldn’t stray too far). I really think the majority are best served at 20-40%, and really that should probably be 30-40%. And for the minority that might consider <20%, it should be an individual who is well researched on how that kind of Australian domiciled portfolio can behave and has a very long holding time frame, and secondarily should make equally researched considerations into hedging and how broadly they allocate their global exposure (e.g. ex-US, mids/smalls, emerging).
Finally, it probably won't make a substantial difference to the long term performances, but they will track differently over time.
Thanks for taking the time to put together such a detailed comment, Michael. It’s good to have contrarian views like this to pressure-test the thesis, even where I don’t necessarily agree with all of it.
On valuation, I’d push back a bit. There are other developed markets with more attractive value metrics than Australia at the moment, and I’ll be covering that in more detail in my blog on 23 September 2026.
On dividends, if Australian companies in aggregate are paying out that much of their earnings, it leaves less capital to reinvest for productive use. To some extent, I think that’s a bit lazy from a corporate capital allocation perspective and may have an negative impact on future capital growth.
Thanks again, Stuart 👍
I’ll read your upcoming Sept-23 keenly.
If there’s an argument for chasing value in developed markets like the UK, especially (or continental Europe, Japan, Canada), I imagine the argument will lie on using valuation metrics and relying on mean reversion theory and anticipating a cycling of markets.
And the contrary argument, again, will be to compare historical data to assess if that kind of tilt is likely to be rewarding over the long-term, and how you’re planning to time this factors-based investing approach.
I’d rather stay long in where the long-term historical data has proven fruitful.
And, yes, higher yields on Aus shares will mean proportionally less return in the price appreciation and more tax drag (franking offset) for the investor. But I guess I would rather focus on total return, rather than its constituents, when assessing historical data, and be confident that these yields haven’t been holding back Aus companies from growing comparably thus far.
Thanks, Michael. I agree that long-term historical data provides the best foundation for investment decisions. That is certainly consistent with an evidence-based approach.
However, the valuation at which you invest also has a significant influence on subsequent returns, particularly over the medium term. Historical returns reflect the starting valuations investors paid during those periods. We cannot assume the same returns will be available today if our starting point is materially more expensive.
Valuation also matters when assessing risk. Paying a high price leaves less room for disappointing earnings or a change in investor expectations. Even a strong market with an excellent track record can deliver poor investment outcomes if the price paid assumes too much future success.