One of Warren Buffett’s sagest observations was that ‘diversification is insurance against ignorance’. We agree: in the absence of knowing exactly what markets might do in turbulent times, diversification is indeed a wise precaution.
Not only that, as we pointed out in one of our recent Investment articles, Australia’s stock market has become highly concentrated with just 10 stocks accounting for over 50 per cent of its value.
In such an environment, diversification is not only wise, it is essential. We believe that international shares provide substantial opportunities to successfully pursue a robust diversification strategy.
Here’s what we are doing about it.
We start with the facts: the chart illustrates (in USD Trillions) GDP in 2020 for major currency zones, and Australia’s share in it. While not entirely insignificant, our share is tiny compared to the Eurozone, USA and China.
Those three zones between them comprise USD$56 trillion in GDP; add Japan and the UK and the figure rises to over 60 trillion: in short, their combined GDP is more than 40 times the size of Australia’s.
We believe that in these international markets, our relative value analysis (RVA) process is making available substantial opportunities for all our clients, especially those for whom we run managed discretionary accounts (MDAs).
We have our own international model comprising 20 stocks. The model is used in most of the midrange MDAs we manage. However, for smaller sums invested, consideration of an ETF may be appropriate.
The table below illustrates performance of some of our model portfolio stocks over the past 2 years.
The management of these portfolios, using our unique RVA methodology, provides a solid foundation for all those who believe that diversification is a wise step in reducing investment risk, taming volatility and growing wealth.
The prime reason behind this is that well designed portfolios contain a range of assets that avoid exact correlation with each other: for example, if Australian equities fall in value, it is most unlikely that a basket of international equities will fall in lock step (and vice versa). Instead of correlation being 1:1, it is more likely, over time, to vary from both country to country and sector to sector.
We further enhance our diversification strategy by scrutinising our model international share portfolios on a monthly basis and change holdings in line with identified relative value (just as we do with equities in the ASX). As always, we underpin our methodology with thorough Morningstar research.
Next steps: if you have not done so already, we invite you to discuss with your account manager diversifying at least part of your investment portfolio into international shares.
We’ll be happy to elaborate further on this important topic and answer any questions you may have.
Yours sincerely,
David Greenfield
Joseph Palmer & Sons
Disclaimer General Advice Warning
This publication
has been prepared by Joseph Palmer Sons (ABN 29 548 490 818) an Australian Financial Services Licensee
(AFSL
247067). Whilst the information contained in this publication has been prepared with all reasonable care
from
sources, which Joseph Palmer Sons believes are reliable, no responsibility or liability is accepted by
Joseph
Palmer Sons for any errors or omissions or misstatements however caused. Any opinions, forecasts or
recommendations reflects the judgment and assumptions of Joseph Palmer Sons as at the date of
publication and
may change without notice. Joseph Palmer Sons, their officers, agents and employees exclude all
liability
whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full
extent
permitted by law. This publication is not and should not be construed as an offer to sell or the
solicitation of
an offer to purchase or subscribe for any investment. Any securities recommendation contained in this
publication is unsolicited general information only. Joseph Palmer Sons are not aware that any recipient
intends
to rely on this publication and are not aware of the manner in which a recipient intends to use it. In
preparing
our information, it is not possible to take into consideration the investment objectives, financial
situation or
particular needs of any individual recipient. Investors must obtain individual financial advice from
their
investment advisor to determine whether recommendations contained in this publication are appropriate to
their
personal investment objectives, financial situation or particular needs before acting on any such
recommendations.