diversified share portfolios

[voltage]

thanks for the comments, I suppose I am looking at a global diversified portfolio. I do hold direct shares in NZ and Aussie. Yes, many brokers financial advisors look at NZ and ASX as an Australasian market.

[Snoopy]

To construct a diversified equity portfolio for long term hold I am confused with the differences suggested by different brokers. Some have very low allocated to NZ and much higher global > 50%
I am working towards
NZ 40%
ASX 20%
Global 40%
I am higher in NZ due to good dividends and imputation credits.
Should I treat NZ and ASX as one market?
Any comments about percentages?

I tend to think about where a company operates rather than where it is listed. For example one of my 'NZX' investments, Scott Technology, obtains 84% of their revenues outside of NZ's borders. So thinking of Scott Technology as a 'New Zealand' investment is probably not wise.

I would never invest for 'tax reasons' alone. But for NZ investors, investing in the NZX is generally tax favourable. Thus if you have a choice between two broadly equivalent investments, one NZ domiciled and one not (e.g. Fisher and Paykel Healthcare (NZX) vs Resmed (ASX) ), I would generally choose the NZ based one.

You may have guessed that using this kind of logic I am more exposed to NZ shares than some financial advisers regard as being prudent. But because I am very unlikely to have to draw on my share portfolio at short notice and am not concerned at missing out on theoretical big overseas market gains, or portfolio smoothing effects, I am comfortable with this position. To me, the generally higher income derived from NZ shares makes up for this.

A further disincentive to pursue overseas shares that kick in the FIF investment taxation regime ( a sum of 'overseas' share purchases above $NZ50,000 ) is that this regime assumes a 'risk free' return of 5%. With government interest rates in Europe, Japan and the US well below this figure, I don't believe a 5% risk free rate of return is an attainable goal in the modern investment environment. If you regard something under 2% as a realistic risk free rate of return (as I do), this means that your 'foreign' investments are being taxed at an assumed return rate that is 3 percentage points higher than is actually attainable long term. In after tax terms, that amounts to around one percentage point. No much in any one year. But it does compound over time to make investments outside of the NZX and ASX less attractive. If such investments are managed funds, the management fees come off your long term returns as well, making the annual return deficit to be overcome sitting at about 2%.

Unless you really have a lot of capital and or specific overseas industry knowledge or expertise, I would tend to recommend getting your 'overseas exposure' through NZX and ASX companies that operate mostly in markets outside of Australia and New Zealand. There would be many financial advisers out there who would regard this kind of advice as heresy. I should add that I am not a financial advisor. You should take great care in accepting any investment advice from a dog on the internet! But neither am I 'clipping the ticket' on those 'overseas investment funds' that I am not selling to you!

SNOOPY

[voltage]

okay, what about companies like google, amazon and apple for example that can not be accessed from our exchange.

[Snoopy]

okay, what about companies like google, amazon and apple for example that can not be accessed from our exchange.

There are certain companies that do not have any real equivalent on the NZX. For high tech companies that don't pay dividends, then the tax disadvantage is less if you buy those shares listed on an overseas bourse. And the higher the growth, the less the handicap of paying an extra single percentage point in tax (the FIF issue I mentioned before) turns out to be. I think all of us have heard of those three big names: Google (now Alphabet I believe), Amazon and Apple, and appreciate what they have achieved in the market so far. So, as leading market players, you could draw up a case for directly owning shares in those three. They are good companies. But whether they still offer value at today's market prices is a different question. Buying a successful 'badge' won't necessarily translate to future investment success, even if the company itself continues to prosper at an operational level.

Perhaps you could invest in a US based hi-tech fund that would include all of those, and some others besides? The problem with the latter is that it would be managed in accordance with US tax laws. So what they do over there might not line up with the best interests of NZ taxpayers?

SNOOPY

[macduffy]

I'm with Snoopy on this subject. The current "fashion" to diversify broadlyinto overseas equities is somewhat overdone in my opinion. Insufficient regard seems to be paid to the difficulty of monitoring such investments nor in getting timely and knowledgeable analysis on developments affecting companies domiciled overseas. Local expertise is absent and the internet has limitations in this regard. Better "control" of a local portfolio, imo, with taxation advantages, no management or custodial fees and avoidance of currency risk.

[voltage]

macduffy and snoopy, you are quite right about the difficulties managing global portfolios from NZ as you have indicated some of the issues involved. That is why the global component is probably best done through ETFs listed on the ASX. This will allow you time to focus on direct control of NZ and Australian component of a portfolio. The successful NZ superannuation fund only has a 5% holding in NZ shares. So, what I am asking is what % of your portfolio should be outside australia and NZ. I know the FIF tax issue complicates things but should that influence portfolios?

[huxley]

Hmmm.... why should an NZ investor hold an overseas ETF? For example do you want a hedge in case some huge event effects the NZ economy?

I'm assuming the Aus ETFs you're looking at are valued in USD? A New Zealand investor buying an offshore fund with no full or partial hedge in place is arguably buying a currency fund...

I don't have an answer to you percentage question, but it's an interesting problem eh.

[macduffy]

No answers re percentages fom me, either, but if I had the billions that had to find a home, as NZ Super Fund does, I'd be forced to look offshore too! And employ the experts to do it.

[voltage]

interesting comments, just that all these financial experts push portfolios that usually have high allocations overseas

[Snoopy]

interesting comments, just that all these financial experts push portfolios that usually have high allocations overseas

In these days of interconnected global markets, I like to get my diversification through investing in different market sectors. There are some market sectors , particularly where those businesses have a strong position in their chosen market and a global reach, where there is no NZX listed share present. In this instance, I would look at the ASX next for investment options, with the rest of the global markets being the third cab off the rank.

From the point of view of a New Zealander investing in global markets, a share listed on the NZX will in general have the most effective tax regime around it for that NZ domiciled investor. However, investing purely for tax minimisation purposes has been from my perspective a road to sub optimal returns. I might compare an NZX listed share from an NZ perspective with an ASX listed share from an Australian perspective. I do this because I recognise that the home market perspective, whatever that is, generally sets the share price. My 'overseas allocation' then comes from the results of these kinds of comparisons.

I could work out what my 'overseas allocation' is. But I have never bothered, because the overseas allocation is an incidental result of my wider 'head to head' in a chosen market investment strategy and is not part of any 'overseas allocation target'.

SNOOPY