Home Country Bias – Time to Do Something About It?

Home country bias – Time to do something about it?

12 May 2021 10.00am – 10.45am

The webinar will begin shortly

Symon Parish Senior Director, Head of Multi-Asset, APAC

Matthew Arnold, CFA, CAIA Director, New Zealand

/ 1 Team New Zealand has delivered…

Cumulative performance NZ shares and global shares 2001 – Apr 2021

1000% Growth of $100,000 NZ 800% Shares Since 2001 $915,000 600% • NZ shares 11.5% p.a. • Global shares 4.0% p.a. 400%

200% Global shares 0% $220,000

-200%

NZ Shares Global Shares

Source: Morningstar Direct, S&P/NZX 50 with ICs . MSCI ACWI NR in NZD. 1 Jan 2001 – 30 Apr 2021. Index returns do not include fees or taxes. Past performance is no guarantee of future results. / 2 Just how big is the home country bias? Average NZ exposure of different investors

International vs. domestic exposure by investor type

KiwiSaver Russell Balanced Fund Average Russell client NZ Super Fund

International Domestic International Domestic International Domestic International Domestic

47% 28% 27% 14%

Retail Institutional

Source: Russell Investments, Morningstar, NZ Super fund website. Estimated KiwiSaver Asset Allocation and Average Russell Investments includes all risk profiles. Data as of 31 March 2021, except NZ Super June 2020. / 3 NZ Managed Funds… Some (modest) evidence of reduction in home bias…

International vs. domestic exposure in New Zealand managed funds

100%

90% • Modest 80% Domestic assets reduction, i.e. 70% increase in 60% international 50% 63% 57% • Note, does Axis Title Axis 40% not capture 30% 37% 43% ‘offshore’ International assets 20% funds 10%

0% 2014 2015 2016 2017 2018 2019 2020

Source: Reserve Bank of New Zealand, Managed fund statistics, 2014 – 2020. . / 4 KiwiSaver… Some more evidence of reduction in home bias…

2012 Q4 2021 Q1

NZ Fixed (inc. cash) International fixed NZ Fixed (inc. cash) International fixed NZ Unlisted Property NZ Listed Property NZ Unlisted Property NZ Listed Property International listed property NZ Shares International listed property NZ Shares Australian Shares International Shares Australian Shares International Shares

International allocation: 42% International allocation: 53%

Source: Morningstar KiwiSaver Survey, as of December 2012 and March 2021. / 5 Why do (NZ) investors have a home bias? … is it ‘rational’?

> Investors typically start from 100% domestic (i.e. savings account, property investments etc.)… > Familiarity bias – buy what you know… > Liabilities in NZD (even though international assets can be hedged) > Product availability – products or services that offer access to NZ securities, managed/researched by local teams are (still) more readily available > Historically higher costs for international investing > Cash, fixed income allocations tend to be domestic focused > NZ dividends benefit from imputation credits which can ‘add’ c. 1.3% to after tax return for taxable investors, while cap gains are typically not taxed* > Research suggests 7% - 11% ‘overweight’ in NZ shares is ‘rational’ relative to weight if there was no tax advantage**

*S&P/NZX 50 TR versus TR with imputation credits, 10 years ending 30 Apr 2021. **The potential effect of taxes on the equity home bias in New Zealand PIEs, S McDowell, J Lee, A Marsden (2021) / 6 Is home bias a feature globally? Average home vs. total equity (pension funds)

Estimated pension fund allocation to domestic equities relative to market cap weight (2018)

70%

60%

50%

40%

30%

20%

10%

0% US UK Japan Canada Australia Domestic exposure FTSE All World Index weight

Source: FTSE Russell, Willis Towers Watson, as of Dec 2018. / 7 Has it paid off to have a home bias? Yes for shares? Hmmmm…. For fixed interest

Outperformance of NZ Shares vs. global (hedged and unhedged) 2010 – 2021 • 9/10 NZD year-to-date April • 8/10 NZD-H 20% 16% 12% 13% 9% 9% 10% 10% 6%8% 7% 6% 4% 6% 6% 3% 2%2% 3% 0% -1% -10% -6% -10% -12% -12% -20% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 YTD

Domestic shares - global shares unhedged Domestic shares - global shares NZDH

Outperformance of NZ fixed interest vs. global (hedged) 2010 – 2021 year-to- date April • 5/10 NZD-H 5% 4% 3% 2% 1% 0% 0% 0% -2% -2% -5% -3% -3% -3% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 YTD

Domestic bonds - global bonds

Source: Morningstar Direct. Domestic shares: S&P/NZX 50 index GR including imputation credits. Global shares: MSCI ACWI NR index, MSCI ACWI NR - NZDH index. Global bonds: Bloomberg Barclays Global Aggregate NZDH index. Domestic bonds: S&P/NZX NZ Composite Invest Grade. YTD ending 30 April 2021. In NZD. Past performance is no guarantee of future results. / 8 How about when risk is considered? … generally, yes…

Risk-return characteristics (Trailing 10 year period ending 20 Apr 2021)

12% • NZ Shares have been 10% Domestic shares ‘lower’ risk

8% Global shares NZDH and generated Global shares unhedged 6% higher Return returns 4% Global bonds Domestic bonds

0% 0% 2% 4% 6% 8% 10% 12% 14% Risk

Domestic shares Global shares unhedged Global shares NZDH Global bonds Domestic bonds

Source: Morningstar Direct. Domestic shares: S&P/NZX 50 index GR including imputation credits. Global shares: MSCI ACWI NR index, MSCI ACWI NR - NZDH index. Global bonds: Bloomberg Barclays global aggregate NZDH index. Domestic bonds: S&P/NZX NZ Composite Invest Grade. Currency: NZD, Data as at 30 April 2021. Past performance is no guarantee of future results. / 9 Performance attribution of the NZX50 FPH and ATM have dominated….

Cumulative return ending 30 April 2021 (top 3 contributors) 1. Fisher & Paykel Healthcare

100% 2. A2 Milk

90% 3. Meridian Energy 1. Fisher & Paykel 80% Healthcare 44% 70% 2. Meridian Energy • More than 1/3 60% 3. Mainfreight of total 1. Fisher & Paykel market return 50% Healthcare 94% attributed to 2 40% 2. Mainfreight 46% stocks, ATM and FPH 30% 3. Fletcher Building 52% 56% • What 20% happens 50% 54% 10% 19% when it goes 50% 0% wrong (very 1 Year (Total return) 3 Years (Total return) 5 Years (Total return) wrong… ATM?) Other Top 3

Source: Factset, performance attribution, total cumulative return of S&P/NZX 50 TR with top 3 contributors. Ending 30 April 2021. Some rounding errors, for illustrative purposes only. Past performance is no guarantee of future results. / 10 But, it’s a world of opportunities…

Investment grade fixed income Global equities

United States Japan United States

China Japan France China United Kingdom United Kingdom Germany Italy France Canada Other Other

NZ$ 92 trillion opportunity set NZ$ 89 trillion opportunity set

+ Global high yield ~ NZ$ 4 trillion + Global small caps ~ NZ$ 12 trillion + EMD local currency ~ NZ$ 4 trillion + Frontier markets~ NZ$ 110 billion + EMD hard currency ~ NZ$ 6 trillion

NZ fixed income ~ $130 billion NZ shares ~ $165 billion

Source: Fixed income opportunity set represented by Bloomberg Barclays Global Aggregate, Global High Yield, Global EM local and hard currency indices. Global equities represented by MSCI ACWI, MSCI ACWI IMI, MSCI Frontier Markets. NZ assets represented by S&P/NZX 50 and Bloomberg 0+ NZBond Composite. As of 31 March 2021. / 11 Local market sectors vs. international

Sector weights Global, NZ and Australia

Communication Services

Consumer Discretionary

Consumer Staples

Energy

Financials Australian banks

Health Care Fisher & Paykel Healthcare Industrials

Information Technology US / Asia technology Materials

Real Estate

Utilities NZ Utilities 0% 5% 10% 15% 20% 25% 30% 35% Australia New Zealand shares Global shares

Source: MSCI and S&P. Sector weights as of 31 March 2021 for the MSCI ACWI, S&P/NZX 50 and the S&P/ASX 200. / 12 Local market concentration S&P/NZX 50

Market cap in top 10 names Market cap Top holdings Weight Sector (NZD m$) Fisher & Paykel Health Care 18,215 14.3% Health Care Auckland International Airport 9,321 7.3% Industrials Spark 8,168 6.4% Communication Services Meridian Energy 6,663 5.2% Utilities 40% a2 Milk 6,302 4.9% Consumer Staples Ryman Healthcare Group 6,251 4.9% Health Care 60% Mainfreight Limited 5,780 4.5% Industrials Fletcher Building 5,745 4.5% Materials Contact Energy 5,280 4.1% Utilities Infratil 5,071 4.0% Utilities

Characteristics

Number of constituents 50 Top 10 market cap Total market cap $127.4 B. Largest $18.5 B. Other Average $3.2 B. Coverage of New Zealand market cap c. 90%

Source: MSCI, Market capitalisation as of 31 March 2021 for S&P/NZX50 / 13 Australia market concentration S&P/ASX 200

Market cap in top 10 names Market cap Top holdings Weight Sector (AUD m$) Commonwealth Bank Australia 152,750 8.0% Financials BHP Group 133,447 7.0% Materials CSL 120,415 6.3% Health Care Westpac Banking Group 89,550 4.7% Financials 45% National Australia Bank 85,725 4.5% Financials 55% ANZ Banking Group 80,187 4.2% Financials Wesfarmers 59,719 3.1% Consumer Discretionary Macquarie Group 51,979 2.7% Financials Woolworths Group 51,715 2.7% Consumer Staples Rio Tinto 41,112 2.2% Materials

Characteristics Number of constituents 200 Top 10 market cap Total market cap $1.9 T. Largest 152.8 B. Other Average 10.3 B. Coverage of Australian market cap c. 90%

Source: S&P, Market capitalisation as of 31 March 2021 for S&P/ASX200 / 14 Global market concentration MSCI ACWI

Market cap Market cap in top 10 names Top holdings Weight Sector (USD b$) Apple 2,077 3.4% Information Technology Microsoft 1,693 2.7% Information Technology 14% Amazon.com 1,320 2.1% Consumer Discretionary Facebook 708 1.1% Communication Services Alphabet A 620 1.0% Communication Services Alphabet C 614 1.0% Communication Services Taiwan Semiconductor 507 0.8% Information Technology Tesla 507 0.8% Consumer Discretionary JP Morgan Change & Co. 464 0.8% Financials Tencent Holdings 451 0.7% Communication Services 86%

Characteristics

Number of constituents 2,978 Total market cap $61.9 T. Top 10 market cap Largest $2.1 T. Average $20.7 B. Other Coverage of global market cap c. 85%

Source: MSCI, Market capitalisation as of 31 March 2021 for MSCI ACWI (NR) / 15 Income opportunities around the world… Cash and fixed tends to be local, but better income globally…

(Pre-tax) Dividend yields (global high dividend shares) and yields (fixed income) 5% 4.5% 4.4% 4.3% 4.1% 4% 3.6% 3.3%

3% 2.9%

2.1% 2% NZ CPI = 1.5% 1.1% 1.1% 1.0% 1% 0.4%

0% Europe Global Emerging Asia EM Hard EM Local US S&P/NZX NZ Corp Global IG NZ Govt 3 mth TD High Markets Pacific Currency Currency 50 Bonds Bonds Bonds Yield Bonds Bonds Bonds

Source: MSCI, S&P, Bloomberg, Stats NZ. Dividend yields of MSCI High Dividend indices, Europe, EM, Asia Pacific and US. Yield to worst of Bloomberg Barclays Global High Yield, EM Hard Currency Aggregate and EM Local Currency Government and S&P NZX 50, NZ Government Fixed Interest and NZ Corporate Fixed Interest. 3 month average term deposit rate, BNZ, Westpac, ANZ and ASB. As of 30 Apr 2021. / 16 Increase in international exposure? Diversification benefits…

Correlation matrix

1 2 3 4 5 6 7 8 9 10 11 1 - Global bonds 1.0 2 - NZ fixed Interest 0.6 1.0 3 - Global shares -0.1 0.0 1.0 4 - Global shares – NZDH 0.0 -0.3 0.6 1.0 5 - Emerging markets 0.0 -0.1 0.7 0.6 1.0 6 - NZ shares 0.1 0.0 0.5 0.7 0.5 1.0 7 - Australian shares 0.1 -0.1 0.7 0.7 0.8 0.7 1.0 8 - Global real estate securities 0.3 0.0 0.4 0.8 0.5 0.6 0.7 1.0 9 - Global infrastructure 0.2 -0.1 0.5 0.8 0.6 0.7 0.7 0.9 1.0 10 – Commodities -0.2 0.0 0.4 0.1 0.4 0.0 0.4 0.0 0.1 1.0 11 – Gold 0.2 0.5 0.1 -0.4 0.1 -0.2 0.0 -0.4 -0.3 0.4 1.0

Source: MorningStar direct. Domestic shares: S&P/NZX 50 index GR including imputation credits. Global shares: MSCI ACWI NR index, MSCI ACWI NR - NZDH index. Global bonds: Bloomberg Barclays Global Aggregate NZDH index. Domestic bonds: S&P/NZX NZ Composite Invest Grade. Emerging markets: MSCI EM NR. Australian shares: S&P/ASX200. Global real estate: EPRA FTSE EPRA NAREIT Developed NR NZDH. Global Infrastructure: S&P Global Infrastructure NZDH. Commodities: Bloomberg Commodity PR. Gold: LBMA Gold Price PM. April 2005 – March 2021 in NZD. / 17 Is Peer Risk relevant?

> Extent of home bias is v. important issue for many investors (opportunity set, risk-return, risk factors, income generation etc.) > Those in the business of comparing their returns to others (which, let’s face it, is almost everyone), then ‘peer relativity’ becomes an issue… > What is peer relativity? i. My KiwiSaver did better than yours ii. Wealth manager A is ‘better’ than wealth manager B iii. Superannuation scheme of company X beat scheme of company Y iv. Press article calling out one investor relative to another > Should investors think about how others invest when they build their asset allocations? Does it really matter how others are doing?

/ 18 Impact of Changing Home Country Bias

Reducing Home Country Bias Increasing Home Country Bias

Source: Russell Investments. Impact of changing allocation to NZ equities based on Russell Investments Conditional Markets Forecasts. For illustrative purposes only. / 19 Increase in international equity exposure? Valuation characteristics…

Forward P/E (x) P/B (x) 40 3.5 35 3 30 25 2.5 20 2 15 1.5 10 1 5 0.5 0

2006 2008 2005 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 NZX50 MSCI World ASX200 NZX50 MSCI World ASX200 Dividend Yield (%) 10 > NZ has historically traded at a discount 9 8 to both global and Australia 7 6 5 > Currently ‘expensive’, particularly given 4 the market profile (i.e. defensive, yield- 3 2 oriented names) 1

2007 2019 2005 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 Source: Bloomberg, Forward price-to-earnings ratio, forward dividend yield and price-to-book NZX50 MSCI World ASX200 ratio. From 2005 -2021 / 20 Massive decline in yields… … has been strong tailwind for rate sensitive stocks

NZ Health Care and Utilities – Yield sensitive sectors make up half of the market

NZ Equity Market - Yield Sensitivity 8% 50%

45% 7% 40% 6% 35% 5% 30%

4% 25%

20% 3% 15% 2% 10% 1% 5%

0% 0%

1-Oct-06 1-Oct-00 1-Oct-02 1-Oct-04 1-Oct-08 1-Oct-10 1-Oct-12 1-Oct-14 1-Oct-16 1-Oct-18 1-Oct-20

1-Jun-01 1-Jun-99 1-Jun-03 1-Jun-05 1-Jun-07 1-Jun-09 1-Jun-11 1-Jun-13 1-Jun-15 1-Jun-17 1-Jun-19

1-Feb-12 1-Feb-00 1-Feb-02 1-Feb-04 1-Feb-06 1-Feb-08 1-Feb-10 1-Feb-14 1-Feb-16 1-Feb-18 1-Feb-20

NZ 10y Bond Yield (LHS) Health Care Utilities Total 'Long Duration' Sectors

Source: Bloomberg, NZ 10 Yr government bond yield, Health Care and Utilities weights in NZ share market. 1999 – 2021. Past performance is no guarantee of future results.

/ 21 The flying Kiwi?!?!? Need to consider FX when considering international…

NZD Nominal Trade Weighted Index 1999 - 2021 90

40 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Source: Reserve Bank of New Zealand, 1999-2021.Past performance is no guarantee of future results. / 22 Is it time to ditch the home country bias?

> There is rationale for ‘some’ home bias in fixed interest and equities (in particular), however many local investors have too much risk in NZ… > But…..It’s a big world of investment opportunities… > Concentrated NZ market is not (at all) representative of the global economy today… > Expensive relative to history (as is everything) but also relative to global markets > Highly exposed to the results of a handful of companies, great if everything is working, v. difficult if not… > Limited fixed interest market – income-oriented investors have many global choices

/ 23 Disclaimer

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