Not just some of our funds but say 90% or even a 100% - let’s invest it all in Norway.
No?
If we are vaguely uncomfortable with the notion of reliance on the Norway economy to produce our longer-term investment returns, why is it then that we don't see the same degree of risk in relying on the New Zealand economy to do the same thing.
There are two main reasons why we should consider international investments. The first is the return opportunities that exist overseas.
New Zealand represents less than 0.3% of the world’s share market. Growth industries such as technology (particularly profitable in recent years), pharmaceutical and aeronautical companies are not well represented on the New Zealand stock exchange, if at all.
Investment in international fixed interest, property and share markets are all available.
The second reason is the diversification of risk. The overall risk of a portfolio can be reduced considerably by introducing overseas investments whose performance lacks correlation with the New Zealand market.
If we were to invest in a foreign market whose ups and downs over time have a completely different pattern to that of the New Zealand market, then we have gone some way to diversifying risk. A market whose ups and downs are very similar to the New Zealand market would have less benefit from a risk reduction perspective.
Investment in overseas markets is difficult to achieve without using investment trusts or managed funds.
There are a range of country funds available. As an investor you can specifically pick Japan, China, India and so on. There are regional funds. A fund investing solely in Europe or perhaps Asia are examples.
And there are international funds where the manager decides the allocations across countries and continents. One manager might do this using a top-down approach - making regional allocations, then going down into those countries and regions to find the companies they wish to invest in.
Another might have a screening system which isolates potential investment opportunities world-wide. Companies that make it through the screening process can then be invested in - so a strict allocation to certain regions is not expected and does not result.
International diversification is an important component of our investment strategies.
