Australia not necessarily a gold medal prospect

Frank Russell tells investors to go offshore and says Australia isn't far enough.

Friday, November 3rd 2000, 6:48AM

In recent years New Zealanders have lamented the poor performance of the local sharemarket and looked across the ditch for better returns. Also, most of New Zealand equity funds have changed their mandates so they can buy Australian shares as well as local ones.

While Australia may look like a glittering prize, especially after its spectacularly successful Sydney Olympics, investors are being warned that putting lots of their money into that economy isn't necessarily going to produce a gold medal investment performance.

A new research paper from global investment specialists Frank Russell is warning investors that moving across the Tasman isn't enough to generate better returns.

"We do not believe that exposure to Australian shares is the best way for New Zealand investors to seek better returns," managing director Dr Craig Ansley says.

Ansley's view is one which many New Zealanders may not like, or others may grudgingly be coming to accept: That is New Zealand is too much like Australia for there to be any major benefit.

"Diversification through international investing should provide both better returns and lower risk as it is precisely the differences, and the low correlation between markets, that provides the real benefit."

Frank Russell's looked at how closely the markets have moved together over all the years from 1981 to 1999 and concluded that "the Australian market has a much higher correlation with the New Zealand market than any other market in the world."

Ansley says that while the two markets have always been close, they are increasingly becoming more correlated.

"This suggests that the diversification benefits derived from Australia are less than the broad markets and those benefits are reducing over time."

"When we compared the historical risks and return characteristics, we found that a portfolio of Australian shares was clearly bettered by a portfolio of New Zealand and international shares," he says.

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