Week 10 Flashcards
Home bias is a concentrated fundamental risk exposure
why can it be diversified?
to the extent that risk premiums are similar in local and global markets, it may be possible to reduce exposure to local risks without sacrificing expected return.
good way of reducing reliance on Australian markets without necessarily sacrificing expected returns.
What is different about global investing
•More dimensions to understand and manage
–Currency
–More securities, more countries, more managers
–More permutations: global / regional / industry / matrix
- Information gaps (but the world IS getting smaller)
- Access is often more limited
- Higher costs, tax differences, etc
Operational
What is different about global investing
•More dimensions to understand and manage
–Currency
–More securities, more countries, more managers
–More permutations: global / regional / industry / matrix
- Information gaps (but the world IS getting smaller)
- Access is often more limited
- Higher costs, tax differences, etc
Operational
Decision to invest globally
home bias
Investors are still investing heavily in their home country or assets they believe they believe they have more info. Assets they believe they are experts at
Overweight of australian equity
Why investors avoid investing outside home countries?
portfolio return net of fee and tax
pay tax because foreign income in that foreign country and taxed again in ustralia if no bilateral tax agreement between two countries
Why investors avoid investing outside home countries?
costs and risks
incur higher cost; Imputation credits strong motivation to invest in AU
Political risk and country risk
Why investors avoid investing outside home countries?
understanding
- have to understand in the equity market
- different disclosure requirements of financial reporting, industry dynamics
With total reutrn you receive from a foreign asset, have two components:
one will be return in foreign currency. Another part of return will be exchange rate changes in forein currency and home currency.
We can hedge currency risk for some investors esp institutional investors
Tend not to invest in foreign market given benefits of
better frontier, the investors waive potential beneifts due to potential costs of investing in foreign markets
Listed property
local or global?
autralian investors when you invest ina autralian equity, you have impicit exposure to australian listed property already.
If you would like to have additional listed property exposure, you would want to global.
Global property market, have a chance to generate alpha
FI
Investing in AU or global
against investing in AU
Australian corporate bond market has very limtied issues in market. Liquidity is a big problem in small market
FI seucirites is much less liquid than securities in australian corporate bond market, extremely illiquid.
FI
Investing in AU or global
invest in high yield US or japan
FI
Investing in AU or global
Australian investors would like to invest in australian gov bond. Only Triple AAA rated gov bond in the world. Minimum credit risk and handsome expected return.
Australian investors holding FI is for cash flow.
Foreign income fixed securiires, do we hedge our exposure?
Why do we hold FI securities? Diversifying from australian equity exposure. Most will hedge currency risk in FI securities.
Inflation-linked securities in total portfolio
domestic:
Worried about australian inflation. Investors will try to invest in their own home country inflation linekd bonds.
Unless they think they can genreate alpha, they can invest in other countries inflation linked bond
Fundamental risk analysis of my fundamental risk: house in ACT,
Concentrated fundamental risk factor which is austrlalian economic development
