A top performer can just as easily slide down to near the bottom of the table the following year. Photo / Supplied
Just as a champion rugby team requires a mix of talents and skill sets, a champion portfolio needs to spread its net widely. Photo / Supplied canny.JPG
By Nick Stewart
With the All Blacks due to play Ireland (and the Māori All Blacks trouncing them 32-17 on Wednesday), all eyes will be on our boys in black to keep the victories coming at the test this weekend.
While the All Blacks are one of the world's most successful sports teams, Kiwi rugby fans have learnt not to expect them to win the World Cup at every tournament. Likewise, while the NZ sharemarket has punched above its weight over the years, that doesn't mean it is going to be a winner every time.
How good have Kiwi stocks been? Out of 22 developed equity markets around the world, the NZ market has featured among the top five performers in eight of the past 20 years. It held top position in 2002 and 2019 and second in 2011, 2014, 2016 and 2018.
But sometimes, like the All Blacks, it can get knocked out of contention. In 2021, for instance, the Kiwi sharemarket was the single worst performer of 22 developed markets in NZD terms with a 12.8 per cent negative return.
In fact, looking at the top-performing countries from one year to the next, it is hard to see any discernible pattern in the results. A top performer, like Canada in 2016, can just as easily slide down to near the bottom of the table the following year.
There is bad and good news for investors from this. The bad news is that while investment opportunities exist around the globe, the randomness of stock returns makes it exceedingly difficult to figure out which markets are likely to be outperformers.
The good news is if your portfolio is sufficiently diversified, this shouldn't matter. Being globally diversified means you don't need to predict which countries will deliver the best returns during the next quarter, the next year or the next five years.
Holding equities from markets around the world, as opposed to those of a few countries or just one, positions you to potentially capture higher returns where they appear, and outperformance in one market can help offset lower returns elsewhere.
Put another way, a globally diversified portfolio can help provide you with more reliable outcomes over time. That is because you are spreading your investments more widely across different economies, markets, sectors and individual companies.
But there's another reason for spreading your bets, particularly if your home country is a relatively small one. Together, the Australian and New Zealand markets represent little more than 2 per cent of the global marketplace by value. While NZ clearly punches above its weight in many fields, its equity market is a rounding error in global terms.
This matters because the smaller your opportunity set as an investor, the more influence that idiosyncratic risk from the varying fortunes of individual companies and sectors can play in your portfolio. Likewise, the bigger your available universe, the less a single company or sector will matter. Figuratively, you are fishing from a bigger pond.
Just look at the numbers. As of December 31, 2021, the NZ Stock Exchange played host to just 61 companies with a total market capitalisation of about US$130 billion. By contrast, the Australian market hosted more than 10 times the number of companies with a market cap almost 20 times as much.
We're also seeing some grim metrics coming through from the NZX – just two weeks ago, it dipped to a two-year low with the worst single session in four months. Business confidence data released from ANZ shows 63 per cent of respondents are expecting the broader economy to take a hit this year, amidst supply constraints, high-cost pressures and the ever-present rate hikes – which it says RBNZ is unlikely to slow any time soon, as the central bank tries to get inflation under control.
But if we widen our lens further, Australia and NZ look small. Dwarfing everything else is the US market, which hosted more than 4000 companies with a total market value of $77 trillion and representing 60 per cent of the global market. A single company, Apple, had a market value of $4 trillion, or double the value of the entire Australian market.
And it doesn't stop there. There were close to another 7000 companies in other developed markets outside the US, while emerging markets played host to more than 9000 companies. You can see now that extending your pool of investable markets and companies increases your opportunity set and leaves you less exposed to the fortunes of a single company, sector or economy.
Just as a champion rugby team requires a mix of talents and skill sets – combining strength, speed, mental and physical resilience – a champion portfolio needs to spread its net widely. It still doesn't mean you'll win every time. But through diversification you increase the reliability of outcomes, reduce the bumps and bruises along the way, and position yourself to capture the premiums available.
And remember, success doesn't come in a silo – a support crew is as important as the players themselves. If you're wanting a second opinion on your portfolio, sitting down with professional fiduciaries for a friendly chat is a great place to start.
It's how World Cup winners are made.
• Nick Stewart is a financial adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX-certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, wealth management, risk insurance & KiwiSaver solutions. Content created in conjunction with Dimensional Fund Advisors. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an authorised financial adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website www.stewartgroup.co.nz