Australia is facing many challenges. The pandemic has exacerbated some of them, including supply chains, migration, skills shortages and geopolitical affairs, but for the most part we have had three decades of uninterrupted prosperity.
Australia still has the second-highest equity bias despite being below 2 per cent of the world’s total market capitalisation.P/ASX 200 or 300. The Your Future Your Super performance tests benchmark to the SBut the benchmark has a size problem, among other things. Three main points stand out about the local bourse.
Active fund managers associate with ‘factors’ by virtue of describing their style such as value or growth., in Australia they don’t work so well as the universe of companies is too small, too concentrated and there is a lack of variability over time. A concentrated market limits stock diversification and also means investors potentially overlook the stronger opportunities among smaller companies compared to larger, near stagnant companies.
To determine how one would invest without these biases one would need to lean on a mathematical approach. A factor or style-agnostic approach is an alternate way to approach investing in Australian equities. Equal-weight is one such approach, so is benchmark-agnostic active management. Equal-weighting assigns each company the same weighting, so it has the benefit of removing Australia’s size problem.