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Stay Away From Australia

By Mary Holm

Saturday 12th May 2001

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I'm not anti-Australian, I swear. My dear old grandmother was an Aussie. But I'm worried about a new trend among New Zealand share funds. Many are adding Australian shares to their portfolios.

Why? According to one recent report, "New Zealand and Australia are increasingly one capital market in the eyes of international and domestic investors."

From an international standpoint, that's understandable. But for New Zealanders who want to invest offshore - which they should do - Australia is the last place to do it.

There are several reasons for this:

- Size of markets.

If staying in New Zealand is staying on the beach, venturing into Australia is merely putting a toe in the water.

In the MSCI world index, Kiwi shares make up just 0.05 per cent, and Australia 1.28 per cent.

You might as well go in up to your waist, and get into America, which accounts for 51.4 per cent of the index. Or, better still, dive into a global share fund.

- Dividend policies.

Shares reward shareholders in two ways, via dividends and capital gains.

Most long-term investors in New Zealand shares pay little or no tax on either. Gains are usually untaxed. And, through dividend imputation, you get credit for tax already paid at company level.

Offshore shares are more complicated.

In some circumstances - for example if you invest in a New Zealand-based international index fund or a UK investment trust or, in many cases, if you invest directly - you are not taxed on your capital gains.

But overseas dividends are always taxable. And companies in Australia tend to pay more in dividends and less in capital gains than in other countries, except New Zealand.

According to AMP, Australia's dividend yield is about 3.1 per cent, while New Zealand's is 5.9 per cent.

In the US, it's just 1.3 per cent, and in Japan, it's only 0.7 per cent. (The UK is in the middle, at 2.5 per cent.)

By investing in Australian shares, then, many investors are boosting the proportion of their returns that are taxed.

- Diversification.

When you invest offshore, you put your money in different industries and different economies. This improves the chances that your investments won't all do poorly at the same time.

But guess which share market is most likely to move in the same direction as the New Zealand market?

Sure, going across the Tasman exposes you to industries not found in New Zealand. But you don't gain nearly as much diversification as in other markets.

The Japanese share market, in particular, tends to be pretty unrelated to our market.

One reason, I suspect, that fund managers have added a few Aussie shares to their New Zealand funds is that the Australian share market has performed better than ours in recent years.

But the reverse has happened many times before, and it will happen again. Already this year we've shown up the Australians - although that's too short a period to make a fuss about.

The fund managers may also be driven by the knowledge that New Zealanders are getting more interested in spreading their share investments overseas. And many people feel safer venturing into Australia than elsewhere.

But that's just sentiment. The facts, as outlined above, argue against it.

I say keep New Zealand share funds purely Kiwi. Then investors can make the most of dividend imputation.

With the rest of their money - many experts say it should be around 75 to 80 per cent of their share investments - they can go offshore properly, via an international share fund.


Mary Holm, a freelance journalist and author of "Investing Made Simple", is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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