GLOBAL - Constellation Capital Management, an Australian investment boutique, has launched a new benchmark system designed to help pension funds overcome the sector quirks of a home country bias and diversify into international markets.
The so-called ‘HomeGlobal’ investment method aims to offset the dominance of certain stocks and industries in home markets and spread their risk overseas.
Doug Little, Constellation managing director, said: “Our method breaks free from the shackles and problems of the current domestic/international paradigm where investors allocate equity assets around independently calculated domestic and international benchmarks.
“Whilst the increasing exposure to international equities has provided diversification benefits, the existence of dominant stocks and or industries in various home markets still causes a distortion in the equity allocation of superannuation and pension funds. The method provides a more relevant equities benchmark around which investment management mandates can be managed.”
The new method will be produce different portfolios based on different markets.
For example, explained Constellation, the Eurobloc is dominate in banks and oil and gas. When a fund allocates equities in an approximately 75:25 ratio to domestic and international markets, banks represent 16.7% of total equities, well above global weights.
“One may well ask why add to the already high domestic exposure in banks,” said the firm.
“Conversely, the low exposure to Europe pharmaceuticals & biotechs need to supplemented with exposure to international stocks. But the current domestic-international paradigm only results in a total exposure of 5.2% to the sector, which is well below the global weight.
“We hear pension fund trustees ask “is the domestic benchmark appropriate to our members?”
The new system is open to investors worldwide and will be operated through FTSE International with exposure to around 3,500 stocks. HomeGlobal is immediately available to Australian investors. Constellation’s Peter Vann, co-inventor of HomeGlobal, said that the method had already secured the interest of 2-3 major superannuation schemes there, but not yet in Europe.
Vann added: “The globalisation of markets is reducing the relative importance of country diversification and increasing the importance of industry factors.
“An investor only need allocate internationally to an industry if the domestic market does not provide adequate exposure to that industry. The method allows investors to capture the benefits of both globalisation and country diversification without surrendering investors’ preference for a home bias.”
The method was introduced in Tokyo at the Nomura Global Index Summit earlier this week.
Constellation said that it intends to follow-up with the launch of a pooled product.
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