For Australians, home bias carries particular nuances. The ASX offers genuine structural advantages (notably franking credits) that do not exist in most other markets. At the same time, Australia represents roughly 2% of global share market capitalisation, making heavy domestic concentration a significant bet on a narrow slice of the world economy.
Key takeaway
Home bias involves real trade-offs between the tax and currency benefits of domestic investing and the diversification cost of concentrating in a single small market.
This article explains what home bias is, why it persists, what the trade-offs look like, and how different approaches distribute risk differently.
The gap between global weight and portfolio weight#
Australia's share market represents approximately 2% of global equity market capitalisation.¹ By this measure, a "neutral" global portfolio would hold about 2% in Australian shares and 98% elsewhere.
In practice, many Australian investors hold far more domestically. Surveys and fund flow data suggest that Australian investors commonly allocate 50% to 70% or more of their equity holdings to the ASX.² Some hold almost entirely domestic portfolios.
This gap between Australia's global market weight and typical Australian investor allocations is home bias. It is not unique to Australia. American, Japanese, and European investors exhibit similar patterns toward their own markets. But the gap is especially wide in Australia, partly because there are rational reasons for some of it.
The interesting question is not whether home bias exists. It clearly does. The interesting question is how much of it is justified, and at what point it becomes excessive concentration.
Rational arguments for some domestic tilt#
Not all home bias is irrational. Several features of the Australian investment landscape create legitimate reasons for holding more domestic assets than a purely global-weight allocation would suggest.
Franking credits and dividend imputation#
Australia's dividend imputation system allows shareholders to receive credit for company tax already paid on corporate profits. Fully franked dividends carry franking credits that reduce (or, for some investors, eliminate) personal tax on that income. For investors in low tax brackets, including many superannuation funds in pension phase, excess franking credits can be refunded.³
This system is relatively unusual globally. It makes Australian dividends more tax-efficient for Australian taxpayers than equivalent unfranked income from international shares. The franking credit benefit is real, measurable, and well-documented. It provides a structural incentive to hold some Australian equities that does not apply to overseas holdings.
Currency matching#
Most Australians earn income in Australian dollars and pay expenses in Australian dollars. A portfolio heavily weighted to international assets introduces currency risk: the possibility that AUD movements against foreign currencies change the value of overseas holdings in AUD terms, independent of market performance.
Holding domestic assets naturally matches the currency of the portfolio to the currency of future spending. This reduces one source of uncertainty, particularly for investors approaching or in retirement, where short-term volatility in AUD-converted values matters more.
Familiarity and information access#
Australian investors generally have better access to information about Australian companies. ASX-listed companies report under Australian accounting standards, are covered by Australian media, and are regulated by ASIC. This familiarity can reduce the sense of uncertainty, even if it does not always translate into a genuine information advantage.
Lower transaction and tax costs#
Investing domestically avoids foreign exchange conversion costs, foreign brokerage fees, and the complexity of foreign withholding tax. These frictions are not large individually, but they accumulate over time and across transactions. For smaller portfolios, the proportional drag can be meaningful.
Arguments against excessive domestic concentration#
The benefits above are real, but they have limits. Beyond a certain point, home bias stops being a rational tilt and becomes concentrated risk.
Sector concentration on the ASX#
The ASX is heavily concentrated in two sectors: financials (primarily the major banks and insurers) and materials (primarily mining companies). Together, these sectors often account for close to half of the ASX 200 by market capitalisation.⁴
This means an Australian-only equity portfolio is, in practical terms, a large bet on banks and mining. It provides limited exposure to sectors that dominate global markets, including technology, healthcare, advanced manufacturing, and consumer discretionary companies at global scale.
| Sector | Approximate ASX 200 Weight | Approximate Global (MSCI World) Weight |
|---|---|---|
| Financials | ~28% | ~15% |
| Materials | ~19% | ~4% |
| Information Technology | ~4% | ~24% |
| Healthcare | ~8% | ~12% |
| Consumer Discretionary | ~6% | ~11% |
Weights are approximate and shift over time. They illustrate structural differences, not precise current figures.
The table makes visible what home bias obscures: an Australian-only portfolio is overweight in sectors tied to domestic lending and commodity cycles, and substantially underweight in sectors that have driven global growth.
Missing the global opportunity set#
The world's largest companies by market capitalisation are predominantly listed outside Australia. Concentration in the ASX means missing direct exposure to the majority of the global economy's publicly listed businesses. This is not a judgement about which markets will outperform. It is an observation about the breadth of the opportunity set.
Sometimes the familiar feels like enough. But comfort and diversification are not the same thing.
Single-economy risk#
An Australian-only portfolio is exposed to a single economy's regulatory changes, commodity cycles, housing market dynamics, and demographic shifts. Australia's economy has distinctive features (significant resource exports, a concentrated banking sector, high household debt relative to income) that create specific vulnerabilities.
Diversifying internationally distributes exposure across multiple economies with different structures, cycles, and risks. This does not eliminate risk. It redistributes it across a wider base.
Historical return concentration#
Over certain periods, the ASX has underperformed global benchmarks significantly, and vice versa. A portfolio that only holds Australian equities accepts whatever the domestic market delivers, with no exposure to periods where other regions outperform. Over long time horizons, the variability between single-country returns and global returns can be substantial.⁵
What "some home bias" looks like in practice#
Australian financial literature and research bodies have discussed the question of appropriate domestic allocation at length. There is no consensus on a single number, but a range of perspectives exists.
Vanguard's research on the topic has suggested that a domestic allocation of around 30% to 40% of the equity component may balance the benefits of home bias (franking credits, currency matching) against the costs of excessive concentration, for a typical Australian investor.²
The Association of Superannuation Funds of Australia (ASFA) and various industry super funds hold allocations that typically reflect some home bias, with domestic equity often representing 20% to 40% of total equity exposure, though this varies considerably by fund and strategy.⁶
Academic research generally finds that the optimal domestic allocation for Australian investors is higher than Australia's 2% global market weight, but substantially lower than the 50% to 70% many Australians actually hold.⁵
These ranges are descriptive, not prescriptive. They reflect what researchers and institutions have published. Individual circumstances differ.
| Approach | Typical Domestic Equity Range | Key Characteristic |
|---|---|---|
| Global market weight | ~2% | Pure diversification, no home tilt |
| Some home bias | ~20-40% | Balances franking, currency, and diversification |
| Strong home bias | ~50-70%+ | Prioritises familiarity, franking, currency matching |
The point of this table is not to suggest one row is correct. It is to make visible that the three approaches represent meaningfully different risk and benefit profiles.
Home bias is also a currency decision#
A detail that often goes unnoticed is that choosing a domestic allocation is simultaneously choosing a currency allocation. Every dollar invested in ASX-listed equities is denominated in AUD. Every dollar invested in unhedged international equities carries foreign currency exposure.
An investor who holds 70% in Australian shares and 30% in unhedged international shares has, roughly speaking, 70% AUD exposure and 30% foreign currency exposure. An investor who holds 30% domestic and 70% unhedged international has the opposite.
Neither position is inherently superior. A higher AUD weighting reduces currency volatility relative to Australian spending needs. A higher foreign currency weighting provides diversification away from AUD-specific risks (for example, a significant decline in the Australian dollar due to falling commodity prices).
Currency hedging (available through some funds and ETFs) adds another dimension. Hedged international holdings aim to remove the currency effect, delivering returns closer to what the foreign market earned in its local currency. Hedging has costs and changes the return profile, but it allows investors to separate the market decision from the currency decision.
The home bias question and the currency question are two sides of the same coin. Choosing how much Australia is enough also means choosing how much AUD exposure is enough.
Closing#
Home bias in Australian investing is not a simple mistake to be corrected. It is a spectrum of trade-offs. Franking credits, currency matching, and familiarity are legitimate considerations that justify some domestic tilt above Australia's 2% global market weight. Sector concentration, a limited opportunity set, and single-economy risk are legitimate considerations that argue against holding 50% or more domestically.
Where on that spectrum a particular investor lands depends on their circumstances, goals, and how they weigh these competing factors. The most useful starting point is understanding that the choice exists, and that each position along the spectrum carries its own set of risks.
Every allocation is a bet of some kind. The question is whether it is a deliberate one.
Summary#
Home bias is the tendency to over-allocate to domestic markets relative to their global weight, and Australian investors exhibit it more than most. Genuine structural advantages, particularly franking credits and currency matching, justify some domestic tilt above Australia's roughly 2% share of global capitalisation. However, the ASX's heavy concentration in financials and materials, combined with limited exposure to global sectors like technology and healthcare, means excessive home bias introduces significant concentration risk. Research from Vanguard and other bodies suggests that a domestic equity allocation in the range of 20% to 40% is commonly discussed as balancing these trade-offs, though individual circumstances vary.
Sources#
- MSCI. (2024). MSCI ACWI Index factsheet. https://www.msci.com/documents/10199/8d97d244-4685-4200-a24c-3e2942e3adeb
- Vanguard Group. (2023). The role of home bias in global asset allocation: An Australian perspective. Vanguard Research. https://www.vanguard.com.au/personal/education-centre/en/insights-article/role-of-home-bias
- Australian Taxation Office. (n.d.). Dividend imputation. https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-dividend-imputation
- S&P Dow Jones Indices. (2024). S&P/ASX 200 sector breakdown. https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200/
- Rowley, J., & Kaplan, P. (2023). The home bias in equity portfolios. Vanguard Research. https://corporate.vanguard.com/content/dam/corp/research/pdf/Global-equity-investing-The-benefits-of-diversification-and-sizing-your-home-bias-AU-ISG.pdf
- Association of Superannuation Funds of Australia. (2024). Superannuation statistics. https://www.superannuation.asn.au/resources/superannuation-statistics/