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For this episode of the podcast I’m speaking with Alex about diversification. To listen to the podcast click on the link below.
First things first, Alex has one of the best job titles ever – Head of Wealth. And it turns out BlackRock isn’t named after a lump of coal - there’s a bit more to the name. Alex touches on the story of BlackRock, which is now the biggest asset manager in the world ($5.4 trillion).
Within BlackRock is iShares, the arm that manages exchange-traded funds (ETFs). iShares is now the largest issuer of ETFs in the world.
Diversification is a term bandied around a lot, but a lot of Australian investors don’t practise this philosophy. They have a home bias towards their investments that involves putting most or all of their investment “eggs” in one basket. Some continually invest in Australian shares and Australian property because international diversification has traditionally been hard and expensive to achieve.
So why diversify? Among the many reasons is that Australia is skewed towards financials and resources – a bank next to a hole in the ground. Furthermore, the ASX only makes up 3% of the world’s capitalisation so if you’re limiting yourself to Australian listed shares you’re missing out on 97% of the world’s investable opportunities.
We discuss two scenarios in which someone is wanting to buy into the biggest 100 companies in the world.
You could find a platform that allows you to buy international shares, sort out currency conversion for the trades in each country, followed by 100 separate trades – a time-consuming and expensive process; or,
You can buy one ETF on the Australian stock exchange (BlackRock offer such an ETF).
An exchange-traded fund is a fund that trades on the market. Alex uses a shipping container analogy to highlight the benefits of ETFs. Shipping containers were invented in 1956 and streamlined the shipping transport process with a uniform container to replace a process which had previously been slow and inefficient. An ETF is just a “wrapper” that holds investments that people have been buying for years (i.e. shares, bonds, cash).
Good ETFs should be transparent (in that you can see what the ETF is holding every day – within the “shipping container”). For example, to get exposure to emerging markets Six Park uses the Vanguard FTSE Emerging Markets Shares ETF (Ticker VGE). To see what this fund holds click here.
ETFs have many different uses for different portfolios. Active asset managers use ETFs to manage billions of dollars, and mum and dad investors use ETFs to help diversify their investments.
If you would like to read more and educate yourself on the market Alex recommends reading Bloomberg markets for daily information on global markets. Or within BlackRock they also have a great resource of information within their own iShares Learning Centre.
As with every guest on the podcast we discuss the worst investment Alex has ever made and what he is currently reading. You will have to listen to the podcast to find out Alex’s worst investment (we’ve all made a bad investment!), but the book Alex is currently reading is Reminiscences of a Stock Operator. Written in the early 1900s, it is about a boy who starts investing at the age of 15. The book, which is considered a thinly disguised biography of American investor Jesse Lauriston Livermore, goes into great detail about the mistakes the character makes over the years. I think I’ll have to do my own review of this book in my next Six Park Super Update.
To find out how Six Park diversifies our clients’ investments click here to see the ETFs we use. And, just like a good ETF, we’re very transparent about where we invest.
Director of Business Development