Where do Australians invest?

[Abstract]: The rapid increase in international capital flows is one of the most significant developments in the global economy in recent decades. International portfolio diversification brings potential benefits to investors by offering investors the opportunity to insulate their portfolios from domestic risks associated with a down turn in local asset prices. The Australian investment environment has been progressively liberalised beginning with the removal of foreign exchange controls in 1987, and the movement to a floating exchange rate regime, other milestones included opening up the banking sector to foreign competition. Until recently, data on the level and geographical pattern of international portfolio investment has been inadequate. In recognition of this fact the International Monetary Fund (IMF) commenced in the mid nineties a pioneering comprehensive survey of the geographic structure of the foreign portfolios (equity and long-term bonds). The first publication covered the 1997 position of foreign portfolios held by the residents of twenty-nine countries, including Australia (IMF 2000), data from a follow up survey relating to 2001 international portfolio holdings was made available in 2003. In this paper we analyse the Australian data reported in the surveys by providing an analysis of the geography of international portfolio investment (equity and long-term securities). We find that countries most open to trade and hence most vulnerable to external shocks tend to diversify more by holding a higher percentage of their portfolios in foreign assets, compared to other countries. Australia appears to be quite outward looking in its investment behaviour, suggesting that Australian investors recognise the advantages of international diversification. However, a cross country analysis of the pattern of international portfolio investment indicates that the Australian portfolio investment position is not proportional to the overall economic or financial market size of the destination countries global standing, but instead matches Australian trade patterns surprisingly closely, here the US is over represented in the case of Australia’s international portfolio investment position. Does this reflect a preference for investing in countries made familiar by trade and other relations? If so, this portfolio may imply sub-optimal strategies by Australian investors?