Has home bias paid off for Aussie investors?

Australian investors have long exhibited a strong home bias – allocating a substantially larger share of their portfolios to local equities than the size of Australia’s share market warrants. With around 2% of the global market capitalisation, Australia’s economy and stock market are small relative to global peers like the US, which makes up 70% of global indexes.

Yet, many Australian investors hold far more than 2% of their portfolio in Australian equities. This could be due to familiarity with the companies, the benefits of franking credits and ease of access.

It is commonly said that diversification is the only free lunch in investing, but has this concentration in Australian equities served a three-course meal for Aussie investors?

The last 10 years: local vs global returns

* Research shows that franking credits add about 2% annually to share market returns. Source for performance figures: Vanguard at 30 June 2025. US equities: S&P 500 Total Return Index (in AUD). Australian equities: S&P/ASX All Ordinaries Total Return Index. International equities: MSCI World ex-Australia Net Total Return Index AUD Index.

Over the 10 years to June 2025, the global share market returned approximately 12.5%, while Australia returned 11.1% (including estimated impact of franking) and US equities shone with 15.5% p.a. Even after accounting for domestic franking credits, global shares materially outperformed Australian shares over this decade.

After tax on a dividend heavy index in Australia, plus capital gains (assuming a CGT discount), the net advantage for franking credits shrinks.

On purely historical return figures, even generous treatment of franking credits would not have closed the gap between Australian and global shares over the decade. In other words, a heavy local tilt likely cost performance relative to a more globally diversified approach.

US and Global equities outperformed Australian equities (inc. franking) over 10 years.

The last 20 years: local vs global returns

* Research shows that franking credits add about 2% to share market returns. Source for performance figures: Vanguard at 30 June 2025. US equities: S&P 500 Total Return Index (in AUD). Australian equities: S&P/ASX All Ordinaries Total Return Index. International equities: MSCI World ex-Australia Net Total Return Index AUD Index.

Over a longer time horizon, the story becomes more nuanced.

20-year performance data from Vanguard shows that Australian equities, with the help of franking credits, were marginally more attractive over international equities. However, US equity markets delivered high returns, outperforming Australian equities and a more diversified global approach. This was driven by strong performance of US tech and other growth sectors.

The themes over the last 20 years saw Australian equities perform better (strong dividend yields, resource exposures) relative to international markets. Global equities were buoyed by heavy exposure to US equities, which delivered strong capital growth.

Finally, currency effects matter. A weakening Australian dollar over parts of these decades boosted global returns measured in AUD. Meaning, global equities performed relatively better than when measured in local currency terms.

Australian equities (inc. franking) outperformed international equities, but US equities outshone both.

The last 30 years: local vs global returns

Stretching the time horizon over the last thirty years includes multiple economic cycles.

Australian equities have performed best for investors that are eligible for franking credits, delivering around 11.3% p.a.. Australian equities on a total return basis, with franking credits, outpaced both US and international equities.

Australian equities (inc. franking) outperformed US and Global markets.

Not perfectly reflective of reality, but instructive

These theoretical performance figures assumes an investor gained index exposure at the beginning of each period – something that was not easily accessible 20-30 years ago.

Many investors held concentrated portfolios of direct shares, meaning that their outcomes likely differed materially from index-level returns.

Does this make this exercise irrelevant? No. The purpose is to test the validity of home bias. One of the most common justifications for overweighting Australia shares is the idea that franking credits meaningfully compensate for a lack of diversification. This analysis shows that the net tax benefit of franking credits is beneficial but future expected returns should also be considered if performance is the sole goal. This is where the data becomes instructive.

The data suggests that a balanced approach, combining both domestic equities (for income and tax efficiency) and global equities (for growth and diversification) likely served investors better than a strong home bias alone across these periods.

What investors gain from each asset class

Investors were implicitly choosing income and tax efficiency over potential growth. To make better informed decisions, a high-level overview can reframe the opportunity cost.

The hidden lessons

What this data doesn’t take into account is the individual goals of an investor. It does not consider whether an investor’s goals were income or capital growth. It does not consider investor time horizons, currency exposure, or any other personal circumstances.

Exposure to asset classes should not be dictated on past performance, but in the same vein, exposure should not be concentrated in one region purely due to preconceived notions of income and tax efficiency buoying performance.

The real lesson is reframing the question. It isn’t about which exposure is ‘better’. It is about what is best for your portfolio. Portfolios serve goals, and not benchmarks. Focus on whether you need to temper your exposure to local markets based on what you are trying to achieve.