Portfolio construction for NZ investors: what to actually put in it

The past four weeks have covered the structural context for NZ investors: why the rules are different here, which platforms suit which investor profiles, and how to avoid the most common and costly mistakes around FIF and PIR. This week the question is simpler and harder at the same time. You have sorted your platform. Now what do you actually put in it?

Start with the home bias problem

Home bias is the tendency for investors to overweight domestic assets relative to what a purely market-cap-weighted global portfolio would suggest. It is a well-documented phenomenon in every country, driven by familiarity, currency comfort, and the convenience of locally listed assets.

For New Zealand investors, home bias is a particularly serious problem. The NZX represents roughly 0.1% of global equity market capitalisation. A fully home-biased NZ investor is concentrating their entire portfolio in one of the smallest, most sector-concentrated equity markets in the developed world. The NZX is dominated by utilities, property, and a handful of large consumer businesses. It has almost no technology exposure, minimal financial services depth, and very limited industrials. Holding only NZ equities is not a conservative strategy. It is a concentrated bet on a narrow slice of the global economy.

At roughly 0.1% of global market capitalisation, staying purely domestic means concentrating your entire portfolio in one of the smallest corners of the world economy.

That said, there are real reasons to hold some NZ equities. Currency alignment is one: NZ assets are denominated in NZD, which removes the currency risk that comes with international holdings. Dividend imputation credits are another: NZ companies can pass on tax credits to shareholders in a way that meaningfully improves after-tax returns for NZ resident investors.

The question is how much. The answer is almost certainly less than most NZ investors currently hold.

The case for global diversification

A market-cap-weighted global equity portfolio today is roughly 65% US equities, 15% other developed markets, and the remainder split between emerging markets and smaller developed economies. New Zealand at 0.1% is a rounding error.

For most NZ investors, the practical implication is straightforward: the core of a long-term portfolio should be globally diversified, with NZ equities as a deliberate allocation rather than a default.

How much NZ equities?

The academic literature on home bias and portfolio optimisation generally suggests that a moderate home bias - holding somewhat more than your market-cap weight in domestic assets - can be justified on the grounds of currency matching and reduced transaction costs. For NZ investors, that might suggest a NZ equity allocation of 10% to 20% of a total equity portfolio, rather than the 0.1% that pure market-cap weighting would imply.

What it does not suggest is 50% or more in NZ equities, which is closer to what many NZ KiwiSaver funds and retail investors actually hold.

The Australian question

Australian equities sit in an interesting position for NZ investors. The ASX is a larger and more diversified market than the NZX, with meaningful financial services, resources and materials exposure that NZ lacks. From a tax perspective, Australian shares listed on the ASX All Ordinaries are exempt from FIF for NZ individual investors, which means they are taxed on actual dividends received rather than a deemed return. That is a meaningful advantage for income-oriented investors.

A modest Australian equity allocation - 10% to 15% of total equities - gives NZ investors exposure to a more diversified market, some resources exposure they would not otherwise have, and a tax-efficient way to hold international assets without triggering FIF.

A practical allocation framework

The following is an illustrative starting point for a growth-oriented NZ investor in their 30s or 40s building a long-term portfolio. It is not a recommendation.

The 60% global equities allocation would typically be accessed through NZ-domiciled PIE funds - Smartshares funds on InvestNow, or Kernel's global index funds - which handle FIF internally. That keeps the tax position clean for the majority of the portfolio.

The FIF threshold and how it shapes construction

Currency hedging: a brief note

For the global equities portion of a portfolio, the choice between hedged and unhedged funds matters over time. The short version: unhedged funds give you full exposure to currency movements, which can add or subtract 10% to 20% in a given year. Hedged funds reduce that variance but come at a cost, typically 1% to 2% per year, which compounds significantly over a long investment horizon. For a long-term investor with a 20-plus year horizon, the compounding cost of hedging is a meaningful drag. We cover this in detail in Issue 7.

Putting it together

Portfolio construction does not need to be complicated. For most NZ investors, a straightforward approach works well: a globally diversified equity core accessed through NZ-domiciled PIE funds, a modest NZ and Australian equity allocation, and enough stability from bonds or cash to avoid being forced to sell equities at the wrong time.

A globally diversified portfolio accessed through NZ-domiciled PIE funds handles most of the complexity automatically. Understanding why it works that way is what separates deliberate investing from accidental investing.