Home Country Bias – A Global Phenomenon

A recent Vanguard research piece highlights the prevalence of home country bias:


Cullen Roche’s take:

What this chart is showing is that every country has a home bias. So, if you’re an American investor you tend to hold mostly domestic stocks. If you’re a Japanese investor you tend to hold mostly Japanese stocks. So on and so forth. And what’s crazy to think here is that you’re literally just buying stocks from one country because you were born there and for whatever reason, you think that’s the only country whose stocks you should own. Of course, we should know better.

The empirical research (see Aness 2011 & Vanguard 2006) clearly shows that international diversification works. And it works for the same reasons that domestic diversification works. Basically, by owning a bigger pool of assets you reduce specific risks within your domestic economy such as domestic economy risk and currency risk.

A great example of this is Japan. One of the great worries every investor has is falling into the Japan trap where you undergo 20 years of stagnant or negative returns. As I noted in “The Importance of Global Asset Allocation“, it’s imperative that investors diversify abroad to avoid such a risk. Yet almost every domestic investor has an overweight in their domestic economy.

It just shows that irrational investing persists despite the well founded empirical evidence that shows how risky home bias can be.

For a variety of reasons, investors are just more comfortable with what they know even though international exposure has the potential to be a valuable part of their overall portfolio.  However, investors in relative strength strategies may take some measure of comfort in looking at an international equity strategy that employs a portfolio management process that they are familiar with, but just applies it to an international equity universe.  For that reason, investors may want to consider our Systematic RS International portfolio.  The portfolio management rules used for this portfolio are similar to the rules we use for some of our domestic equity portfolios.  We rank a universe of securities by their relative strength, buy stocks out of the top quartile of our ranks and sell them when they fall out of the top half of our ranks.  What is different is that rather than evaluating a universe of U.S. mid and large cap stocks, our model is evaluating a universe of about 500 ADRs from both developed international markets and emerging markets.  This portfolio just reached a 10-year track record earlier this year and we are very proud of the results.  Performance details shown below:

intl perf

intl perf 2

As of 7/31/16

This portfolio is available as a separately managed account and a unified managed account at a number of firms.  If your clients fall into the category of investors who need to beef up their international equity exposure this may be a solution that they can get excited about.  To receive the fact sheet for this portfolio, please e-mail andyh@dorseymm.com or call 626-535-0630.

1The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model.  Net performance shown is total return net of management fees, commissions, and expenses for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account.  The advisory fees are described in Part 2A of the adviser’s Form ADV.  The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter.  All returns since inception of actual Accounts are compared against the NASDAQ Global ex US Index.  The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq.  The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable.  There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.  Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.


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