Home market bias: better the devil you know?

Anthony Rayner is a multi-asset fund manager at Miton.

It’s well documented that investors have a home bias, regardless of their location globally.

Understanding why this bias exists is relevant for all investors who are looking to diversify, especially those whose home market is small, concentrated or very domestically orientated.

Canada and Australia are two fairly extreme examples. They are overwhelmingly dominated by financials and resources, and their stock markets are both below 5 per cent of global market capitalisation. However, Canadian and Australian investors typically hold much more than half of their exposure in domestic stock markets. The dynamic in the UK is less extreme, but a similar principle holds.

There are some commonly cited concerns around overseas investing, including currency risk, corporate governance and geopolitical risk. However, currency risk can largely be mitigated by hedging back into the home currency, while corporate governance and geopolitical risk are not the preserve of overseas markets. Just take a look at Brexit.

While it’s difficult to prove, it seems that a large part of the rationale for home bias is psychological, driven by a preference for the familiar and a suspicion of the unfamiliar. From our perspective, we try to limit human biases, in order to remain as pragmatic as possible.

Brexit has led us out of the UK stock market

At the moment, we have a small exposure to the UK and the vast majority of that is to large multinationals, rather than domestically focused businesses. The rationale for this is driven by Brexit. There are undoubtedly some excellent stockpicking opportunities in the UK, but from a top-down perspective , which is how we view the world, the outlook is dominated by uncertainty around what the Brexit vote will actually mean.

This is blurring visibility for the UK economy and UK financial assets, and therefore colouring the relative risk/reward. As we aren’t constrained by indices, and endeavour not to be constrained by our emotions, we look to opportunities with better risk/reward profiles outside the UK.

Recognising our prejudices also allows us to be dispassionate overseas. For example, during a 95-minute televised debate before the German election, Brexit wasn’t mentioned once. If you’re based in the UK, it’s difficult to appreciate how this could be. Similarly, it’s difficult, but not impossible, to look past the Trump noise, to see that the US economy is motoring on nicely. Meanwhile, the potential fallout of the North Korea/US shouting match has distracted from the fact that the Chinese president came across as incredibly statesmanlike, no doubt important for geopolitics going forward.

We have to work even harder to recognise and limit our prejudices in an age of social media and fake news. We do this by reading local and varied news sources, looking at the facts presented, to get a holistic view of the data, while editorials can be useful to understand how emotional or desperate respective arguments are.

We try not to be seduced by the lure of geographic proximity and the prejudices that living in the UK can impose on us. A practical starting point for this is not locking onto an index as a first point of reference. It’s easy to rely on the comfort blanket of a domestically biased benchmark, but investment outcomes are our only benchmark, and a domestic bias is unlikely to be helpful.

Anthony Rayner is a multi-asset fund manager at Miton.  


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