Summary: Home biases can exist within portfolios but is this due to investment rationale or historical norms? In a more economically and geographically diverse world, Chris Forgan portfolio manager of Fidelity’s Multi Asset Allocator range, explains why home bias can act as a hindrance rather than a help in static allocation portfolios.
Key points
- The evolution of financial markets over the years has weakened or eliminated many of the original arguments for a home bias.
- Every region has its own characteristics, so reducing home bias can also reduce unintended sector and style bias.
- The Fidelity Multi Asset Allocator range aims delivers a simple proposition at an attractive price. We have a globally diversified fund with a range of risk profiles and crucially we have no UK home bias.
Why home bias exists
Home bias - the inclination to invest more in domestic assets - has been prevalent since the dawn of financial markets for several reasons. First, some investors assume they have better information on their home markets and can therefore improve returns by tilting towards domestic securities. Second, some investors regard foreign assets as riskier and prefer to invest in their ‘comfort zone’ as a form of risk management. Third, regulations and transactions costs can make foreign securities less attractive. Finally, investors with static allocations can be left with a home bias by long-term changes in global markets. This is especially true in the UK, where the decline in size of the UK market over the past few decades could mean investors are unwittingly left with a home bias.
Chart 1: UK investors with static regional weights could now have a home bias
MSCI UK and MSCI World used. Source: Refinitiv, Fidelity International, January 2024.
Home bias is still common today. However, the evolution of financial markets over the years has weakened or eliminated many of these arguments, especially in developed economies such as the UK. Information on even distant markets is now more readily available and foreign investment is routine. Regulations in the UK have shifted to facilitate and encourage the international flow of capital, while the increasing sophistication of the financial system has reduced transaction costs across virtually all asset classes.
Therefore, one of the primary reasons that home bias still exists in the UK is because it has become a structurally embedded industry norm, rather than a superior investment approach.
Our research highlights the benefits of increasing diversification
In the Fidelity Multi Asset Allocator range, we have worked hard over the last few years to make sure we offer a simple proposition based on sound investment principles and global diversification at an attractive price. To reflect this, we have eliminated the UK home bias in our portfolios. We believe this will improve performance, reduce risk, and provide more transparency for investors.
1. Improve performance
Industry surveys suggest that the average balanced model portfolio has around 25% of the overall equity exposure in UK equities1, and around 18% in UK bonds2. However, the UK accounts for just 3% of global GDP and only 4% of global equity and bond markets.3 Therefore, reducing or eliminating UK home bias gives investors access to a greater share of the growth that helps drive asset performance.
Reducing home bias also increases the number of return drivers in a portfolio. Greater exposure to a particular region can be desirable when taking shorter term decisions. But running a long-term overweight to a single region increases the dependency on a narrower set of return drivers and can lead to missed opportunities in other regions. On the contrary, increasing global diversification gives exposure to a broader set of opportunities and tends to smooth returns over time.
