Investors’ natural tendency to be most attracted to investments in domestic markets. Investors tend to focus more on their home markets and the companies that do business within these markets because they are familiar with them.
Much has been written on investors’ Home Country Bias recently. Studies and analyses have been performed. It’s real and this syndrome has infected most of the planet. But there is an antidote! But wait. Before we get too carried away, let’s take a closer look.
In his recent article Home Country Bias: The Worst Offenders, Joshua M. Brown presents a case that currency strength is the primary determinant of stock market performance. The one issue I have with Joshua’s article is the reference to Vanguard’s paper. A seventh element should be included: Taxation (both home country and foreign).
Currency strength is one I can relate to. With the US dollar at a level rarely seen, my foreign holdings have been increasing. The theory being as the US currency falls the foreign dividends increase through the exchange rate. For investors uncomfortable with currency issues, there is still hope!
The article that I’ve seen cited most often is Your portfolio may be less diversified than you think by Jeffrey Kleintop. Along with some cool graphs, Jeffrey lays out a compelling case. Until you get to the small print. His (Schwab’s) solution is MSCI which is not a singular view. Vanguard, Northern Trust, Franklin Templeton, et.al. all subscribe to this view. My opinion is that quite a bit of this hype is boilerplate advertising provided by MSCI.
So what is MSCI? MSCI Inc. (MSCI) was a Morgan Stanley spin-off. Their claim to fame is as an index provider used by a number of funds. I’m not saying the data is inaccurate. Nor that the information provided isn’t pertinent. What I am saying is that I have a problem with packaging a solution to an important investor issue as an infomercial without requisite disclosures.
If you wade through Jeffrey’s article, an alternative is provided! He notes that country performance closely correlates with one sector, the US being technology. I would assume that by weighting the portfolio less in technology and higher in other sectors could result in a 100% home bias performing as if there were no bias.
Just food for thought. Comments?
Seeking Returns 
I agree that taxation is a huge issue to lots of investors. It is the main reason why most of our investing will remain in Australia. US investing we’d be taxed more, and with Australian investing we receive more money (tax is refunded).
Tristan
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Sorry – just found this one – the spam filter got you. So in general, what’s the treatment for dual listed companies? Example – HGG.AX (also HGG.L), now merging with JNS. HQ will remain in London, listing moved to New York and Australian dual listing retained.
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It is like any other company listed in Australia but not a tax resident. There aren’t any franking credits, but the dividends are paid as normal. The new entity may be different, not sure. It’s an interesting development, that’s for sure.
Tristan
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Interesting read. Guess we are also somewhat home country biased with our real estate ventures, crowd funding loans and even with our dividend stocks (primarily Canadian, due to investment account and tax reasons). But at least our ETF’s are well diversified outside the Netherlands 😉
Cheers!
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My sense is that real estate (other than REITs) and P2P pretty much necessitate home country bias due to local laws and regulations. I suspect most investors gravitate toward their home country due to taxes and/or foreign exchange – or the effort required to understand the nuances.
I might have to address this issue further looking specifically at DGI portfolios vs. MSCI data to see what correlation there may be …
Thanks for the comment and here’s to your next year 🙂
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Think you’re right on the tax and foreign exchange points. Looking forward to your review on the DGI vs MSCI portfolios.
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