Home bias 'alive and well' nonetheless, says Accuvest's Garff; game plan flawed
A marked home country bias prevents many investors around the world from going global — a big mistake, according to David J. Garff, founder and president of Accuvest Global Advisors.
"Home bias is alive and well. The question is why," said Mr. Garff, speaking at the Investment Management Consultants Association's 2011 annual conference in Las Vegas.
He cited a 2009 study of endowments conducted by the National Association of College and University Business Officers, which showed that the range of equity exposure to the U.S. by U.S. endowments was between 54% and 75%, depending on the size of the endowment. Meanwhile, the U.S. represents only about 43% of world market capitalization, as defined by the MSCI AC World index, according to a white paper that Mr. Garff wrote this year.
The home bias among U.S. investors might be explained in part by the large U.S. weighting in that index. A separate study from 2009, however, shows that the bias is even more extreme in other developed countries, he said. According to an AllianceBernstein pension study, Australia — which represented just 2% of the index — had a home country allocation of 63%. Likewise, Canada — representing just 3% of the index — had a home country allocation of 49%. Meanwhile, Japan, which had a weighting of 12% in the index, had a home country allocation of 60%
Two main reasons account for the bias, Mr. Garff said.
First, investors are more comfortable investing in what they know, even though that may provide a false sense of security, he said. "For me, this is just an illusion," Mr. Garff said. "It doesn't work."
The reality is that investors rarely know much more about companies based in their home countries than they do about foreign companies, he said.
Another reason for the home country bias: investors want to avoid risks such as currency fluctuations, sovereign risk, weak or non-existent accounting standards, lack of publicly available information, and insufficient government regulation. But Mr. Garff pointed out that some of these same risks exist in U.S. markets.
Despite the debate as to whether investing globally based on the country or sector is preferable, recent research has shown that investing globally is important and that investors should diversify across both countries and sectors. Mr. Garff added that country effects tend to dominate sector effects over long time periods, particularly in emerging markets.
