The Home Bias You Didn’t Know You Had

April 21, 2021

4 min read

David Wong| Senior Investment Strategist and Head—Asia Business Development, Equities

Domestic investors often favor local companies, while shunning attractive opportunities elsewhere. For Asian investors, local-market bias has produced lackluster returns in the past and could do so again in the future. There are good reasons to expand allocations abroad.

In most sports, the hosting team carries a few subtle advantages over the visiting side. In addition to greater familiarity with their home field and local environment, having a supportive fan base produces an environment that’s more conducive to success.

The same is true in investments. Like sport fans, investors are generally more comfortable with markets and companies that operate closer to home. And an investment premium is often assigned to better-known assets.

Holding home biases is natural. When considering other variables—including foreign exchange risks, unknown regulatory environments or even tense political climates—investors tend to agree with Dorothy from The Wizard of Oz that “There’s no place like home.”

However, this type of prejudice can hurt investment returns. Not surprisingly, many investors are probably unaware that their asset allocations reflect these biases. For example, in Asia, where the home bias is led by emerging-market (EM) equity exposure, investors are less exposed to developed markets (DM), where innovative tech companies and shareholder-friendly policies are more prevalent (Display).

The Home Bias Is Evident Everywhere

Asset Class as a Percentage of Portfolios

Bar chart shows the difference in asset class allocation of family offices in the US, Europe and Asia.

Past performance and current analysis do not guarantee future results.
Average breakdown of assets held
Based on The Global Family Office Report, 2019, by UBS and Campden Research. The report combines qualitative and quantitative research drawn from 25 interviews with senior family office executives from around the globe, as well as 360 surveys collected between February and May 2019 from family offices worldwide.
Source: Campden Research, UBS and AllianceBernstein (AB)

Sometimes a home bias may seem justified by economic and market data. Many investors gravitate toward economic growth and market valuations in order to validate their country allocations. While both are important, the simplicity produces a false sense of security.

GDP Growth Rates Could Be Misleading

A country’s macroeconomic landscape is important to business operators. An expanding gross domestic product (GDP) implies demand creation, while a recession implies the opposite.

But over the past decade, faster-growing GDP rates did not necessarily benefit shareholders. While EM’s GDP growth averaged 4%, outpacing DM’s 1% rate, equity markets in the developing world grossly underperformed (Display). Over that 10-year period, the MSCI Emerging Markets Index (MSCI EM) squeezed out 12% returns, compared with 126% for the MSCI G7.

Faster EM Growth Has Not Translated into Better Shareholder Returns

G7 and EM countries are compared by annual GDP growth and equity market returns over 10 years through 2020.

Past performance and current analysis do not guarantee future results.
MSCI DM is represented by MSCI G7
Right display index to 100 on January 1, 2010
As of December 31, 2020
Source: Bloomberg, MSCI and AB

Profitability for larger listed companies partially explains the disconnect between economic fundamentals and stock market performance. Conversely, smaller private companies that are not represented on any major indices lack the scale to drive better investment returns on assets and often rely more on expensive bank loans to expand. While listed companies see lower servicing costs translated into better earnings growth and higher share prices, smaller firms face a tougher operating environment.

Besides economic growth, investors often rely on market valuations, or multiples, to inform their allocation decisions. Defined as the ratio of a company’s market capitalization to its reported earnings, this multiple helps assess how assets are priced relative to each other. The larger the ratio, the more expensive the asset.

But this, too, is an inaccurate generalization. Sector multiples vary, based on specific factors such as debt profiles or revenue recognition schedules. Like faster economic growth rates, lower market multiples are often misleading. Cheaper equities might not be a bargain—if their fundamentals aren’t strong or persistently profitable, the shares could become cheaper still. Weak corporate governance principles may also have a direct impact on profitability and earnings per share growth, in Asia or in any other region. And valuations can be constrained in family held conglomerates with complex shareholding structures, as well as state-owned enterprises and other firms that do not always act in the best interest of minority shareholders.

Coupled with a natural home bias, these market variables can unknowingly influence asset allocations. Expensive markets have become pricier over the previous decade, and this trend is unlikely to change. For example, investors place a premium on innovative DM companies (Display), particularly those that successfully readjusted their businesses to the new operating normal during the coronavirus pandemic.

Emerging Markets Have Been Cheaper than Developed Markets for Some Time

MSCI G7 and MSCI EM indexes are compared by price/forward earnings and the valuation difference between them since 2013.

Past performance and current analysis do not guarantee future results.
Left display shows the forward trading multiples for MSCI G7 and MSCI EM from 2013 to 2022.
Right display is the MSCI G7 premium multiple over EM from 2013 to 2022.
Through December 31, 2020
Source: Bloomberg, MSCI and AB

As a percentage of sales, DM companies spend significantly more than EM peers on research and development, which is critical for developing innovative technologies or building brand equity (Display). Conversely, EM companies spend more on capital expenditure, which is less valued in this environment.

DM Companies Spend More than EM Peers on Research and Development

MSCI G7 and MSCI EM are compared by R&D and capital expenditure, both as a percentage of sales.

Past performance and current analysis do not guarantee future results.
Left display represents annual research and development spending divided by revenue from 2014 to 2020.
Right display represents annual capital expenditure spending divided by revenue from 2014 to 2020.
Through December 31, 2020
Source: Bloomberg, MSCI and AB

Home bias is easy to correct. By understanding the risks of holding too much exposure to domestic stocks, and discovering the benefits of companies and markets abroad, reallocating can become a natural choice. For Asian investors, we believe that increasing exposure to DM stocks over EM stocks can help enhance return potential and reduce risk by opening allocations to a world of opportunities.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

About the Author

David Wong

David Wong is a Senior Investment Strategist and Head of Asia Business Development for Equities. He joined AB in March 2015, bringing two decades of experience in global equity markets to the firm. Prior to joining AB, Wong was a partner at Janchor Partners, a Hong Kong-based long/short equity hedge fund with US$2 billion in assets under management (AUM). Before that, he had set up the Hong Kong office for GMT Capital, an Atlanta-based long/short equity hedge fund with $5 billion in AUM, where he served as portfolio manager and head of Asian investments. Over Wong's eight years at the two hedge funds, he was responsible for global investments in technology stocks, and also served as a generalist portfolio manager for the Asia-Pacific region, including Japan. He was also the founder and managing director of Mobile Adventures, a pan-Asian wireless content company. Wong started his career as an equity research analyst at Bankers Trust and Deutsche Bank; at Deutsche, he managed a team of five associates as the firm's regional semiconductor analyst. He holds a BA in political science from Yale University. Location: Singapore

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