MARKET COMMENTARY

Seeing The World

How’s home country bias potentially influencing your portfolio? See what’s involved and how we approach this well-known, worldwide phenomenon.

07.23.2019 - Giles Marshall, Vice President, Portfolio Manager,

Seeing the World

By Giles D. Marshall

Home country bias—the strong tendency to own securities listed in your home country—is a well-known, worldwide phenomenon. In many instances, including Canada, focusing heavily on domestic holdings generally results in an under-diversified portfolio, where risks are concentrated and opportunities are foregone.

Home country bias has been well documented over the years. While there’s plenty of empirical evidence to suggest it’s suboptimal from a portfolio construction perspective, we think it’s understandable to a certain extent. After all, most of us prefer what’s familiar. For most Canadians, Loblaw and Safeway (now owned by Sobeys) are more familiar names than Kroger or Tesco. The Royal Bank and CIBC are more familiar brands than US Bancorp and Standard Chartered. Bell and Telus are more familiar than Verizon and China Telecom. Beyond simple familiarity, home country bias may also stem from investors wanting to avoid currency risk and the belief that corporate governance, if imperfect at home, is at least better understood than in foreign markets.

According to Investor Economics1, the average Canadian investor held 73.8% of their portfolio in domestic investments in November 2018. Part of that 73.8% represented Canadian bonds where there’s a stronger case for a domestic bias. However, the average Canadian investor’s portfolio held a weighting in domestic equities many times greater than Canada’s weighting in global equity indices. At the time of the Investor Economics report, Canada represented a mere 2.7% of world stock market capitalization (the total value of world stock markets).

S&P/TSX Composite vs. MSCI ACWI Sector Weights

For investors in countries such as the United States, where the domestic market is a large percentage of global bond and equity capitalization, and where there’s ample diversification by issuer and sector, we agree home country bias may be less of an issue. In Canada, on the other hand, the S&P/TSX Composite Index is especially concentrated at the sector level. The two largest sectors, Financials and Energy, have a combined index weight of 49.8%, while the four largest sectors, which include Industrials and Materials, have a combined index weight of 71.2%. Moreover, these sector concentrations are highly pro-cyclical—sensitive to the economic cycle. Defensive sectors on the S&P/TSX Composite Index, such as Utilities, Consumer Staples and Health Care, have a combined index weight of only 10.4%.

Managing Home Country Bias

As the above chart shows, the S&P/TSX Composite Index has sector weightings and concentrations that are very pronounced relative to a well-diversified global equity index such as the MSCI All Country World Index (MSCI ACWI).

At Fiduciary Trust Canada, we have long been aware of the shortcomings of home country bias and, over time, the equity component of clients’ portfolios has typically had a strategic weight of less than one-third Canadian equities, with the balance in US and International equities. While Canadian equities tend to perform well when global growth is strong, broad diversification outside Canada has served our clients well through the full economic cycle.

To gain a measure of how home country bias may be at work in your portfolio, talk to your advisor and/or portfolio manager.

 

 

 

 

NOTES:

1 “Investor Economics Insight. Canadian Investment Funds Advisory Service,” Investor Economics. December 27, 2018, https://www.investoreconomics.com/reports/investor-economics-insight-december-2018.

 

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