Home bias costs return | Opinion | Currently

British investors, who mainly invested in the local stock market, had to accept lower returns in 2020. (Image: Shutterstock.com/QQ7)

Investors’ propensity to invest primarily in domestic assets is puzzling to Invesco’s Colin Fitzgerald. Because a focus on the home market means an increased cluster risk and often results in lower returns. The solution lies in strengthening the financial knowledge of investors.

A survey of UK investors carried out earlier this year showed that almost half of the investors surveyed held more than 50% of their assets in UK stocks, even though hardly any other major stock market did as poorly as the UK in 2020. A focus on the local market is therefore an “incredibly limited perspective”, says Colin Fitzgerald, Head of Distribution EMEA at Invesco.

One of the specific problems facing the UK stock market, the Invesco manager counts, is the relative loss of importance of the London Stock Exchange, which now accounts for just 3.6% of the global stock market, compared with more than 10% in 2006. It also reflects the underperformance of UK stocks in 2020 also reflected the lack of technology companies in his view: The technology sector accounts for less than 2.5% of the total value of the FTSE 100, compared with around 30% of the S&P 500. Meanwhile, the number of IPOs is also in London has declined dramatically over the past 15 years. Investors would therefore be “more likely to find a company that is over a hundred years old than a dynamic start-up”.

Don’t put everything on one card

However, that does not mean that investors should generally steer clear of British stocks, stresses Fitzgerald. In fact, the Invesco manager continues to see many attractive investment opportunities in this market: “Despite the additional complication of Brexit, the growing number of promising young companies and the increasing influence of venture capitalists show that the market is far from over The UK stock market could also be undervalued in terms of price / earnings, which is currently below comparable stock indices. ” Nonetheless, he believes the UK example illustrates the dangers of focusing too narrowly on a single market and the puzzling phenomenon that many investors remain reluctant to look beyond their home market, even if it underperforms over time.

According to Fitzgerald, one of the keys to investment success is to see the big picture – that is, to think long-term, thematically and globally. “Even if your home market should be the strongest economy in the world, you as an investor are well advised not to put everything on one card,” he emphasizes. After all, good diversification potentially reduces the overall risk and can help to achieve higher returns in the longer term.

In today’s investment world, investors could draw on a vast global investment universe and find that it is often worthwhile to think globally. “Just like diversification across different asset classes, regional diversification is not an absurd theory, but simply corresponds to common sense,” says Fitzgerald.

Fund managers are also vulnerable

As various studies show, however, this insight has still not caught on among investors. On the contrary, it has been shown again and again how many investors continue to weight their home market disproportionately in their portfolios. In fact, studies published nearly a decade ago have shown that some fund managers are just as vulnerable to home bias as individual investors.

Market psychology helps to explain this phenomenon: on the one hand, investors tend to feel more comfortable with assets they know well – or at least believe that they know them well – and hold onto what is supposedly unknown and more Far away, for riskier. Likewise, some investors prefer seemingly foreseeable results over what they think they cannot predict. Historically, the home bias can also be attributed to the fact that investors shied away from the difficulties traditionally associated with investing in foreign stocks, especially the perceived difficult access to these markets and the additional transaction costs.

For Fitzgerald, the phenomenon of home bias shows how important it is to strengthen the financial knowledge of many investors – especially at a time when the investment world is increasingly digitized and thus democratized. “The investment industry must do its part to close the gap between the enormously easier market access for investors and a still widespread lack of information, which is certainly not conducive to investment success,” emphasizes Fitzgerald.