Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Australia ranks poorly with country bias
Australian super funds tend to pride themselves on their international outlook and the level and diversification of their offshore exposures, notwithstanding the historical volatility of the Australian dollar. However, after adjusting for the size of the Australian market and several other factors, we are ranked only 11th in terms of avoiding ‘home country bias’.
A German researcher, Helena Kleinert, has written a paper called “Cultural Influences on Domestic and Foreign Bias in International Asset Allocation”. In it she looked at home country and foreign country biases after considering 15 variables grouped into six categories: economic development, stock market development, capital control, investor protection, cultural dimensions and familiarity.
Australia is ranked 16th out of the 26 countries studied for home country bias, with an average of 80.8 per cent of institutional investments allocated domestically. But the US is ranked 26th despite having almost the same level of domestic investment with 80.9 per cent. The country with the highest home country bias was Turkey, followed by Chile, Malaysia, Denmark and Norway.
This is an edited version of the researcher’s table:
Rank Country Actual allocation %
1 Turkey 98.6
2 Chile 79.2
3 Malaysia 95.9
4 Denmark 45.2
5 Norway 42.8
6 Finland 46.4
7 Belgium 48.9
8 Russia 99.6
9 Singapore 46.0
10 Sth Africa 87.5
11 Brazil 97.5
12 Sth Korea 93.2
13 India 99.7
14 Sweden 53.9
15 Hong K. 81.3
16 Australia 80.8
17 Spain 87.1
18 Italy 48.8
19 Switz’land 53.9
20 Canada 73.0
21 France 78.4
22 Holland 26.1
23 Germany 78.4
24 Japan 86.3
25 UK 62.4
26 USA 80.9
