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Asian Investors Could Benefit From a Reduction in Home Bias

Although it is trending down, Asian pension funds continue to hold domestic equities larger than their respective market capitalisation levels in their portfolios. Adding global equities could improve investors’ long-term risk-return profiles in the five Asian markets that we examine — Hong Kong, Japan, Korea, Singapore and Taiwan. International diversification reduces risk much more than domestic diversification because domestic securities tend to be more highly correlated with each other given their exposure to country-specific shocks.

Head of Strategy & Research, APAC
Senior Investment Strategist

Home bias refers to the phenomenon of investors worldwide tending to disproportionately allocate their equity portfolios with domestic assets despite potential benefits from international diversification. While recently we have been seeing a downward trend in domestic equity holdings across Asia, there still remains a significant home bias in equity allocations in Asian markets. This exposes pension plans in Asia to higher risks as Asian equity markets often display higher volatilities and concentration risks relative to global equities.

Home biases can exist for a variety of reasons including investment barriers, transaction costs, corporate preferences and regulatory constraints. There are also currency risks to consider. However, there is no denying that there are significant benefits to expanding investments into global markets, including volatility reduction, return diversification and the ability to reduce concentration risk.

Over the long term, global equities tend to generate comparable or better risk-adjusted returns relative to those of Hong Kong, Japan, Korea, Singapore and Taiwan — the markets that we are considering for analysis in this paper — suggesting global investments could improve long-term risk-return profiles in these markets. This would imply that the trend toward global investments should (and likely will) continue across Asia.1