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