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.
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
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.