Is your portfolio suffering from home country bias?

union jack flag and iconic Big Ben at the palace of Westminster, London

In 1970, I hadn't yet visited Sweden. But I did visit the country in 1974, as part of a summer spent youth hostelling around Europe.

And I left with a strong sense of admiration for it. Things weren't cheap, particularly for a 19-year-old on a limited budget. But the place worked. And the contrast between Sweden's railways, Stockholm's underground, and their dirty, creaking British equivalents could not have been starker.

All of which came flooding back as I read an article by investment commentator Merryn Somerset Webb in the Financial Times last month, gently mocking BBC presenter John Humphrys' perceptions of Africa, and in particular, the African state of Rwanda.

Tunisia, Algeria, Morocco, Libya and Egypt now have life expectancies that match Sweden's in 1970, wrote Ms Webb. And Rwanda has reduced its child mortality rate faster than Sweden did, cutting it from 114.6 deaths per 1,000 live births before the age of five in 2005, to 38.5 in 2016.

Invest further afield

Ms Webb's broader point was to advance the case for investing in frontier economies, a strategy with which I broadly concur. In aggregate, economic growth and wealth creation is always going to be higher in emerging economies than in mature Western ones.

Today, though, I want to make a slightly different point. Specifically, on the dangers of home country bias. This is the well-documented tendency for investors to focus their investment allocations largely, or exclusively, on their own domestic stock market, ignoring opportunities in other markets.

In part, such an investment stance is understandable. It avoids currency risk, for instance. One might expect dealing costs to be lower. Overseas investments can attract less favourable taxation treatment, such as the levying of withholding taxes. And investors will naturally expect to be more familiar with domestic markets than overseas ones.

A home country bias can be expensive

But the dangers are equally clear. All your eggs in one basket? They teach diversification in Investing 101.

The fact is that few countries possess the growth and diversification characteristics of a broad set of major stock markets. Even the United States makes up just over 35% of the world's capital markets, according to investment bank JP Morgan.

And yet, time and again, home country bias is what we see.

A good example is Australia, where investors are just as prevalent to home country bias as they are anywhere else. Yet Australia makes up less than 2% of world GDP, and its stock market is dominated by resources stocks, agriculture stocks, and finance stocks.

Corrected vision

But what does this mean for UK investors like you and me?

First, simply be aware of home country bias. Look at the growth rates of other economies and stock markets, and be aware of what you're missing out on.

Second, be aware how easy it is to rectify this with broad-brush low-cost index trackers from providers such as Vanguard and iShares.

And third, consider the place that overseas-focused stocks hold in your portfolio. People think of HSBC as a British bank, for instance. In fact, it's chiefly a Far Eastern play, with just 4% of revenues being earned in the UK, and just 8% of revenues coming from Europe in total.

Similar cases can be made for many other shares that can be bought on London's stock exchange, and which are part of the FTSE 100, but which provide handy exposure to overseas economies. Royal Dutch Shell, for instance. BP. BHP Billiton. GlaxoSmithKline. Unilever. And many more besides.

They may be big. They may be boring. But undeniably, they're not home country biased. And with businesses like these in your portfolio, neither will you.

Are You Prepared For Brexit?

Following Brexit, fear and indecision could hurt share prices in the coming months. That's why the analysts at the Motley Fool have written a free guide called "Brexit: Your 5-Step Investor's Survival Guide". To get your copy of the guide without any obligations, click here now!

Malcolm owns shares in HSBC, Royal Dutch Shell, BP, BHP Billiton, GlaxoSmithKline, and Unilever. The Motley Fool owns shares in GlaxoSmithKline and Unilever and has recommended shares in HSBC.

Read Full Story

FROM OUR PARTNERS