...but your portfolio might be better off elsewhere.
There is strong evidence that investors around the world favour their home market and this is reflected in their portfolio holdings. The phenomenon is known as home bias and has remained a puzzle in academic literature for decades.
Despite barriers to international investment continuing to fall, most individual investors have remained overly invested in their domestic market. There are certainly practical reasons why some SA investors might not be invested in foreign stocks (due to individual constraints or liability matching, for example). But for those who can, the balance of evidence suggests that global diversification is worthwhile.
Returns for an unhedged investor
Chart 1 compares real returns in rand and return volatility (as a proxy for risk) across 26 foreign markets. Universe consists of: Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, UK, US.
From a returns perspective there is no blanket statement that can be made about foreign exposure – some individual markets have outperformed the SA market over this period and others have underperformed, with a few extreme outliers on both sides.
However, the picture becomes more interesting when looking at global investments. The global portfolio, which represents the MSCI All Country World index (ACWI), has had higher returns than the local market. While the ACWI is easily investable, it has had large country concentration (the index is currently over 50% invested in the US).
This story is from the 21 February 2019 edition of Finweek English.
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This story is from the 21 February 2019 edition of Finweek English.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
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