There is a natural tendency for people, wherever they live, to invest more in their domestic market. One of the most common and significant investment biases, home country bias, occurs when people invest the lion’s share of their portfolio in companies from their native market.
The Productivity Commission’s Draft Report Superannuation: Assessing Efficiency and Competitiveness, publicly released in May, noted that, “Self-Managed Super Funds (SMSFs) in Australia hold, on average, a higher proportion of assets in cash and domestic equities than APRA-regulated funds, and much less in international equities and fixed income products. It also appears that, on average, SMSFs hold significant assets in unlisted property and in various pooled investment vehicles (such as managed funds and listed and unlisted trusts).”
Why does home country bias occur?
People are familiar with local companies–these are the companies where they bank, shop and are the firms that they have grown up to know and trust. Often people may have inherited shares in local companies from their parents or grandparents or bought them through a public float. So, having a preference for investing in local companies is understandable.
Moreover, investing in foreign companies has also historically been difficult and costly, and the idea of moving into unknown territory with investment capital can be overwhelming.
Home country bias is somewhat exacerbated in Australia because of local investors’ fixation with franking credits. Franking credits provide additional income for Australian investors, rebating back the portion of company tax that is paid in Australia and distributed as dividends.
Therefore, irrespective of the performance of the Australian market or the valuation of Australian shares, they are considered a safe haven by many local investors.
Most people in Australia are heavily exposed to Australian-based risks through their property, income, super, or business. For the average Australian, they make their income from a local job, have some savings on term deposit with one of the Australian banks, and have substantial assets tied up in their home residence. So, it makes great sense to diversify your investment portfolio by shedding the home country bias.
Look around: It’s a big world!
While home country bias may dominate investment thinking, Australians are far worldlier when it comes to consumption. Think of the many international brands we have embraced, and which are part of our day-to-day lives in Australia, for example, Apple, Samsung, Google, BP or Toyota. Alternatively, think about the last holiday you may have had – perhaps it was spent enjoying the European summer or in Tokyo taking in the beauty of the cherry blossoms.
The underlying point is, while Australians readily participate in a global marketplace and look overseas constantly when making purchasing choices, most people are far more myopic about their financial investment strategy.
Active global equity investing at your fingertips
Templeton Global Growth Fund Ltd (ASX: TGG), one of the oldest global equity listed investment companies on the ASX, is an investment vehicle helping Australian investors become financial globetrotters while keeping their funds parked in an ASX-listed stock. As value-style bottom-up stock pickers, every stock in the portfoliois chosen by one of Templeton’s global analysts who deems it to be undervalued.
Take for example one of everyone’s favourite sectors, Australian banks. Despite a period of underperformance and with regulatory scrutiny undermining their outlook, the local banks still look expensive relative to some of the global banks, such as HSBC, Barclays or Citi.
Similarly, on the commodity side, when Australian energy stocks are lined up versus their global peers, they are trading at substantial premiums when compared to a stock like Royal Dutch Shell, a global leader in liquefied natural gas with an enticing 5.5% dividend yield, which also makes it attractive for income investors.
Just as importantly, investors need to be mindful that they’re not ending up with exposure to other potentially expensive share markets. Looking at the US, many global equities managers currently hold up to 70% exposure to US equities. However, with the US market returning more than 200% since 2009, while Europe, Japan and the Emerging Markets are up around 50%, it’s much harder to find undervalued stocks in the saturated US market.
TGG continues to see a clear investing opportunity for value stocks outside Australia. TGG’s share price is currently trading at a pre-tax discount to Net Tangible Assets of around 6%, representing a potential buying opportunity for investors wanting to explore the world of global equities.
To learn more about Templeton Global Growth Fund Ltd visit the website www.tggf.com.au
 Productivity Commission Draft Report Superannuation: Assessing Efficiency and Competitiveness. April 2018.Page 284