Home Country Bias: A Ranked List of Nations

(July 29, 2013) – The known benefits of diversification haven’t persuaded investors to reach en masse outside of their own borders.

But according to German researchers Hans-Peter Burghof and Helena Kleinert, the methods of measuring home country bias have long been flawed.

If a US pension system has 60% of it equities portfolio invested domestically, for example, is it as biased as a Belgian fund who has also invested 60%, but in a much smaller home market?

Burghof—the chair of banking and finance at the University of Hohenheim—and PhD student Kleinert would say no. In a white paper, the two presented a formula for measuring both home country and foreign market bias. It considered 15 variables grouped into the following six categories: economic development, stock market development, capital control, investor protection, cultural dimensions, and familiarity.

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Investors’ tendency to allocate both at home or to a specific foreign country was most influenced by the economic development variables.

For foreign bias, specifically—asset owners’ willingness to invest outside their border—investor protection proved to be a crucial factor. Kleinert and Burghof quantified this quality through an index of nation’s willingness and ability to protect investors.

Cultural familiarity also seemed to influence where investors allocated beyond their own boarders. The researchers’ regression analysis found a negative correlation between distance and asset flows. The further away two nations were, the less investment passed between them. Furthermore, a common language tended to correlate with higher investment levels between foreign nations.

Kleinert and Burghof drew their data set from the International Monetary Fund’s Coordinated Portfolio Investment Survey, which tracks listed investment on a security-by-security and aggregate basis for 26 countries. The data covered holdings between 2001 and 2011, all of which were expressed in US dollars.

Read Hans-Peter Burghof and Helena Kleinert’s entire paper, “Cultural Influences on Domestic and Foreign Bias in International Asset Allocation,” here.

See next page for table…

The below table contains the values of the domestic bias of domestic investors and the average foreign bias of foreign investors in a target country, across a sample of 26 home countries. The domestic bias measures the deviation from a county’s actual domestic investment weight to its optimal weight. The optimal weight was calculated according to that country’s world market capitalization weight. The study calculated the average foreign bias of foreign investors in a host country by averaging the foreign bias across all remaining countries. The table shows the average values for the sample period of 2001 to 2011.

Home Country 2

(July 29, 2013) — Bev Durston, the former head of alternatives at the BA Pension Fund is to join the Royal Mail pension to help shape its portfolio, aiCIO understands.

The £3.4 billion Royal Mail pension informed its advisers, asset managers, and other market participants last week that Durston would be joining on a contract basis this summer-subject to final agreement from all parties.

Durston left the BA pension in June in order to return to Australia, where she had lived for 20 years, aiCIO revealed. She is to maintain these travel plans and work for the Royal Mail Pension from Australia on a part-time basis. Before returning to the UK in 2008, UK-born Durston had worked at various Australian superannuation funds and the Government Investment Company of Singapore.

During her five-year tenure at BA, the alternatives portfolio made an annualised 16% return, with 6% volatility. It was allocated across various asset classes that make up the sector.

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The Royal Mail pension told suppliers that the fund would increasingly be making direct investments in hedge funds and private markets, and Durston’s experience would help shape the portfolio.

Last year, the Royal Mail operated one of the largest pensions in the UK due to its background as a public sector employer. In May 2012, the fund handed over some £27.5 billion in assets-along with a chunk of its liabilities-to the UK Treasury. The fund was left with just £2.5 billion, but had already grown to over £3.2 billion in May this year.

Durston’s appointment follows a reshuffle at the Royal Mail fund. In April, aiCIO revealed that Chris Hogg, head of funding at the Royal Mail pension, was elevated to CEO, while Ian McKnight, senior investment strategy manager, took the newly created position of CIO at then £3.2 billion fund. These moves followed the departure of long-time CEO Gerry Degaute.

Hogg and McKnight have both featured on aiCIO‘s Forty Under Forty lists–Durston featured on the Power 100.

The Royal Mail pension’s press representatives have confirmed the move.