The decade-long global bull market ended suddenly and dramatically in February, as the shutdown of businesses in reaction to COVID-19’s spread caused massive economic disruptions across the globe. The declines have been swift and jarring, which likely has many equity investors questioning whether their portfolio strategy is proper for the market conditions ahead. Fisher Investments UK thinks you can learn one lesson relevant to this from the 2009-2020 bull market: Investors who fall prey to home country bias needlessly limit options and increase risk.

The bull market that began 9 March 2009 was one of the biggest ever, with world equities soaring 369%.i But not all investors reaped such grand gains. Whilst American shares rose 526%, European equities returned less than half that—229%.ii Many European investors who succumbed to home country bias—the tendency to favour companies in their country of residence—lagged global markets significantly because they lacked exposure to stronger-returning markets elsewhere.

More recently, equity markets’ sharp declines have spared no one. But global diversification likely would have helped many investors weather the storm better. Significant day-to-day volatility makes the figures change quickly, but, as an example, world equities returned -22.5% from the start of the downturn on 20 February through 19 March.iii But the returns varied widely even within Europe—whilst Swiss equities were down -12.0%, for example, German shares plunged -31.1%.iv

Some studies suggest home country bias is widespread. A 2019 paper examined nearly 700 European-focused equity funds domiciled across 15 European countries and found more than 90% of funds exhibited a home country bias.v It also isn’t just a European phenomenon. Another study examining 26 countries across the Americas, Asia, Australia and Europe during 2001 – 2011 found evidence of home country bias in every country studied.vi

This trend is unsurprising, as some contend home market familiarity provides an advantage. British investors might think they know the ins and outs of UK banks better than most. Germans might consider their vaunted Industrials to be the world’s best. But no matter how well you think you understand your home country—or how much you believe it offers the best opportunities—it is important in investing to realise that you could always be wrong. Investors whose portfolios reflect broader global markets dampen the risk of a big home market tilt detracting from returns.

Going global also provides sufficient exposure to all the industries the world offers. Consider the makeup of the MSCI World Index, which represents equities spanning 23 economies MSCI deems developed markets. Many European countries constitute a tiny portion of the Index—only the UK (4.6%), Switzerland (3.6%) and France (3.3%) have at least a 3% market capitalisation weighting in the MSCI World.vii America, meanwhile, makes up 65.5% of the Index and offers exposure to sectors many European markets largely lack, including Technology.viii

Fisher Investments UK thinks another shortcoming with home country bias is that there is often huge variance between individual countries’ returns. Consider the returns of four European countries over the past decade. The leaders for each year are in bold in the following exhibit.

Exhibit: UK, Norway, Germany and Netherlands Equity Returns, 2010 – 2019

Returns by Country 2010 – 2019
Year UK Norway Germany Netherlands
2010 12.2% 14.4% 11.8% 4.9%
2011 -1.8% -9.3% -17.5% -11.5%
2012 10.2% 13.4% 25.2% 15.3%
2013 18.4% 7.4% 28.9% 28.9%
2014 0.5% -17.2% -4.8% 2.5%
2015 -2.2% -10.1% 3.8% 7.2%
2016 19.2% 35.2% 22.6% 25.0%
2017 11.7% 17.2% 16.6% 20.8%
2018 -8.8% -3.0% -17.3% -7.7%
2019 16.4% 6.1% 16.1% 27.0%

Source: FactSet, as of 18/02/2020. MSCI UK Index, MSCI Norway Index, MSCI Germany Index and MSCI Netherlands Index returns in GBP with net dividends, 31/12/2009–31/12/2019.

Fisher Investments UK has found this variance occurs for several broad reasons. Some countries’ markets are dominated by one or two companies. Also, economic performance can vary as countries specialise in different industries. Political and legislative risk differ, too. For example, we think Brexit-related uncertainty was likely a big reason UK equities underperformed their European counterparts from the 2016 Brexit referendum up through the eventual 31 January 2020 exit date.

Market composition also factors into leadership shifts, as not every country has much exposure to all sectors or investment styles (e.g., small or large firms, value- or growth-orientated companies). In smaller countries—including many in Europe—one or two sectors may dominate the domestic equity market. Fisher Investments UK has found this market composition can heavily influence how local equities fare at different points in the market cycle—leading to big underperformance when their key sectors and/or styles are out of favour. By investing globally, you can compensate for your home market’s gaps and mitigate country-specific risk.

Investing abroad won’t always add to performance. Nor does it mean your portfolio won’t suffer declines when a bear market strikes. When markets beyond your country’s borders lag, your portfolio could feel the chill. But that is by design and, in Fisher Investments UK’s view, it is the price to pay for proper diversification. Investing globally means your highs might not be as high as they would be if focused primarily on any single market, including that of your country. But the lows shouldn’t be as low, either. We think investors would be wise to look beyond their own borders and diversify globally.

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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

i Source: FactSet, as of 20/03/2020. MSCI World Index return in GBP with net dividends, 09/03/2009–20/02/2020.
ii Source: FactSet, as of 20/03/2020. MSCI USA and MSCI Europe Index returns in GBP with net dividends, 09/03/2009–20/02/2020.
iii Source: FactSet, as of 20/03/2020. MSCI World Index returns in GBP with net dividends, 20/02/2020–19/03/2020.
iv Source: FactSet, as of 20/03/2020. MSCI Switzerland Index and MSCI Germany Index returns in GBP with net dividends, 20/02/2020–19/03/2020.
v “Determinants of Home Bias: Evidence From European Equity Funds,” Moritz Maier and Hendrik Scholz, SSRN, 29/01/2019. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3354503
vi “Cultural Influences on Domestic and Foreign Bias in International Asset Allocation,” Hans-Peter Burghof and Helena Kleinert, SSRN, 27/07/2013. http://dx.doi.org/10.2139/ssrn.2298992
vii Source: FactSet, as of 20/03/2020. MSCI World Index country breakdown.
viii Ibid.