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The Dangers of Keeping Your Money at Home
Most people prefer investing in stocks from their home country, but global portfolios will give them the potential
for better returns with less risk.
Home-Country Bias
When it comes to spending, we’re all citizens of the
world, buying the best products no matter where
they’re manufactured. When it comes to investing,
however, we suddenly turn provincial and prefer to
keep our money at home. This is a global prejudice.
Investors tend to keep 80% or more of their
investments in domestic securities, no matter where
they live.
Local markets are more volatile than the MSCI World Index
Annualized Volatility
(%)
25
20
15
10
5
0
Australia
What drives this bias? Some of the biggest reasons are
purely emotional: Many investors stick to a traditional
home-country orientation simply because it feels more
familiar or comfortable. Others do it out of a sense
of loyalty or patriotism. It can also be a matter of
regulatory policy: Some governments have imposed a
home country bias on their investors by restricting the
amount of nonlocal assets they can own. (The trend
seems to be to remove such restrictions. For example,
Canada eliminated its cap last year.)
Here are the three things investors need to understand:
1. Historically, global returns are better than
local returns
We all tend to think that our home stock market will
outperform the global average. But that, of course, is
impossible. Everybody can’t be better than average.
Over the long term, in fact, local returns are no better
than global returns, and in many cases they’re much
worse. The results, of course, vary considerably from
country to country, and by time period
2. Local stocks can be riskier
Many investors believe overseas markets are more
volatile than their own. This is also demonstrably
false. We found that local markets are almost always
more volatile than global markets over the long term.
The results were the same whether we examined
returns in U.S. dollars, British pounds or Japanese yen
(see display, above right).
Canada
Japan
Local Index
U.K.
U.S.
MSCI World Index*
All data from 1 January 1973 through 31 December 2005, except
Australia, which is from 1 November 1983 through 31 December 2005
* Unhedged in local currency
Source: MSCI and AllianceBernstein
Local stock markets are more volatile for one simple
reason: They contain far fewer stocks than the world
index and thus offer fewer ways to diversify risk. The
MSCI World Index of nearly 1,700 stocks includes
80% of the market capitalization of each of the major
developed countries in the world.
Local equity markets, by contrast, tend to be more
concentrated in a handful of large stocks. The smaller
the market, the more pronounced the stock concentration. The 25 largest-cap stocks typically make up
about 70% to 80% of the market capitalization in
Australia, Canada and the U.K. and more than 95%
of the market capitalization of the BRIC countries. In
contrast, the largest 25 names typically make up only
20% to 25% of the MSCI World Index (see display,
next page).
If you invest exclusively in your own country, you’ll
have a greater exposure to individual stock risk than if
you invested globally. Your portfolio is also likely to
be highly concentrated in particular industrial sectors.
If your country’s economy suddenly falters, you’ll pay
the price. The global approach naturally diversifies
these exposures.
Some recent research conducted by Mercer Investment
Consulting proves our point. The firm compared the
median returns of managers who invested in local
portfolios in a variety of different countries with the
median returns of investment managers who invested
in global portfolios. If the opportunities were better at
home, the local managers would have outperformed
their global counterparts. Instead, Mercer found that
the global managers consistently outperformed the
local managers, sometimes by hundreds of basis points
(see display below).
The top 25 largest stocks make up a relatively small part
of the MSCI Index
Weight of Top 25 Stocks
(%)
100
80
Australia
U.K.
Canada
60
Japan
40
U.S.
Global managers typically outperform local managers
MSCI World*
20
Median-Manager Alpha*
0
80
85
90
95
00
2.7%
05
2.2%
* MSCI World Index data prior to 2000 are based on a combination of
MSCI World ex US and S&P 500.
Source: MSCI and AllianceBernstein
3. Global managers have more choices
Many investors prefer to keep their money at
home because they feel their understanding of the
local business environment allows them to choose
investment opportunities more effectively.
1.7%
1.3%
0.8%
Australia
Once again, we found the opposite to be true.
Investors are more likely to find winners when
drawing from a broad global universe of investment
ideas than from a narrower local universe. Treating the
world as one investment universe allows investment
managers to pursue the best investments in whatever
country they occur. It also gives them the power
to shift between geographic regions, industries and
sectors as opportunities arise and subside.
1.1%
Canada
Japan
U.K.
U.S.
MSCI World
From 1 January 1994 through 31 December 2004
All local-market returns in local currency; MSCI World in USD.
* Median-manager returns versus the S&P/ASX 300 for Australia, the
capped S&P/TSX for Canada, the TPIX for Japan, the FTSE All-Share
for the U.K., the S&P 500 for the U.S. and the MSCI World Free
Source: Mercer Investment Consulting, MSCI and Standard & Poor’s
Our research and the research of others make it clear
that home-country bias is dangerous for investors.
Increasing allocations to global equities can increase
returns and reduce risk. We believe that investing in
our Global Wealth Strategies Portfolios is the perfect
way to transform yourself from a provincial to a
global investor.
The sale of shares in ACM Funds may be restricted in certain jurisdictions. In particular, shares may not be offered or sold, directly
or indirectly, in the United States or to US Persons, as is more fully described in the ACM Funds’ prospectuses or Offering Circulars.
Further details may be obtained from the Distributor.
The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. As of
December 2003 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland,
the United Kingdom and the United States. An investor cannot invest directly in an index or average and they do not include sales charges or operating
expenses associated with an investment in a mutual fund, which would reduce total returns.
The information contained herein reflects, as of the date hereof, the views of AllianceBernstein L.P. and sources believed by AllianceBernstein L.P. to be
reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee that any
projection, forecast or opinion in these materials will be realized. The views expressed herein may change at any time subsequent to the date of issue
hereof. These materials are provided for informational purposes only and under no circumstances may any information contained herein be construed as
investment advice. Neither may any information contained herein be construed as any sales or marketing materials with respect to any financial instrument,
product or service sponsored or provided by AllianceBernstein L.P. or any affiliate or agent thereof.
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