Home Country Bias - What Is It and Why Does It Matter?
Home Country Bias - What is it and why is it harmful?
Canada represents about 2.4% of the total global market capitalization of equities in the world (according to statista.com)
○ In fixed income, Canada represents about 4% of the total global market
○ So, in the global scheme of things - Canada is fairly small slice of the pie
Canada is also a very concentrated equity market when you look at the type of businesses that are the largest in Canada
○ We have a heavy over-weight to Energy and Financial Services companies, as well as materials when compared to global averages
According to a white paper from Vanguard written in 2014, relative to the global average weightings by industry, we have:
- 11.4% overweight to Materials
- 23.1% overweight to Energy
- 35.6% overweight to financials
According to another white paper from Vanguard written in 2014, Canada has underweights to many sectors, including:
○ 11% underweighting to information technology
○ 6.8% underweighting to healthcare
○ 6.7% underweighting to consumer discretionary
○ 6.2% underweighting to consumer discretionary
Canada's equity market is also very concentrated at the top
○ According to a whitepaper by RBC Global Asset Management in 2019, 36.5% of Canada's equity market is represented by Canada's 10 largest equity names.
○ Compared to the MSCI Europe, which has 12.1% total weight of the top 10 holdings
○ Compared to the S&P 500, which has 21.7% total weight of the top 10 holdings
- According to Vanguard, 56% of Canadian investors' equity exposure is in Canadian stocks
Recommendations:
○ Portfolios I recommend will typically have about 30% exposure to Canadian equities, which is still an overweight to Canadian stocks, the rest allocated to the global market weight
○ We don’t know which countries are going to outperform, so the best thing is to allocate more closely to the global market cap weighting
Reasons why some overweight to Canada is a benefit
○ Taxes - Canadian dividends received preferred tax treatment compared to foreign dividends
○ Behavior benefits - having an allocation to Canadian equities can help prevent regret and bad portfolio decisions if Canadian investments perform well (reduces fear of missing out)
○ Volatility Benefit - historically, a 30% weighting to Canadian equities has resulted in less volatility when compared with a market capitalization weighted portfolio.
Links
https://www.vanguardcanada.ca/documents/global-equities-advisor.pdf
https://www.vanguardcanada.ca/documents/home-bias-inst-indv.pdf
https://www.statista.com/statistics/710680/global-stock-markets-by-country/
https://www.rbcgam.com/en/ca/learn-plan/investment-basics/minding-the-concentration-risk/detail
https://www.canadianportfoliomanagerblog.com/home-bias-in-the-vanguard-asset-allocation-etfs/