close menu

Home bias and international diversification

by Sable International | Jul 14, 2014
  • Studies have shown that over the long term, equity markets tend to outperform many other asset classes, and although the investor must tolerate an elevated level of risk, equities remain a core component of both private and institutional investor portfolios. The investment decision with regards to share choice is an entire industry within itself, and beyond the scope of this article. However, one aspect which most astute investors will be aware of is diversification.

    The major benefit of diversification is the reduction in portfolio risk by decreasing exposure to any single element. In addition to this, research1 published in recent years has shown that there are significant added benefits to international diversification.

    Failure to diversify across international markets is often referred to as ‘home’ or ‘domestic’ bias. There are a number of reasons for this; ease of access to information regarding local firms, or inexperience as well as anxiety with regards to offshore investment and the potential tax or cost implications which may arise. Many of these biases and concerns may be unwarranted, but perhaps more importantly, investing solely within domestic equities presents a significant opportunity cost.

    The chart below depicts the world not according to land mass, but by the size of each country’s stock market relative to the world’s total market value. Whilst the US is by far the biggest market, it is interesting to note the wide dispersion following that. China, Japan, Germany, France and the UK – which make up the next five biggest economies (as measured by GDP and according to the World Bank) – make up a combined share of just 22%. The implications here are significant as the domestic investor in developed financial centres such as South Africa, or even Spain and India, are exposed to just a fraction of the global equity market, heightening local market risk, whilst limiting exposure to offshore gains. 

    Figure 1: World Market Capitalisation (£23.1tln as at 31 Dec 2012) 

    With this knowledge at hand, the prudent investor may make an effort to diversify across international markets. However, the question remains as to where exactly they should place their money? The chart below shows annual equity returns of developed markets. Interestingly, the USA outperforms its peers on just one occasion, thus market size is perhaps not the best indicator of where to invest.


    Figure 2: Equity Returns of Developed Markets (Ann Ret, GBP %)

    It is clear then that there are significant benefits to invest outside of your domestic market, but as it is near impossible to determine which market will deliver optimal returns, it makes sense to diversify across as many countries as possible. This will expose your investment to the largest and most developed capital markets, whilst elevating your risk-adjusted return.

    This is easier said than done, and opening up your portfolio to international markets may seem like a daunting prospect. However, this need not be the case. Sable investment portfolios are, by construction, heavily diversified across global financial markets. Furthermore, given the nature of the funds in which they have been invested, costs have been kept to a minimum. As a result, by moving your portfolio over to Sable, you will enjoy all the benefits of an internationally diversified portfolio at a cost likely to be lower than a domestically invested fund. 

    If you have any queries, or for further information regarding our fund offerings, please feel free to contact our wealth team on + 44 (0) 20 7759 7519.



    French, Kenneth; Poterba, James (1991). "Investor Diversification and International Equity Markets." American Economic Review
    Tesar, Linda; Werner, Ingrid (1995). "Home Bias and High Turnover." Journal of International Money and Finance 
    Coval, J. D.; Moskowitz, T. J. (1999). "Home Bias at Home: Local Equity Preference in Domestic Portfolios." Journal of Finance

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

    • Typical-english-house
      Common mistakes that first-time homebuyers make
      Dec 06, 2018  |  by Ian Henning
    • Man-on-a-rocket
      Are you a UK contractor? Maximise tax-efficiency by using your pension
      Sep 25, 2018  |  by Bill Monty
    • terraced-houses-in-london
      Are you a UK contractor? Here’s how to get your mortgage approved
      Sep 12, 2018  |  by Marlon Borez
    • property-feud
      The hidden dangers of not having a will in the UK
      Sep 07, 2018  |  by Sherron Alexander-Bedingfield
    • typical-english-house
      You can receive your rental income tax-free if you don’t live in the UK
      Jul 12, 2018  |  by Ian Henning
    • carrot-incentive-running-track
      UK pensions: Between a QROP and a hard place? Or is it a damp SIPP?
      Jun 21, 2018  |  by Niel Pretorius
    • piggy-bank-dollar
      What to do with your living annuity when you retire abroad
      Jun 11, 2018  |  by Niel Pretorius
    • house-london
      In the UK, mortgage inaction is pickpocketing thousands of homeowners
      Jun 07, 2018  |  by Bill Monty
    • Hand-currency-blue
      Saying goodbye to South Africa? Financial emigration can give you access to your RA before you turn 55
      Apr 13, 2018  |  by Niel Pretorius
    • Dubai_skyline
      Lessons learned on a trip to Dubai: South Africans take note
      Nov 10, 2017  |  by Mike Abbott

    South Africa

    Cape Town

    Regent Square
    Doncaster Road
    Kenilworth 7708 +27 (0) 21 657 2120


    25 Richefond Circle
    Umhlanga 4320 +27 (0) 31 536 8843

    United Kingdom


    Castlewood House
    77/91 New Oxford Street
    WC1A 1DG +44 (0) 20 7759 7514


    5-7 Selsdon Road
    South Croydon
    CR2 6PU +44 (0) 20 7759 7581



    9 Yarra Street
    South Yarra
    VIC 3141 +613 (0) 8651 4500

    Sable International is a trading name of 1st Contact Money Limited (company number 07070528), registered in England and Wales. We are authorised and regulated by the Financial Conduct Authority in the UK (FCA no. 517570), the Financial Services Conduct Authority in South Africa (1st Contact Money [PTY] Ltd - FSP no. 41900) and hold an Australian Financial Services License issued by ASIC to deal in foreign exchange (1st Contact Group - AFS License number 335 126).

    We use cookies to provide the best website experience for you. Using this website means that you agree to this. How we use cookies.