not looking beyond the IBEX and missing huge returns

Evidence over the years concludes that investors tend to overweight a disproportionate share of domestic assets in your investment portfolio, a phenomenon known as “local bias”. In other words, investors’ international investment allocation is affected by their propensity to incorporate companies close to the region into their portfolios.

From a Eurozone point of view, investors still tend to overweight stocks in this economic area relative to their market capitalization, providing some evidence of a “Eurozone bias” on equities.

Let’s go to the data. Relative to the market capitalization of listed companies, Eurozone investors remain overweight. In 2018, the market capitalization of companies listed in the Eurozone was 8% of the world market capitalization, while investors from the Eurozone placed around the 15% of its shares in equities from this environment.

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And in Spain?

In recent decades the boomer generation has been the helm on how to invest. It has pivoted on a profile contrary to everything that has to do with volatility: we save on the purchase of our home (an evident local bias) and 40% of our financial assets are made up of Spanish deposits and cash.

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If we go into investment funds, Spanish investors show a deviation of the country’s share of 2.9 points in their holdings of investment funds compared to the relationship between the capitalization of Spanish equities and that of the world. In other words, if Spanish equities weigh 0.70% overall, our funds would be assigning a weight of 3.6%.

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As we see in the table, countries like Ireland or Luxembourg have practically neutralized the local bias. This is due to being large financial centers, the measure of local bias changes considerably for countries whose investors place a large part of their assets outside the fund sector of their own country.

Are there reasons to invest beyond our borders?

In principle, if there are no geographical restrictions, investors should not be affected by a certain local bias. But reality prevails … we invest in the near, as it offers us greater security about the degree of knowledge of that specific investment. This leads to an information asymmetry whose resolution cost is perceived as higher than the opportunity cost of a geographically diversified portfolio.

One of the risks perceived by investors when investing across borders is exchange rate risk. This is the financial impact due to exchange rate fluctuations. The fear of being exposed to another currency can put back many investors who do not move beyond Spain or the Eurozone in the composition of their portfolio.

This decision comes at a cost … Diversification of international portfolios allows investors obtain a risk-return ratio higher than that offered by a portfolio of national assets.

And it is that investing in the Ibex may seem attractive but this entails investing in a stock market that integrates representative companies of the old economy, with Telefónica and Spanish banks sunk to a minimum. The numbers speak for themselves, the ten-year annualized profitability of the Spanish stock market is 3.18%.

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On the contrary, the global stock market that we represent by The MSCI ACWI Index has reflected an annualized return in the last 10 years of 13.39% the key? A more interesting geographical and sectoral diversification is integrated, incorporating the United States with a weight of 61% and highlighting the technology sector with 24%.


Source: El Blog Salmón by www.elblogsalmon.com.

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