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Familiarity may overcome home bias

The familiarity that individuals have of a particular company may help address the situation many SMSF investors are often accused of facing, that is, having disproportionately large portfolio allocations to Australian equities, a behavioural finance executive has said.

Speaking as a panellist at the 2016 SMSF Association Sydney Chapter Christmas lunch, Behavioural Finance Australia director Simon Russell said: “There is a familiarity effect. If we’re familiar with Telstra, and NAB, and BHP and we like them because they’re familiar can we unpick a portfolio and say ‘yes [the stocks] are in countries you’re not so familiar with but look what’s in there’.

“There’s Apple, or Samsung, or whatever it is. Just pick a few of those [companies] so we can leverage that same effect that we like what we’re familiar with.

“If we can pick a few of those brands that happen to be in a portfolio then that’s still a strategy to try and perhaps use the same effect.”

Russell pointed out advisers would not be able to overcome home country bias entirely.

Fellow panellist Platinum Asset Management managing director Kerr Neilson doubted investor home bias as a result of familiarity could be eliminated.

“Most people are not willing to learn the hard efforts of being unemotional about investing,” Neilson said.

“So I fear we will always have this home bias because it is familiar. The fact that many of our companies are going abroad doesn’t seem to change that view.

“The fact they know quite as much in a label sense about BMW as they do about Holden doesn’t seem to have any influence.”

BetaShares senior investment specialist Roger Cohen concurred about the difficulty of overcoming home country investing bias.

“What goes on next door is much more important than what goes on in some other country and that’s why we have all this inequality and everything like that,” Cohen said.

“I don’t know the answer and I think it’s a really tough one to overcome.”

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