Home Bias in Australian Equity Allocations
Home bias is defined as having a portfolio where the proportion invested in the domestic market is larger than the proportion that market is of the global index. Despite the many potential benefits of investing globally, institutional and retail investors in Australia tend to prefer investing closer to home. The sense of familiarity and access to local market information, franking credits, along with a tendency to avoid international currency exposure, are powerful stimulants for this home bias.
In recent times, the home bias in Australia has fallen from 58% in 2014 to 44% in 2024.1 This mirrors a broader trend we have observed in the Asia region. We posit that the main rationale for this trend is the increased capacity constraints that asset owners face in their local markets and foresee it continuing as these asset owners continue to grow.
Franking credits have been used to justify the home bias in Australia as they increase the return available to domestic investors. Our research has found that this benefit is about 1% p.a. Despite this increased return, our modelling shows that there is still a significant return and risk-adjusted return opportunity that increased global allocations offer Australian investors.
One of the more difficult decisions for Australian asset owners is what to do with the currency exposure. Given the large multi-year fluctuations of the Australian Dollar, we think that asset owners could achieve a better result from employing a dynamic currency hedging strategy that takes currency relative valuation and the costs of hedging into consideration.
In this paper we demonstrate the diversification benefits of increasing global allocations and restate the case for why Australian investors should reduce their home bias.