16 July 2017
Institutional constraints such as barriers to invest across boundaries, limitations on repatriation of investment income, varying corporate governance standards, higher transaction costs and currency risk have been put forth as possible reasons. Interestingly, closer to home regional mutual funds in GCC markets suffer from home bias as well, despite the region being largely homogenous and frictional costs to invest across the region are largely non-existent.
The primary goal of a fund manager is to maximize returns while minimizing risk. However, the presence of varying country-level exposures among fund portfolios in achieving a common goal – to outperform the benchmark index (S&P GCC Composite Index for conventional equity funds and S&P GCC Composite Sharia Index for Islamic equity funds) – is puzzling, as this bias is a result of conscious and intentional move made by the fund manager. Indeed by overweighting domestic exposure the fund managers are adding on to the risk that they could have diversified away.
Possible explanation for such behaviour could be attributed to the perceived informational advantage of fund managers over their country stocks. Fund managers are more familiar with domestic stocks and thus have a higher degree of confidence in their ability to generate outperformance through active management. For instance, local fund managers could talk with employees, managers, and suppliers of the firm, they could obtain key information from local media, social events, and the close personal ties with senior management, all of which could provide them with better information than their regional peers and provide a distinct advantage. In part, home bias could also be an extension of “confirmation bias” as fund managers may simply feel more comfortable about their domestic investments when they keep hearing about them in local media. Country specific systemic risk factors such as political risk or poor corporate governance practices could also influence the fund manager allocations resulting in home bias.
An analysis of the GCC funds
In our analysis we observe that the level of home bias among GCC mutual funds (equity) is heterogeneous in nature. Funds in markets such as Saudi Arabia and Kuwait exhibit significant home bias (greater than 10% overweight to home market) while United Arab Emirates (UAE) funds have been observed to exhibit moderate home bias (greater than 5% but less than 10% overweight of home market). Funds based out of Qatar and Oman exhibit relatively minimal home bias. Based on our observation, Bahrain funds did not exhibit any home bias. In fact, GCC funds domiciled in Bahrain had underweighted their domestic country.
Table: Degree of Home bias witnessed among GCC Funds
|Difference in Country weightages with benchmark (%)
Table: 1Yr Performance of the funds with respect to their benchmarks
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