I have both active and passive investments in my cash account. The active investments are in local equities while the passive investments are in global/US equities. Part of the reasons is because I understand that passive investments, especially using index funds, can lead to better performance over active investments. In recent years, I have come to realise that there is another important reason for having passive investments that are invested globally. It is the increasing disadvantage of the home bias in the face of globalisation and technology.
Since my active investments are in local equities, I am highly susceptible to the home bias. Home bias means that an investor invests only in companies operating in his home country due to familiarity with local companies and regulations. Literature shows that home bias results in lower performance as the investor gives up the opportunities of investing in better managed companies overseas. With globalisation and technology, the disadvantage posed by home bias is increasing.
Let us use Yellow Pages as an example to illustrate the increasing impact of globalisation and technology on home bias. Before the rise of internet search engines, whenever consumers wish to search for a particular good or service, they had to refer to either word-of-mouth or Yellow Pages. Yellow Pages thus could do well as it had a monopoly on the directory of goods and services in the country. Each country has its own version of Yellow Pages, with some doing better than others due to different environments. While investors who invest only in their country's Yellow Pages might not have reaped the maximum benefits from investing in the best run companies globally, they could still do relatively well. Before globalisation and technology, home bias leads to relative underperformance, but it is still not serious.
Enter the internet search engines. With internet search engines, consumers no longer need to refer to the local Yellow Pages to find goods and services. They can search on the internet instead. Companies also respond by advertising their goods and services on the internet instead of Yellow Pages. There is also a network effect at work. The more companies a particular search engine covers, the more consumers use that search engine. And the more consumers use that search engine, the more companies advertise on that search engine. This gives rise to just a few dominant search engines in every country. The 3 dominant search engines in the world are Google, Bing and Yahoo, which all reside in US. Thus, with the march of technology and globalisation, local Yellow Pages in every country suffer declining revenue from a business that used to be very stable. Investors who invest in their country's own Yellow Pages suffer as well. Home bias, in the face of globalisation and technology, can be serious.
Although I used Yellow Pages as an example, it is by no means the only company facing increasing challenges from globalisation and technology. SPH's newspapers are facing declining readership due to internet news sites, ComfortDelgro's taxi business is under threat from Uber, hotel business trusts like CDLHT, FrasersHT, FarEastHT, etc. are facing competition from Airbnb. The list goes on and on. The examples above show that big, local companies are not spared from the competition. Not only that, the competitors threatening the local companies are all based overseas. Investors who invest only in local companies are likely to see declining dividends and share prices.
In conclusion, before globalisation and technology, home bias is a small price to pay for the familiarity with local companies and regulations. But with the relentless march of globalisation and technology, the price of home bias is more and more singnificant. It looks like I have to allocate more money to my passive investments, which are invested in global/US equity funds.
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I've been an avid reader of your blog and really enjoy your weekly updates. :)
I've just started work and was looking at ways to invest passively in Global ETFs such as Vanguard funds etc, but i realise that the costs to maintain it will be susbstantial.
As you have a passive investment portion, would you mind sharing any advice with me?
Hi, thanks for your support!Delete
The 2 equity index funds in my passive portfolio are held thru dollarDex. They are LionGlobal Infinity Global Stock Index Fund & LionGlobal Infinity US500 Stock Index Fund.
Thanks for the quick and helpful reply!Delete
Looking forward to your next article!
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