Wednesday 26th November 2014
NEWS TICKER: TUESDAY, NOVEMBER 25TH 2015 - Morningstar has downgraded its Analyst rating for the Fidelity European Opportunities fund to Neutral. Jeremy Beckwith, director of manager research, Morningstar UK comments: “We have assigned the Fidelity European Opportunities fund a Morningstar Analyst Rating™ of Neutral. The fund had previously been placed Under Review following the fund’s management change announced in the summer. It was previously rated Silver. Alberto Chiandetti—who has gained most of his investment experience in the Italian market—took over from former manager Colin Stone on 1 October 2014. He is also responsible for two single-country strategies: Fidelity Italy since 2008, which has a Morningstar Analyst Rating of Silver, and Fidelity Switzerland since 2011, rated Neutral”. According to Beckwith: “This is Chiandetti’s first time running a European mandate and we expect to see him bring in relevant changes to the strategy. Over a full market cycle, he has proven able to execute his process well at the helm of Fidelity Italy; that said, his past results are not fully relevant for this product, given the differences in the investable universe and the opportunity set compared to the country funds. We have therefore assigned a Neutral rating to reflect the uncertainties surrounding the future of this strategy.” - Among the five China ETFs listed on Singapore Exchange (SGX), the three most active China ETFs in the 2014 year-to-date have been db x-trackers CSI 300 UCITS ETF, db x-trackers MSCI CHINA INDEX UCITS ETF, and United SSE50 China ETF. These first two are traded in US dollars, and the latter in Singapore dollars. These three China ETFs are synthetic ETFs that use derivative instruments such as swaps to track the reference index as compared to physical ETFs that hold the securities or assets of the reference index. These three ETFs generated an average 2014 year-to-date total return of 8.4% - The Straits Times Index (STI) ended +4.46 points higher or +0.13% to 3344.99, taking the year-to-date performance to +5.69%. The FTSE ST Mid Cap Index gained +0.21% while the FTSE ST Small Cap Index declined -0.47%. The top active stocks were SingTel (+0.26%), Olam Intl (-2.27%), DBS (+0.20%), ComfortDelGro (-2.71%) and CapitaLand (+0.30%). Outperforming sectors today were represented by the FTSE ST Technology Index (+1.14%). The two biggest stocks of the FTSE ST Technology Index are Silverlake Axis (+2.40%) and STATS ChipPAC (-1.11%). The underperforming sector was the FTSE ST Basic Materials Index, which declined -0.84% with Midas Holdings’ share price declining -1.70% and Geo Energy Resources’ share price unchanged. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (-0.77%), SPDR Gold Shares (+0.43%), STI ETF (unchanged). The three most active Real Estate Investment Trusts (REITs) by value were Suntec REIT (+1.58%), Ascendas REIT (+1.76%), CapitaMall Trust (+0.25%). The most active index warrants by value today were HSI23800MBeCW141230 (unchanged), HSI23600MBePW141230 (-3.23%), HSI24400MBeCW141230 (unchanged). The most active stock warrants by value today were DBS MB eCW150602 (-2.96%), OCBC Bk MBeCW150413 (+1.08%), UOB MB eCW150415 (+6.25%) - Inter-American Development Bank (IDB) is providing financing under a Regional Public Goods Programme (RPG) that will be managed by Caribbean Export Development Agency in its capacity as the Secretariat for the Caribbean Association of Investment Promotion Agencies (CAIPA. The IDB has provided US$900.000 to CAIPA to support several initiatives geared towards increasing foreign direct investment (FDI) into the Caribbean and will be implemented over a two year period - Mexico has posted record FDI of $35.2bn inflow in 2013, nearly double the level seen in 2012, mainly due to Belgian brewer Anheuser-Busch InBev's acquisition of Mexican beer giant Grupo Modelo, which brought in over $13bn, according to figures released by the economy ministry - Eight Italian regions have hired banks to manage a round of bond buybacks for them, the treasury said on Tuesday, in a move aimed at giving indebted local administrations more time to repay their loans. Abruzzo, Campania, Lazio, Liguria, Lombardy, Marche, Piedmont and Puglia have hired Barclays, BNP Paribas, Citigroup and Deutsche Bank to manage any offers to buy back their bonds.

Are there rational causes for “home bias”?

Wednesday, 02 May 2012 Written by 
Are there rational causes for “home bias”? Savers and investors in every country hold an excessive quantity of domestic securities relative to foreign securities, so-called “home bias”. In the euro-zone, home bias has been growing sharply of late. http://www.ftseglobalmarkets.com/

Savers and investors in every country hold an excessive quantity of domestic securities relative to foreign securities, so-called “home bias”. In the euro-zone, home bias has been growing sharply of late.

Suggested causes for home bias include:

  • holding domestic assets can protect domestic investors against domestic risks such as inflation or exchange-rate depreciation;
  • the benefits of international diversification are small relative to the transaction costs involved in buying foreign assets;
  • and information on domestic assets is of better quality than that on foreign assets.

The scale of the home bias
“Home bias” characterises an excessively high weight of domestic assets in portfolios, relative to what would be optimal, and therefore results in an excessively low weight of foreign assets.



Using Germany and France as examples, 65% of French and German institutional investors’ stock portfolio is in domestic equities while German institutional investors have 53% of their bond portfolio in German bonds. Indeed, French savers as a whole hold three times more French equities than foreign equities while German savers hold almost four times more German equities than they do foreign equities and more German bonds than foreign bonds. And in September 2011, German and French banks held respectively 75% and 42% of their own government’s securities.

Is it possible to find rational explanations of home bias?
There may be irrational explanations for home bias i.e. investors are not penalised by losses on domestic assets as much as by losses on foreign assets and they have a "patriotic" attitude etc. But there may also be rational explanations for home bias such as hedging domestic risks, small benefits of international diversification, and quality of information.

1. Hedging of domestic risks

Investors will hold large portfolios of domestic assets if these assets provide a better hedge against specific domestic risks than foreign assets do.

Exchange rates

Holding euro-zone equities is unlikely to protect investors in the euro-zone against a depreciation of the euro. Indeed, this much is evident when comparing the European stock market with the US stock market. Over the period 2008 to 2012, the European stock market declined relative to the US stock market and the euro depreciated.

Inflation

Certainly, this argument cannot apply to bonds since countries that experience an unexpected increase in inflation normally experience a rise in long-term interest rates, which generates losses for domestic investors – meaning that an internationally diversified bond portfolio would actually be preferable.

In the case of equities, one could think that this is an asset indexed to prices, which therefore provides a hedge against domestic inflation. However, in the case of France and Germany it is quite the opposite as the Price Earnings Ratio is negatively correlated to inflation. Indeed, equities do not provide any protection against domestic inflation, and the reverse is in fact true.

2. Small benefits from international diversification

The idea is that if the benefits of international diversification are smaller than the adjustment costs (transaction costs) incurred when buying foreign assets, investors will abstain from international diversification. If we take the example of euro-zone bond portfolios, one would see that diversification to the euro-zone as a whole in the period 1999-2012 reduces the return and the risk slightly, but in a very limited way.

3. Advantage in terms of information

It is an often-heard argument that the information available for investors is better for domestic assets than for foreign assets – largely because investors have better contacts with company management and their own government.

If this is true, this bias is likely to be far larger for small and mid-sized companies than for large companies that have better information resources. As a result, we should expect larger unexpected (news) shocks for small and mid-caps than for large-caps, and subsequently higher volatility in small and mid-cap indices. Indeed, this appears to be the case. The volatility of large-cap indices has been lower since 2003 than that of small and mid-cap indices.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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