Is home bias costing you? December 27, 2022

Is home bias costing you?

A common concern among investors with regard to home bias is that they are earning inferior returns when compared to those holding a global portfolio. But what is home bias? Home bias is the propensity to cling onto what is familiar. In investment terms, home bias is the reluctance to invest in foreign markets despite the benefits they present, such as diversification. An example will be investors being more familiar with DBS and UOB when compared to JP Morgan and Goldman Sachs. A quick way for an investor to determine if he exhibits home bias is through his investment portfolio. An investor with a portfolio consisting of mainly Singapore stocks would have exhibited a high degree of home bias.

Why is home bias prevalent?

In the past, information on foreign stocks was not as freely available as it is now. Compared to local stocks where information is more readily available, investing abroad was seemingly riskier due to the lack of information. Now, obtaining information is much easier and should not hinder a smart investor from investing in foreign shares. However, even with information so easily accessible, there are still things that cannot be ascertained online. For instance, the quality and service provided by a company can only be correctly perceived first hand; most individuals prefer to believe what they see as opposed to information gathered online.

With that said, even with equal information access, home bias still exists. Based on the research article by Stijn and Laura (2009)1, home investors, despite having the same knowledge as their foreign counterparts, still preferred to invest in domestic stocks. The reason for such behaviour was the mental frame of familiarity and optimism towards domestic assets. According to a research by Manag (2020)2, investors were generally more optimistic about the domestic market and assumed athat it would avail a higher return. Framing the domestic market as the one with a higher expected return, investors with home bias tend to stick to domestic stocks.

Thus, home bias is caused by information disparity and the investors’ mindset of having higher expectations from their home market.

In this discussion on home bias, the most important question still remains unanswered – Will this bias lead to an inferior risk-return? To answer this question, below is a comparison of the performance of 3 portfolios.

The first portfolio invested in the SPDR Straits Times Index ETF (ES3.SP); the second portfolio invested in the SPDR S&P 500 ETF Trust (SPY.US), and the third portfolio invested equally in both the ES3.SP and SPY.US.

Returns comparison

Portfolio 1 Portfolio 2 Portfolio 3
Weightage 100% ES3.SP 100% SPY.US 50% ES3.SP

50% SPY.US
1 year annualised return 0.3% -14.67% -7.19%
3 year annualised return 1.96% 10.08% 6.02%
5 year annualised return 1.72% 10.29% 6.01%
10 year annualised return 3.38% 12.64% 8.01%

Source: Bloomberg, PSPL. As of 31 October 2022

A global exposure allows investors to access investment opportunities with higher returns. With Portfolio 2, investing in the US market brings in higher returns than when investing solely in the SG market. With regard to Portfolio 3, a mixed exposure of both SG and US markets allows investors to gain better returns as opposed to solely holding SG stocks. A diversified portfolio can potentially double one’s returns as seen in the 3, 5 and 10 year annualised returns.

Thus, home bias can potentially lead to an inferior risk-return.

With the US portfolio (Portfolio 2) earning superior returns, some investors may be thinking of solely investing in the US market. But doing so is not encouraged as investing purely into a single market can lead to larger losses. An example is shown in Portfolio 2 where a loss was made in its 1-year annualised return. Therefore, while holding a portfolio of SG stocks may be relatively safe, investors may lose out on achieving higher returns.

Ultimately, the key is to add a global mix into the SG portfolio to help increase returns and achieve diversification.

As of September 2022, there were a total of 6366 listed stocks on the Nasdaq and NYSE3. With so many stocks to choose from, picking out a few may be difficult. To narrow down their choices, investors can consider picking from the banking industry. The reason for this is a rising interest rate environment. Most industries are facing a slowdown, except for the banking industry. Banks benefit as higher interest rates increase their margins. This is evident as major banks such as JPM.US, WFC.US and BAC.US have topped estimates over this earnings season.

Aside from investing directly in individual stocks, investors can also consider ETFs with exposure to the banking industry such as SPDR S&P Bank ETF (KBE.US); First Trust NASDAQ ABA Community Bank Index Fund (QABA.US) and Invesco KBW Regional Banking ETF (KBWR.US).

The ETFs experience the same benefits as the individual banking stocks in a rising interest rate environment. Additionally, an added benefit of ETFs is survivorship bias. Investing in ETFs reduces the losses from companies that may go under, as companies that no longer meet the requirements to be on the index are replaced by another stock. This way, only financially sound companies stay on the index.

An example is the dropping of General Electric (GE.US), the last original member of the Dow Jones Index Average (DJI), in 20184. The reason was that GE.US no longer met the requirements to stay on the DJI. GE.US was replaced by Walgreens Boots Alliance (WBA.US) which is a better representative of the US economy.

From a valuation perspective, the shares of the US market seem to be more competitively priced.

P/E 12.63 11.58 10.40 10.97 12.44 11.44
5 years Average P/E 12.320 11.754 11.34 12.701 18.515 13.021
Price/Book 1.646 1.20 1.111 1.531 1.133 1.249
5 years Average P/B 1.299 1.146 1.075 1.634 1.217 1.201

  • P/E: DBS seems to be the most overvalued.
  • Comparing 5 years average P/E with current PE, US banks are currently trading at a higher discount than SG Banks
  • Price/Book: DBS and JPM.US are priced above their peers which suggests a stronger asset base.
  • Generally, US banks are priced at a better valuation than SG banks

One of the reasons why US banks are at a better valuation is due to the bearish sentiment of US investors. The bearish sentiment is mainly caused by the Federal Reserve’s war against inflation. Inflation is still running high despite the numerous rate hikes this year, but signs of slow down appeared in October’s headline inflation. October’s headline inflation came in at 7.7% Year-On-Year (YOY)5 which was a sharp decline from September’s headline inflation of 8.2% (YOY)6. Although October had a lower inflation level, many Fed Governors still think that more rate hikes are needed before pausing. Some of the members are San Francisco Fed President Mary Daly7; St. Louis Fed President James Bullard8 and Minneapolis Federal Reserve Bank President Neel Kashkari9. Hence, there will probably be more rate hikes in the future reducing the odds of a soft landing, causing many investors to stay away from the market.

Apart from the banking sector, investors can explore some of our popularly traded stocks.

“Be Greedy When Others Are Fearful.”

The above quote is by Warren Buffet, one of the world’s most renowned investors. Even though many are staying away from the market, investing now may be a good “bargain” with stock prices at their recent lows. Also, according to a market historian, Jeffery Hirsch, the fourth quarter of 2022 may be a good entry point10. An occurrence in1964 offers precedent to the current situation. After falling for the first three quarters in 1964, the S&P 500 gained an average of 28.2% over the following five quarters. Hence, buying during this quarter may actually bring about a much higher return.

In summary, home bias is just one of the many psychological factors that affect investment performance. There are many other common mistakes made by investors and traders. Aside from the mental aspect of investing, focusing solely on SG stocks has its benefits but also has the opportunity costs of giving up potentially higher returns. In the long run, investors are better off holding onto a diverse portfolio with global exposure.



These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.

The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.

Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you


This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  


Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066