We will start with a home bias definition: this is a tendency for investors to favour companies from their own countries over those in other territories or regions.
There are reasons for home bias: it’s natural to be optimistic about our home territories and have a better understanding of local firms.
A related concept is known as the home bias puzzle. The puzzle arises because investors may be missing out on the benefits of global diversification because of their focus on domestic stocks. Did you know that by investing in Australia only, you are missing out on 98.2% of the world’s market index? As at July 2023, Australia represents around 1.8% of the MSCI All Country World Index, the standard benchmark for international- share managed funds. The other 98 per cent of the index covers 2,934 stocks found on 23 other developed and 24 emerging country stock markets.
One simple way to diversify single stock holdings in your investment portfolio is by investing in managed funds or listed Active ETFs. Active ETFs are easily accessible managed funds that trade on a stock exchange. The Fidelity Global Emerging Markets (Managed Fund) (ASX:FEMX) provides investors with exposure to a portfolio of 30–50 actively managed emerging-market stocks with just one trade on the ASX.
Emerging markets have been growing rapidly in recent years. In fact, they now contribute over 50% of global growth and are expected to contribute to more than 60% in 2025. Read more about the case for emerging markets (pdf).
At Fidelity, we use a prudent and patient approach to select, quality companies that we believe are well positioned to generate returns through market cycles. In particular, we focus on businesses with a track record of robust corporate governance. Find out more about our investment approach in emerging markets.
Investors should note that investments in overseas markets can be affected by currency exchange movements, and this may affect the value of the investment. Additionally, investments in small and emerging markets can be more volatile than investments in developed markets.