The problem of home bias is not all down to the individual's natural instinct. Paul Lindfield, director of Wealth Management at Manchester-based Sedulo Wealth Management, explains that home bias is a traditional investment strategy dating back over three decades and instigated by older, traditional life insurers and pension providers.
He said managed funds would be biased, typically, with 50 per cent or more of a fund's assets held in UK equities, property and UK sterling denominated assets, such as gilts and corporate bonds.
Mr Lindfield notes: “This could be attributed in part that to two aspects. This was prior to the development of a truly global investment universe with the development of emerging markets, Tiger economies, and new investment sectors.
“Secondly, there was a widely held marketing belief that individuals would be more likely to invest in something that they could see and understand here in the UK, in terms of UK news and the sectors or industries to which they had exposure.”
Why is it important to avoid home bias in auto-enrolment funds?
It is important to avoid home bias because it exposes members to substantial and unnecessary risk, and may ultimately leave them with disappointing outcomes, according to Mr Fawcett.
He explains: “The UK market is dominated by a number of key sectors such as banks, oil, gas and mining companies. A strong home bias means taking big bets on those sectors."
We have already seen the effect oil prices can have on the wider economy - inflation rose to 2.3 per cent in February according to Office for National Statistics data, largely as a result of the oil price.
"It is also worth noting there is often a relationship between a worker’s future earnings and the growth of the domestic economy; as a result home equity bias in particular can unnecessarily increase the risk to the their pension savings", Mr Fawcett adds.
Matt McGill, head of corporate propositions at Aviva, adds that home bias is seen a potential pitfall when dealing with investments, where a proportion, and a potentially significant proportion, of funds are placed in domestic equities despite the apparent benefits of diversifying into foreign investment opportunities.
He comments: “Clearly there could be issues with this strategy. Home bias can however be misunderstood, particularly in the global economy that we now operate.”
When is home bias not necessarily 'bias'?
Using the example of a default fund that is invested heavily in the UK stock market, he warns it is likely to be using a passive investment that tracks the FTSE All-Share Index.
