Home Country Preference vs Home Country Bias?

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yatesd
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Home Country Preference vs Home Country Bias?

Postby yatesd » Sun Mar 19, 2017 8:20 am

I was reading Vanguard's white paper on Vanguard's approach to target date funds and they utilize a term called "home-country preference" to justify below market caps in both stocks and bonds. In this case, it seems to be referenced in a somewhat positive light, but within the forum I have also seen the term "home country bias" which has negative connotations. Is this approach justifiable?

Curious to hear opinions about this statement.

Vanguard
weighs factors including home-country preference,
costs, liquidity, concentration, and regulatory constraints
when assessing the appropriate allocation to non-U.S.
fixed income. As with global stocks, we believe further
movement to market-capitalization weights can be
prudent.

https://institutional.vanguard.com/iam/pdf/ICRTDF.pdf

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nedsaid
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Re: Home Country Preference vs Home Country Bias?

Postby nedsaid » Sun Mar 19, 2017 7:40 pm

Cullen Roche at Pragmatic Capitalism has argued that to be truly passive that an investor would have to follow the market weights of the world markets. For example, the U.S. has 53% or so of the world stock market capitalization. Vanguard for its Target Date and LifeStrategy Funds uses a 60% allocation. Someone made a judgment to overweight US Stocks a bit relative to the world market. It wasn't too long ago that Vanguard had a 70% allocation to U.S. Stocks. Why is 60% U.S. better than 70%?

My guess is that Vanguard has come over more and more to Roche's thinking. I also noticed that Vanguard added Total International Bond to their Target Date and LifeStrategy portfolios, now International is 30% of Vanguard's bond allocation. I think Vanguard is coming around to a more "world portfolio" point of view.

You can't help but notice that International right now is cheaper than the U.S. Compare the valuation benchmarks of the US Total Stock Market Index vs. Developed Market Indexes vs. Emerging Markets Indexes, you will see what I mean. Emerging Markets are particularly compelling. I think that Vanguard has noticed this as well.

In another thread, Packer16 mentions that stock markets do better in countries where there is a strong sense of free markets and limited government interference. He said this applies to the U.K. and other Anglosphere countries like the U.S., Canada, Australia, and South Africa. He also mentioned Scandinavian countries and the Netherlands. If you didn't want returns dampened by investing in countries that don't have free markets, a US only investment strategy makes sense.

The 20th Century was also the American Century, I suppose a lot depends on whether or not you believe the 21st Century will also be an American one too.

If you are a believer in U.S. only investing, I guess it is home country preference. If you believe that it makes sense to invest internationally, it is home country bias.
A fool and his money are good for business.

Karamatsu
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Re: Home Country Preference vs Home Country Bias?

Postby Karamatsu » Mon Mar 20, 2017 1:57 am

I suspect that "preference" and "bias" are just two names for the same thing, and usage just depends on which way you want to spin it.

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celia
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Re: Home Country Preference vs Home Country Bias?

Postby celia » Mon Mar 20, 2017 3:19 am

Since there are different Vanguard funds available in Australia, Canada, and UK than what is available in the US (due to regulatory requirements), I suppose "where" you live and invest is your preference but choosing funds (or individual stocks or bonds) that weight your local companies more is the bias.


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