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Advisor Portfolios Show Rampant Home Bias

Across almost 10,000 portfolios, non-U.S. holdings account for only 22.7% of assets, adding unnecessary risk while potentially forgoing higher returns, say top researchers at BlackRock.

Financial advisors in the U.S. are leaning on domestic stocks and bonds to build portfolios, hoping that they will continue to outperform foreign markets. Top researchers at BlackRock, however, think they might be risking too much and potentially leaving returns on the table.

Four directors at the asset manager authored a July paper after analyzing the model portfolios of nearly 10,000 financial advisors last year and found a considerable “home bias.” The results are based on data from September 30th, 2017, to September 30th, 2018.

Across all portfolios, non-U.S. holdings accounted for only 22.7% of assets. The share of non-U.S. securities is 28.7% compared to 46.2% in the MSCI All Country World Index (“ACWI”). In fixed income, the advisor average holding of non-U.S. assets is 13.9% compared to 61.1% in the Bloomberg Barclays Global Aggregate Index.

“These findings suggest several ways in which an advisor may improve the risk-return trade-offs for their clients,” the BlackRock employees wrote.

Reducing a concentrated exposure to economic growth would make the biggest improvement on risk-adjusted returns in portfolios. Advisor portfolios are “dominated by exposure to economic growth,” according to the paper. For the 88% of advisor portfolios with equity allocations greater than 30%, economic growth risk account for 74.7% of portfolio volatility.

That change would insulate portfolios in the event economic growth slows in the U.S. 

The authors also said skewing equity allocations to certain factors – not just, say, toward small-cap stocks – might lead to either better risk adjusted or absolute expected returns.

Fixed income allocations could also use a tune up, the research suggests.

“We find a consistent overweight to credit risk and underweight to interest rate risk, relative to the Bloomberg Aggregate Index. This combination produces more stability through better balance of rate risk and credit risk, but mitigates the bond sleeve’s ability to provide maximum diversification of the overall portfolio.”

Implementing those changes with historical data, advisor portfolios’ returns exhibited an increase in returns along with a reduction in risk, according to the paper, authored by Managing Directors, Brian Lawler, and Andrew Ang, PhD, and Directors, Brett Mossman, and Patrick Nolan.

Home bias has been decreasing and helping fund emerging market allocations in recent years. U.S. weights have trended down from 75% in December of 2016 to 71% at September 2018. 

Advisors heavily favored passive exchange traded funds for U.S. equity allocations (BlackRock employees found 33.5% were passive and 24.5% actively managed). But they turned to active mutual funds for non-U.S. developed equity exposure (11.6% passive vs 16.1% active).