Institutional investors have never had greater access to global markets. Capital moves across borders in seconds, companies publish information simultaneously to investors around the world and advances in technology have transformed both the speed and cost of international investing. In theory, geography should matter less than ever.
Yet portfolios continue to tell a different story.
Despite the benefits of international diversification, investors across the world consistently allocate a disproportionate share of their assets to domestic markets. Economists have long referred to this phenomenon as home bias, and although it has been recognised for decades, it remains one of the most persistent features of portfolio construction.
The question is no longer whether home bias exists. It is whether it still represents a rational investment decision in an increasingly interconnected financial system.
Access has become global. Understanding has not.
Historically, investing close to home offered genuine advantages. Local investors often understood domestic regulation more thoroughly, had easier access to company management, operated within familiar legal systems and benefited from information that travelled far more slowly than it does today.
Many of those barriers have now disappeared. Corporate announcements are distributed globally within moments, research is increasingly international and technology has dramatically reduced the cost of investing across borders.
But access is not the same as understanding.
Political priorities, corporate governance, accounting standards, legal frameworks and regulatory environments continue to vary significantly between jurisdictions. Institutional investors increasingly compete not on who receives information first, but on who interprets it most effectively. In many markets, local knowledge still provides valuable context that cannot be replicated simply through greater data availability.
Diversification is only one objective
Modern portfolio theory demonstrates the benefits of international diversification, but institutional portfolios are rarely built to maximise diversification alone.
Pension schemes manage long-term liabilities. Insurance companies operate within regulatory capital requirements. Asset managers must consider client mandates, governance frameworks and reporting obligations, while many institutional investors are measured against benchmarks rather than in isolation.
Reducing domestic exposure may improve diversification, yet it can also increase tracking error, introduce additional currency risk or create governance challenges that outweigh the theoretical benefits.
Portfolio construction therefore involves balancing multiple objectives rather than pursuing diversification at any cost.
Familiarity should not be confused with discipline
Behavioural finance suggests investors naturally feel more comfortable allocating capital to businesses, economies and brands they know well. That familiarity can increase confidence, but confidence is not necessarily evidence of better diversification or superior long-term outcomes.
Equally, dismissing home bias altogether would be overly simplistic. Domestic allocations may reflect carefully considered views on liabilities, regulation, liquidity or currency management rather than unconscious behavioural preference.
The important distinction is whether home bias is the result of deliberate investment policy or simply the comfort of the familiar.
Global markets have changed the debate
Today’s investment landscape has added further complexity. Currency movements, geopolitical tensions, industrial policy, supply-chain resilience and national security considerations increasingly influence capital allocation alongside more traditional measures such as valuation and expected returns.
For global investors, the question is therefore no longer whether international investing is possible. It is how those additional risks should be reflected within a portfolio.
Home bias is neither inherently rational nor inherently irrational.
For sophisticated investors, its suitability depends entirely on why it exists. If domestic exposure reflects liabilities, regulation, benchmark management or clearly defined investment objectives, it may represent disciplined portfolio construction. If it exists primarily because familiar assets feel safer than unfamiliar ones, valuable opportunities may be overlooked.
In an era where information moves globally but investment decisions remain rooted in judgement, perhaps the more important question is not whether investors exhibit home bias, but whether they fully understand the reasons behind it.