Suffering from home bias? Try Asia and its smaller companies

What is the biggest hurdle to successful investment? Popular candidates normally include the likes of fear, short-termism and lack of expertise, but the title arguably deserves to go to a comparatively unappreciated phenomenon: home bias.

The inclination to invest the majority of a portfolio in domestic assets has been in evidence for a long time. Carried out in the late 1980s, one of the first significant studies into the issue found Americans held around 94% of their wealth in US stocks.

That particular leaning might have worked out rather well in some cases, given the extent to which US companies have driven equity markets’ performance in recent years. But the picture is likely to have been less rosy elsewhere.

Take Britain. One survey found almost half of all advised investors in the UK had more than 50% of their holdings in home-grown stocks in 2021, despite the market’s notably poor performance over the course of the previous 12 months.

I have even been guilty of much the same failing myself, investing almost exclusively in emerging markets for many years. I was born in Brazil to a South African father and have spent my entire career focused on developing countries, so maybe I am what might be called a child of EMs. Silly me.

Logically, home bias can be seen as fundamentally irrational. It would make sense only if investors could have absolute faith in the continued global pre-eminence of their own nations’ businesses.

In most countries, frankly, such an outlook would be delusional. Even in the US, which has much of recent history on its side but whose primacy seems increasingly unassured, it is an unrealistic outlook. This is one of the many reasons why diversification has always mattered – and why it could matter more than ever today.

Importantly, there is more to diversification than geographical variety. Diversifying across industries, sectors, market capitalisations and other dimensions can also be beneficial. For example, historically, small-caps have tended to outperform their large-cap counterparts over the long term.

Taking all the above into account, where might investors seek new opportunities in attempting to move away from an unhealthy reliance on the usual suspects? In my opinion, one arena that seldom attracts the attention it merits is the sphere of Asian smaller companies.

From home bias to hidden gems

The arguments for investing in Asia as a whole are relatively well-known. The region contains some of the world’s most dynamic economies, with growth often fuelled by domestic demand rather than exports – meaning a degree of insulation from international trade tensions and other unwelcome distractions.

The arguments for investing in Asian smaller companies, meanwhile, are much less recognised. This is chiefly because even the investment analyst community pays scant attention to these businesses.

The paucity of coverage is not a reflection of Asian small-caps’ prospects. It stems from the enduring reluctance of the “sell side” of our industry to tear its gaze away from mega-cap tech titans and other headline-grabbing stocks.

Hundreds of analysts closely follow the fortunes of household-name listed companies in the US. Dozens monitor those in Europe and other developed markets. But only a handful are likely to cover a small-cap in Europe – and fewer still are likely to focus on a small-cap in Asia.

As a result, most investors are completely unaware of these businesses and their capacity to deliver growth over time. No wonder they rarely – if ever – think of diversifying into this corner of the investment universe.

This is where specialist teams with on-the-ground insight enter the reckoning. A fund like ours uses local knowledge, in-depth research and direct engagement to find Asia’s hidden gems.

Most have a market capitalisation of below £5 billion. They include companies that shine within their own markets, companies that have broader ambitions and companies that already boast an overseas presence.

Of course, debates over the effective limits of diversification have raged for decades. It is accepted that spreading investments too thinly can be as counterproductive as barely spreading them at all. So this is by no means a call to overcome the perils of home bias by striking out in every conceivable direction.

This is instead a call to acknowledge the likely benefits of diversifying sensibly – to understand that nothing is certain and that avoiding the risk of having too many eggs in one basket is as at least as prudent today as it has ever been. To that end, in my view, Asian smaller companies can play a valuable role in bringing balance to an investment portfolio.

Important information

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Emerging markets tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

The Aberdeen Asia Focus PLC Key Information Document can be obtained here.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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