Understanding International Diversification and Home Bias in Asset Management
This lecture outlines key concepts related to international diversification, home bias, and performance attribution in asset management. It explores preferences for domestic securities, the implications of consuming in domestic currencies, and information asymmetries that influence investment decisions. Furthermore, it covers the Portuguese asset management industry, detailing investment asset allocation as of February 2009, and provides formulas for performance attribution, including contributions from asset class, security selection, and currency selection. The discussion incorporates the EAFE index and performance examples to illustrate these concepts.
Understanding International Diversification and Home Bias in Asset Management
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Presentation Transcript
Asset Management Lecture 17
Outline for today • International Diversification • Home bias • Performance attribution
Home bias Home bias Preference for domestic securities Consumption in domestic currencies Information asymmetry Other explanations?
Portuguese Asset Management Industry (as of Feb 2009) • Main Investment Asset allocation
International Performance Attribution Extension to consider additional factors Currency selection Country selection Stock selection Cash and bond selection
International Performance Attribution Foreign return Currency appreciation
Reminder: Formula for Attribution B: Bogey portfolio P: the managed portfolio
Reminder: Formula for Attribution Total contribution from asset class i Contribution from asset allocation Contribution from security selection
Formula for International Attribution Total contribution Contribution from country allocation Contribution from stock selection Contribution from currency selection
EAFE Index The Europe, Australasia, and Far East Index from Morgan Stanley Capital International. An unmanaged, market-value weighted index designed to measure the overall condition of overseas markets. from the perspective of a North American investor
EAFE Index As of 2006-12-31, the weight of the stocks from the various regions was as follows: Europe (excluding United Kingdom) 45.268% United Kingdom 23.712% Japan 22.555% Asia-Pacific (excluding Japan) 8.465%
Example Total performance
Example Attribution to Currency Selection
Example Attribution to Country Selection
Example Attribution to Stock Selection
Example Summary of performance attribution Overall Performance : -0.1% Currency Selection: -1% Country Selection: -0.25% Stock Selection: 1.15%
