Barriers to cross-border portfolio flows have come down substantially in the last decade across just about every country. Here in Canada, the elimination of the Foreign Property Rule over a decade ago laid the groundwork for truly global diversification in portfolios here at home. But despite the fact that portfolios are more globally diversified than ever, a home bias persists in some funds – a fact which has left analysts and academics scratching their heads for years. A new paper seeks to solve the so-called home-bias puzzle by looking at international mutual funds and the role played by “home biased managers.”

The paper – Is there a home field advantage in global markets? — will be presented at this week’s Northern Finance Association Conference, where Canadian Investment Review is proud to be a media sponsor for the fourth year in a row.

As authors Murali Jagannathan, Andrew Karolyi and Wei Jiao, observe:

 International equity mutual funds that hire managers from a country linked to the fund’s geographic mandate exhibit a strong bias to invest in stocks of that country. These funds with “home-biased managers” attract disproportionally more flows, on average, that intensify during periods of higher economic uncertainty in that country.

At the same time, stocks domiciled in countries where the fund has a home advantage tend to outperform those held by other funds without home-biased managers and with investments in the same countries. The authors also find these managers benefit from on-the-ground information gained from operating in the country where they are making investments — that suggests they are benefiting from an informational advantage.

Read the full paper here.