US equity returns have historically dominated those of most other countries for over a decade. So it’s not surprising to observe that US investors continue to chase these returns with what is most common to them: more US equities. In the vernacular of behavioral economics, this is called familiarity bias – the tendency to feel most comfortable investing in what is most well-known. In some cases, this could mean investing in stocks that an individual is most familiar with, like the company they work for or a business they frequent. However, in broader terms it also means that investors tend to invest more locally, in US equities, demonstrating a more specific kind of familiarity bias called home country bias. At Goldman Sachs Asset Management, we have observed home country bias among professional investors, and we believe that overlooking non-US equity opportunities may be detrimental to returns in the long run.
Avoiding non-US equities may result in investors potentially missing attractive returns. Of the top 50 performing global stocks each year, on average, more than 75% have been domiciled outside of the US over the last decade1.
Consider the recent allocations we observe from thousands of portfolios collected through our GS PRISM™ portfolio construction analysis. As shown in Exhibit 1, our team has observed that the average allocation to non-US equity as a percent of total equities is less than 28%, which is less than the global market cap as well as our GS Asset Management 70:30% model.
