Market Focus | The Home Bias Phenomenon in Asia

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Market Focus | The Home Bias Phenomenon in Asia
2013
February
Market Focus | The Home Bias Phenomenon in Asia
“Home bias” refers to the propensity of individuals to make
financial investments in their home country rather than in
foreign markets. Surveys show that institutional investors in
North America hold roughly 75% of their assets in North
American securities and European investors hold around 60% in
European securities, while Asian investors hold an overwhelming
85% of their assets in Asian securities^. Hence, it appears that
the home bias phenomenon is even more prominent in Asia than
elsewhere.
From a risk versus reward perspective, such behavior seems
irrational and inefficient. So why don’t Asian investors expand
their investment universe to include greater exposure to
overseas markets? Government restrictions on capital flows,
transaction costs and liquidity issues, exchange rate volatility,
political risks, less information about overseas markets, and
different foreign taxes, regulations, languages and cultures all
appear to contribute to home bias. However, with the exception
of the first explanation, these barriers seem more psychological
than real, as investment through mutual funds is relatively
hassle-free.
The old saying “don’t put all your eggs in one basket” is
particularly true for investing. While risk and reward profiles for
different asset classes vary across different geographical
regions, the real benefit of diversification springs from low or
negative correlations, which can help mitigate downside risk.
The table shows that investors gained 300% from investing in
Asia ex-Japan equities over the past 10 years. However, the
annualized volatility of Asia ex-Japan equities was almost 20%.
Regional equities were also the worst performers during the
crisis year of 2008 and in 2011. Investors were exposed to
extreme volatility. In contrast, while the 10-year cumulative
return for an “asset allocation” portfolio (which includes a mix of
other asset classes, such as high yield corporate bonds,
emerging market debt, etc.) was not as good as pure Asian
equities, the portfolio still showed respectable returns of 190%,
while volatility was almost half that of regional equities. This
lower volatility is very valuable both in helping investors stick
with a disciplined strategy and in reducing the risk of
disappointment if investors need to cash in their investments in
a down year.
Although home bias is a universal phenomenon, this doesn’t
mean that it is the best strategy for investors from a risk and
return standpoint. Asian investors are advised to look outside
their home country/region to enjoy the diversification benefits
from exposure to different geographical regions, countries,
sectors, currencies and asset classes in order to improve the
risk-adjusted returns of their overall investment portfolio.
^ BNY Mellon’s research report “Asia’s Evolving Investment Landscape - Considering
Hong Kong, Mainland China and Singapore as Investment Sources,” May 2012.
An example of diversification
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
4Q ’12
10 years (’03 - ’12)
Cum. Ret. Ann. Ret. Ann. Vol.
MSCI AxJ
MSCI AxJ
MSCI AxJ
MSCI AxJ
MSCI AxJ
MSCI AxJ Global REITs
MSCI AxJ
EMD
US Agg
302.9%
15.0%
22.7%
5.7%
40.5%
72.5%
19.8%
31.3%
8.5%
5.2%
DJ UBS
High Yield
EMD
EMD
EMD
EMD
Asset Alloc.
MSCI AxJ
Asset Alloc. Asset Alloc.
US Agg Global REITs High Yield
Cmdty
58.2%
198.4%
11.6%
-10.9%
8.9%
19.0%
19.9%
32.7%
21.0%
3.3%
12.8%
7.8%
11.1%
DJ UBS Global REITs
EMD
EMD
EMD
High Yield
Asset Alloc. Asset Alloc. Asset Alloc.
Asset Alloc. S&P 500 Asset Alloc. High Yield Asset Alloc.
Cmdty
15.8%
6.0%
18.5%
3.3%
11.7%
10.2%
29.0%
191.7%
11.3%
-26.2%
12.0%
13.6%
37.1%
16.7%
S&P 500
EMD
High Yield
High Yield
High Yield
S&P 500 Asset Alloc. High Yield
Asset Alloc. Global REITs Asset Alloc. High Yield
High Yield
US Agg
28.7%
10.7%
11.1%
11.8%
15.9%
1.8%
174.3%
10.6%
16.0%
5.0%
-27.3%
28.4%
11.4%
7.0%
DJ UBS
EMD
S&P 500
S&P 500
S&P 500
S&P 500
High Yield S&P 500
High Yield Global REITs
S&P 500
EMD
EMD
EMD
Cmdty
1.2%
25.7%
2.1%
4.9%
10.9%
95.3%
6.9%
15.1%
15.8%
14.8%
6.3%
28.2%
9.9%
-36.6%
DJ UBS
DJ UBS
S&P 500
High Yield
S&P 500 Asset Alloc. Asset Alloc.
S&P 500
S&P 500
US Agg
US Agg
US Agg
US Agg
US Agg
Cmdty
Cmdty
26.5%
2.7%
15.1%
14.8%
5.5%
-37.0%
-0.3%
0.2%
65.8%
5.2%
4.3%
3.6%
7.6%
22.7%
DJ UBS
DJ UBS
DJ UBS
DJ UBS
DJ UBS
S&P 500
High Yield Global REITs DJ UBS
EMD
US Agg
US Agg
US Agg
US
Agg
Cmdty
Cmdty
Cmdty
Cmdty
Cmdty
Cmdty
-0.4%
1.9%
-41.7%
12.0%
4.3%
2.4%
4.1%
4.2%
-13.4%
-2.7%
26.1%
2.3%
18.4%
18.7%
DJ
UBS
DJ
UBS
MSCI
AxJ
Global REITs
Global REITs Global REITs Global REITs
MSCI AxJ
US Agg
US Agg
Note: FTSE EPRA/NAREIT Global
Cmdty
Cmdty
-52.2%
-21.0%
-0.5%
0.0%
21.9%
-17.0%
5.9%
6.5%
-6.4%
-1.1%
REITS data unavailable prior to 2007
MSCI AxJ
47.0%
MSCI AxJ
17.7%
MSCI AxJ
23.2%
DJ UBS
Cmdty
17.5%
MSCI AxJ
33.7%
Source: MSCI, Dow Jones, Standard and Poor’s, Barclays Capital, FactSet, J.P. Morgan Asset Management “Guide to the Markets – Asia”.
The “Asset Allocation” portfolio from 2002 – 2006 assumes the following weights: 20% in the S&P 500, 40% in the MSCI Asia ex Japan (MSCI AxJ), 10% in the
J.P. Morgan EMBIG Index, 10% in the Barclays Capital Aggregate, 10% in the Barclays Corporate High Yield Index and 10% in the DJ UBS Commodity Index.
However, in 2007, weights were changed to: 10% in the S&P 500, 20% in the MSCI Asia ex Japan, 20% in the J.P. Morgan EMBI, 15% in the Barclays Capital
Aggregate, 15% in the Barclays Corporate High Yield Index, 10% in the DJ UBS Commodity Index, 10% in the FTSE EPRA/NAREIT Developed REITs Index.
Balanced portfolio assumes annual rebalancing. All data except commodities represent total return for stated period. 10-yr data are used to calculate
cumulative total return (Cum. Ret.), annualized returns (Ann. Ret.), and annualized volatility (Ann. Vol.). These returns and volatility reflect the period from
1/1/03 – 31/12/12, except for Global REITs where returns and volatility reflect the period from 1/1/07 – 31/12/12 due to data availability.
The information contained in this document does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security,
investment product or service. Informational sources are considered reliable but you should conduct your own verification of information contained
herein. Investment involves risk. Please refer to the offering document(s) for details, including the risk factors before investing. Issued by JPMorgan
Funds (Asia) Limited.
Fund Focus | JPM Global High Yield Bond Fund
IMPORTANT INFORMATION
 The Fund invests in fixed income instruments, primarily in below investment grade global fixed and floating rate debt securities.
 The Fund is therefore exposed to interest rate risks which may affect the price of bonds, credit market related risks, emerging markets and
Eurozone sovereign debt crisis risks. Pertaining to investments in below investment grade or unrated debt securities, these securities may be
subject to higher liquidity risks and credit risks comparing with investment grade bonds, with an increased risk of loss of investment.
 The investment manager may at its discretion pay dividend out of (i) capital and (ii) gross income while charging/paying all or part of the Fund’s
fees and expenses to/out of the capital of the Fund, resulting in an increase in distributable income for the payment of dividends by the Fund
and therefore, the Fund may effectively pay dividend out of capital. Payment of dividends out of capital amounts to a return or withdrawal of
part of an investor’s original investment or from any capital gains attributable to that original investment. Any distributions involving payment of
dividends out of the Fund’s capital or payment of dividends effectively out of the Fund’s capital (as the case may be) may result in an immediate
reduction of the net asset value per share.
 The Fund may invest in financial derivative instruments in a limited extent for investment purpose and may therefore be subject to the derivative
risk that may result in a total loss of the Fund’s assets.
 Investors may be subject to substantial losses.
 Investors should not solely rely on this document to make any investment decision.
Market Review
The reduction of tail risks in Europe, an improving
Chinese economy, and the last minute bipartisan bill
from the Fed to avoid the fiscal cliff all contributed to
stabilizing market sentiment. Ultimately, investors’
desire for yield and positive fundamentals will continue
to drive demand into the asset class. The BofA Merrill
Lynch US High Yield Master II Constrained Index
returned 3.18% in the fourth quarter, and both spreads
and yields tightened during December. We believe
continued demand for risky assets contributed to the
vigorous new issuance with refinancing activity still
dominating the use of proceeds.
We believe spreads adequately reflect current risks and
provide an attractive risk/return trade-off. Although the
potential for further capital appreciation is limited, the
demand for high yield will remain firm as global
investors’ desire for income has never been higher,
given negative real deposit rates in most countries.
JPM Global High Yield Bond Fund Review
The Fund remains overweight in consumer products,
consumer services and technology due to our positive
view of the relative value opportunities within those
sectors. The Fund is currently underweight in the
banking, metals & mining and electric utilities sectors.
We maintain a strong preference for the deeper and
more liquid USD-denominated market segment. The
Fund’s average rating was BB- as of 31 December, while
the average rating for the Index was B, making the
portfolio’s yield* slightly lower than the Index, at
5.56%.
Market Outlook
Corporate health remains strong, but company
management’s stance towards leverage is still cautious.
Despite the ongoing debate over the US debt ceiling
and the potential sequester kicking in in the first
quarter, we expect modest economic growth in the US
and positive growth globally in 2013. Solid corporate
fundamentals and proactive refinancing activities
should allow default rates to remain well below the
historical average of 4%.
* Yield is based on yield-to-worst, which is the lowest potential yield that an investor
can receive on a bond without the issuer actually defaulting. The yield-to-worst is
calculated by making worst-case scenario assumptions on the issue by calculating
the returns that would be received if provisions, including prepayment, call or
sinking fund, are used by the issuer.
Refinancing activities are still dominating the new issuance market
350
300
Total New Issuance Volume
Share of Issuance Used for Refinancing
250
200
150
100
50
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: J.P. Morgan, December 2012
Contact Us : Investment Centres
1/F, Jardine House, Central, Hong Kong
G62, E Plaza, Legend Tower, 7 Shing Yip Street, Kwun Tong, Hong Kong
J.P. Morgan Funds InvestorLine (852) 2265 1188 | Fax no. (852) 2868 5013 | www.jpmorganam.com.hk
The information contained in this document does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security,
investment product or service. Informational sources are considered reliable but you should conduct your own verification of information contained
herein. Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document(s) for details,
including the risk factors before investing. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.

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