Member Investment Choice and International Asset Exposure: A Preliminary Investigation of Home Bias Paul Gerrans Deb Gardner Marilyn Clark-Murphy Craig Speelman Edith Cowan University We gratefully acknowledge the support of the GESB, UniSuper, STA and HESTA in the conduct of this research

The Context An environment of ever increasing choice Many concerns expressed about members ability to choose well Discussion on the role of education and information in facilitating good choices

Two Specific Issues Home bias –More knowledgeable about home assets (Kilka & Weber, 2000) –More optimistic about the familiar (Huberman, 2001) –Manifestation of the recognition heuristic (Goldstein & Gigerenzer, 2002) Naïve diversification (Benartzi & Thaler, 2002) (Hedesstrom et al 2004)

The Present Study : Government Employees Superannuation Board (GESB) Do members exhibit home bias in choices? Would this vary over time? GESB –Not-for profit fund > $5 billion assets –W.A. public sector employees –MIC data 4/2001 – 9/2004 Pension Scheme Gold State Super West State Super Defined Benefit Defined Contribution /1992

Member Investment Choice April 2001 Asset Classes EquityDebtProp.Cash Aust.Int.Fixed Int. Securities Inflation Bonds Global Bonds Listed Prop. Cash Options Growth 25%40%15%8% 4%11%10%2% Balanced 20%30% 15%8%4%19%10%2% Conservative 10%15%60%30%8%4%34%5%2% Cash 100% My Plan 100%

Member accounts (92%) default, (8%) MIC Inactive accounts –For members since choice introduced 30% have balance < $435 –Include members Made contributions 2004 financial year, or Have balance of > $500 and have been a member since choice introduced Reduces accounts to default –No gender difference

Choice & No Choice Members Default n= Choice n=18547 Cash n=743 Cons. n=862 Bal. n=368 Growth n=12851 MyPlan n=3723 Balance $ Mean SD Median Male/Female % 31/6941/59 44/5636/6446/5439/61 51/49 Age Yrs Mean SD Median Mem.length Yrs Mean SD Median Total Cont’s. $ Mean SD Median

Home Bias? What is optimal? Markowitz optimisation French and Poterba (1991) –estimated expected return differentials required to justify observed holdings relative to market weighted allocation, rather than optimum Gorman and Jorgensen (2002) –“international diversification benefits are particularly difficult to capture in practice” Herold and Maurer (2003) –US investors bias can be explained by beliefs of efficiency of US/Global portfolio & measure of regret aversion Dimson, Marsh and Staunton (2002) –Sharpe Ratio World/Aust = 1, 20 th Century,

Bias? Industry Norm: Allocations Multisector Super Funds Aggressive (n=20) Growth (n=202) Balanced (n=64) Mean % Median % SD % Mean % Median % SD % Mean % Median % SD % Aust Equity Int. Equity Aust. Fixed Int. Sec Int. Fixed Int. Sec Aust. Prop Int. Prop Source: Morningstar Total Access

GESB: My Plan Asset Allocations Where non-ve weighting in Aust. or Int. –64% (62) equity male (female) –International/Australian equity 50/50 No more evidence of home bias than industry norm –though less exposure than GESB growth option

Asset Class Allocations in My Plan Int. Equity % Aust. Equity % Property % FIS % Inflation Linked Bonds % Cash % Sample, n=4604 (SD) (28.42) <Growth (23.27) (22.98)  8.31 (14.28) 1.89 (7.15) 5.00 (14.35) Male (Female) * (32.04) * <Growth (29.78) (18.79)  8.32 (8.28) 2.05 (1.73) 4.44 * (5.67) * * 90%

Decision Order Int. Equity % Aust. Equity % Property % FIS % Inf. Linked Bonds% Cash First M,n=1759 (F,n=1689) ** (35.84) ** (30.74) (16.97) 7.03 (7.38) 1.21 (1.04) 3.16 ** (4.63) ** Second M,n=391 (F,n=311) * (17.27) * (26.69) (26.62) (11.88) 2.98 (3.68) 7.32 (8.56) Third M,n=134 (F,n=79) (21.46) (26.39) (22.82) (10.16) 5.78 (6.89) 9.27 (7.33) Fourth M,n=56 (F,n=25) ** (13.40) ** (27.24) (25.80) (14.88) 3.13 (2.40) 3.66 ** (11.52) ** Asset Allocation by Decision Order    * 90% ** 95%

Influences on Asset Allocations Trailing 1, 6, 12 month returns of old and new options using GESB published monthly returns

Choice Historical Performance Mean (%) SD (%) t-stat of differences All Investment options 12 month (n=5103) Old New month (n=6223) Old New month (n=7623) Old New Report (n=13475) Old New

Choice Historical Performance Mean (%) SD (%) t-stat of differences My Plan option 12 month (n=1888) Old New month (n=2184) Old New month (n=2485) Old New Report (n=2424) Old New

What is the story? Two clearly different decisions 1. First decision when MIC introduced –“Activate your super” “Take control” –Do so by choosing different allocations –Historical performance not a driver –No home bias, higher international asset allocation

What is the story? 2. Subsequent decisions –Different information set, performance (more salient?) –Reduce exposure to poor performers and increase exposure to property, Australian equity –Recognition bias rather than Home Bias per se

Limitations & Future Work One fund – extend to two industry funds Time period – extend earlier period Pooled time series preserve time structure & multivariate influences Thanks to support of GESB, UniSuper, STA, HESTA