1. 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

2. 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

3. 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)

4. 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 1986 1995/1992

5. Member Investment Choice April 2001 Asset Classes EquityDebtProp.Cash Aust.Int.Fixed Int. Securities Inflation Bonds Global Bonds Listed Prop. Cash Options 2001 2004 2005 2001 2004 2005 2001 2004 2005 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%

6. Member accounts 199 559 (92%) default, 17 616 (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 147 157 default –No gender difference

7. Choice & No Choice Members Default n=146739 Choice n=18547 Cash n=743 Cons. n=862 Bal. n=368 Growth n=12851 MyPlan n=3723 Balance $ Mean SD Median 12597 16197 6557 25855 34115 18210 42706 76324 17490 30808 47353 17189 45863 63123 31145 22572 23748 17217 29678 38759 21038 Male/Female % 31/6941/59 44/5636/6446/5439/61 51/49 Age Yrs Mean SD Median 42 11 42 61 10 60 51 11 48 55 11 52 53 9 51 62 9 62 60 9 60 Mem.length Yrs Mean SD Median 859859 8 4 10 849849 749749 8 4 10 8 3 10 8 4 10 Total Cont’s. $ Mean SD Median 2529 2247 5271 12100 3918 13274 35352 3781 7429 19792 3542 11723 30419 4820 4496 7819 3884 5101 7498 4102

8. 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, 1.5 1950-2000

9. 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 Equity38 356 37 395 33 308 Int. Equity37 365 25 5 19 205 Aust. Fixed Int. Sec. 8 112 16 2 24 287 Int. Fixed Int. Sec. 6 93 5 53 6 73 Aust. Prop.7 64 10 7 9 84 Int. Prop.0 20 0 00 0 02 Source: Morningstar Total Access

10. 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

11. Asset Class Allocations in My Plan Int. Equity % Aust. Equity % Property % FIS % Inflation Linked Bonds % Cash % Sample, n=4604 (SD) 33.41 (28.42) <Growth 29.45 (23.27) 18.60 (22.98)  8.31 (14.28) 1.89 (7.15) 5.00 (14.35) Male (Female) 34.61 * (32.04) * <Growth 29.17 (29.78) 18.43 (18.79)  8.32 (8.28) 2.05 (1.73) 4.44 * (5.67) * * 90%

12. Decision Order Int. Equity % Aust. Equity % Property % FIS % Inf. Linked Bonds% Cash First M,n=1759 (F,n=1689) 40.10 ** (35.84) ** 29.48 (30.74) 16.16 (16.97) 7.03 (7.38) 1.21 (1.04) 3.16 ** (4.63) ** Second M,n=391 (F,n=311) 20.93 * (17.27) * 25.36 (26.69) 27.74 (26.62) 11.09 (11.88) 2.98 (3.68) 7.32 (8.56) Third M,n=134 (F,n=79) 21.87 (21.46) 28.62 (26.39) 19.61 (22.82) 12.69 (10.16) 5.78 (6.89) 9.27 (7.33) Fourth M,n=56 (F,n=25) 19.96 ** (13.40) ** 38.07 (27.24) 22.50 (25.80) 10.71 (14.88) 3.13 (2.40) 3.66 ** (11.52) ** Asset Allocation by Decision Order    * 90% ** 95%

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

14. Choice Historical Performance Mean (%) SD (%) t-stat of differences All Investment options 12 month (n=5103) Old3.72938.6713 23.5532 New5.91909.1219 6 month (n=6223) Old2.32404.7177 19.5169 New3.19305.0709 1 month (n=7623) Old0.11081.6077 7.5319 New0.20931.8179 2001 Report (n=13475) Old2.68000.4145 -119.2810 New1.24001.3587

15. Choice Historical Performance Mean (%) SD (%) t-stat of differences My Plan option 12 month (n=1888) Old3.41799.3117 8.0024 New7.22849.4771 6 month (n=2184) Old2.31025.0475 6.7437 New3.94715.4504 1 month (n=2485) Old0.12941.7522 2.1734 New0.37302.0337 2001 Report (n=2424) Old2.65640.7799 -61.4683 New0.00332.0198

16. 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

17. 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

18. 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