The secret to a robust portfolio is diversification. Nevertheless, Asian investors tend to exhibit a strong home bias in their asset allocations, Alex Fung of Vontobel Wealth Management Asia writes.

By Alex Fung, CEO Vontobel Wealth Management Asia-Pacific

Ideally, investments are the result of a realistic assessment of the expected risks and opportunities while ignoring personal preferences as much as possible. That's the theory, at least. In practice, investors worldwide tend to strongly prefer investments in their own country. For example, surveys show that Asian investors hold roughly 85 percent in Asian securities.

Behavioural finance calls this phenomenon «home bias». Home bias, while all too human, occurs because people tend to pay more attention to information when it is easily accessible, and less attention when it is hard to obtain. Asian investors, for example, can more easily obtain information on local companies and better assess the reliability of sources in their region.

Unnecessary Risks

Further reasons why investors are reluctant to invest abroad include exchange-rate risks, higher transaction costs or sometimes also government restrictions on capital flows.

Consequently, investors feel more secure if they overweight domestic securities in their portfolio. However, an excessive home bias builds up concentration risk in the portfolio and introduces unnecessary and unrewarded risks.

Outperforming the Rest of the World

Judged over the long term, international diversification can reduce volatility, decrease losses and generally decrease investment risk. For example, Asian equity markets are heavily exposed to the financials and information technology sectors but investors are underweight in sectors such as healthcare that represent a significant part of the global economy. By increasing international equity holdings, investors can reduce sector concentration and decrease the overall portfolio risk.

Switzerland, with its stable economy and large share of companies in high-value sectors such as pharmaceuticals, mechanical engineering, or watchmaking, allows Asian investors to diversify their regional and sectoral allocations while also benefiting from an interesting return potential. Measured in Swiss francs, the Swiss equity market has outperformed the rest of the world over the last 30 years.

One reason for this outperformance lies in the international nature of the Swiss stock market. For example, the corporations represented in the Swiss Market Index (SMI), Switzerland's leading share index, generate less than 10 percent of their aggregated revenue in their home markets.

Attractive and Safe Swiss Equity Market

Few countries have as many internationally successful companies per capita as Switzerland. There are many reasons for this, ranging from high-quality infrastructure and excellent educational institutions to the flexible labour market and highly developed financial sector.

In addition, the strong Swiss franc has forced companies to constantly innovate and seek new efficiencies. Swiss companies invest more than average in research and development, which also helps explain their strong competitiveness.

Strict Company Laws

Companies listed in Switzerland are governed by Switzerland's strict company laws and corporate governance rules. In addition, financial institutions are subject to the oversight of Swiss banking regulators. This gives investors a feeling of security that should not be underestimated. Moreover, Swiss corporate culture is known for characteristics such as reliability, quality, preciseness, innovation and modesty.

Investors interested in participating in the attractive growth potential of Swiss companies while benefiting from a strong and safe currency are advised to consult with Swiss stock market specialists. This ensures that they don’t miss out on attractive opportunities with little-known niche players and small-cap companies.

Proven Expertise

Vontobel has many years of proven expertise in the field of Swiss equities and offers the broadest research coverage in the small- and mid-cap segment. This expertise has also been recognized by the prestigious Extel Survey, which in 2016 rated Vontobel as the best institution for Swiss equities for the sixth year in a row.

Alex Fung is the Chief Executive Officer of Vontobel Wealth Management Asia, based in Hong Kong.