We analyzed Mexico’s market characteristics, performance and risk-to-return profile, represented by the FTSE Mexico Index, against the FTSE All-World Index, a sub-index of the FTSE Global Equity Index Series (FTSE GEIS).
Although home bias occurs across global pension schemes, Mexico shows a significant disparity between its allocation to domestic equities at 32% and its weight in the FTSE All-World Index 0.4%. This difference in weight translates into a home bias ratio of 80 times.
We compared the relative performance of Mexican equities with that of overseas equities in Mexican pesos, and in local-currency terms to remove the currency effect. A depreciating currency improves the overseas returns in pesos of a Mexican-based investor (and vice versa).
As the chart below illustrates, Mexican equities outperformed international ones in local currency terms (blue bars) during six of the 13 years examined, but they outperformed in pesos (green bars) for only three years. The relative performance shows Mexican investors being worse off for having a bias to domestic equities in 10 of the 13 years examined (in Mexican peso terms).
It’s important to note that the depreciation of the peso had a significant effect, decreasing Mexican equity returns for Mexican investors, relative to the global index. As a net oil exporter, Mexico was hit hard by the oil price collapse of 2014, which caused rapid, multi-year depreciation of its currency and a decline in domestic equities.
Chart 1: Year-on-year returns of the FTSE Mexico Index and the FTSE All-World Index in MXN and LC – Relative
Source: FTSE Russell to September 30, 2020 (Q3 2020). Past performance is no guarantee of future results.
In contrast, international equities delivered a higher risk-adjusted return ratio after the Global Financial Crisis. The histogram below demonstrates that Mexican equities delivered better risk-adjusted returns in only three of the 13 years examined (2008, 2010 and 2012).
Chart 2: Year-on-year return/risk ratios of the FTSE Mexico Index and the FTSE All-World Index – Relative
Source: FTSE Russell to September 30, 2020 (Q3 2020). Past performance is no guarantee of future results.
Jesus Togno, regional director, Latin America, FTSE Russell:
There has been a marked increase in the offering of international-exposure solutions in Mexico in recent years. Thus, the heavy bias towards local equities, 80 times their weight in a global portfolio, is an active decision that has proved to be costly for Mexican investors as reflected in most of the period covered in this analysis.
Giovanni Onate, head of BlackRock’s institutional client business in Mexico:
At BlackRock, we believe a more diversified global portfolio can deliver advantages over time. Our goal is to help our clients build healthy and balanced portfolios in a diversified approach that incorporates both domestic and international securities that will improve investment outcomes.
Hugo Petricioli, country head – Mexico & Central America, Franklin Templeton:
Despite increasingly integrated financial markets, investors worldwide tend to show preference for domestic securities, and Mexico stands out with a particularly high home-bias ratio, which has led to an opportunity cost for Mexican-based investors over the past decade. FTSE Russell’s case study of the Mexican equity market shows that investors might benefit from balancing their portfolios and increasing their exposure to international equities. In my opinion, the only acceptable home bias for investors should be rooting for their national team. However, the study suggests that it is likely in their best interest to diversify globally.
Ignacio Saralegui, senior investment Strategist, Vanguard Latin America:
“FTSE Russell’s examination of investors’ home-country bias underscores the importance of considering any concentrated exposure within a diversified investment approach. Vanguard’s investment principles and strategies have shown that diversification can help Mexican investors be resilient in all market conditions.”
For a deeper analysis, please see the full report, “Appraising home bias exposure – Mexico” on the FTSE Russell website.
