Is Local Knowledge an Advantage?

This column tackles the question of whether investor performance is influenced in any way by the tendency to hold more shares of nearby companies. Factors unrelated to expected performance may be the real story behind the tendency to overweight locally. As it turns out, this is a relevant issue not...

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Bibliographic Details
Published in:Journal of Financial Planning 2008-04, Vol.21 (4), p.38
Main Author: Riepe, Mark W
Format: Article
Language:English
Subjects:
Equity funds
Influence
Institutional investments
Portfolio investments
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Summary:This column tackles the question of whether investor performance is influenced in any way by the tendency to hold more shares of nearby companies. Factors unrelated to expected performance may be the real story behind the tendency to overweight locally. As it turns out, this is a relevant issue not only for individual investors, but institutional investors as well. Coval and Moskowitz (2001) constructed a dataset that matched the holdings of individual actively managed equity funds with the distance from the headquarters of those companies to the fund's location. So while it is intriguing that 35,000 households were, on average, able to achieve some success by overweighting local firms in their portfolios, there's still room at the table for the concept of "too much of a good thing can be dangerous." If clients want to execute small "local" tilts in their equity portfolios, that's terrific. But make sure the investment policy statement for the client establishes some sensible limits on such a strategy within the overall portfolio.
ISSN:1040-3981