Home Bias Makes Sense for U.S. Pension Plans

Abstract

A home bias of investment means international securities are less represented in a portfolio than domestic securities. In an asset-liability framework, pension portfolio weights are chosen not just by an asset's return and variance, but also by its correlation with the pension liabilities. This results in higher weights on the assets that are highly correlated with pension liabilities. When managers try to maximize the portfolio surplus, allocations to international equities are lower than would be predicted by typical mean-variance models. Thus there is really no home bias in pension plan investment.