That's Where the Money Was: Foreign Bias and English Investment Abroad, 1866-1907

Abstract

Why did Victorian Britain invest so much capital abroad? We collect over 500,000 monthly returns of British and foreign securities trading in London and the United States between 1866 and 1907. These heretofore-unknown data allow us to better quantify the historical benefits of international diversification and revisit the question of whether British Victorian investor bias starved new domestic industries of capital. We find no evidence of bias. A British investor who increased his investment in new British industry at the expense of foreign diversification would have been worse off. The addition of foreign assets significantly expanded the mean-variance frontier and resulted in utility gains equivalent to a meaningful increase in lifetime consumption.

Keywords: capital markets, home bias, history, Victorian overseas investment

JEL Classification: E44, F22, G11, G15, N21, N23, O16