At one stage I was collecting UK companies like football stickers. I used their products and liked their brands so to me, adding another high street name to the album meant I was putting my money where my mouth was.
Considering buying into a firm I had experience with is generally not a bad starting point, but skipping straight to a portfolio full of logos I saw on my way to work wasn’t the best next step. Although I don’t think I’m the only one to do it.
Recent figures from the Investment Association show that, even with UK firms falling out of favour among investors this year, investment in UK equities still accounts for 29% of UK assets.
Putting that into perspective, the UK only accounts for around 3.5% of the MSCI World Index. We aren’t nearly as big as we think we are.
Now, investing simply on that basis would mean holding nearly 60% of our portfolio in the US, which may feel like too much of a commitment to the country and its currency, but there’s a point in there somewhere. And it is this - falling victim to home bias is easily done but we have to do what we can to avoid it.
All my portfolio did was reflect my own little London-centric bubble and, by extension, exposed me too heavily to the British market, with little in the way of opportunity elsewhere.
Of course, the next question is if that’s always such a bad thing. The legal framework that comes with a UK-listing can give us a bit of comfort and, with around 70% of the UK's biggest 100 listed firms' earnings coming from overseas, you might have exposure to foreign markets and currencies already.
But, this year has laid bare exactly why global diversification is so important. There have been opportunities that the UK just doesn’t offer in the same way as other markets - US tech, healthcare and communications being good examples here. Those investors with a geographical split closer to MSCI World will have been thankful for it so far in 2020.
A quick look at the British bourse throws up miners, oil majors, big tobacco, pharma and banks too - all starting to look their age compared to the innovation seen across the Atlantic. These sectors are very cyclical too, relying on a jolt to kick start the economy and prompt a shift away from growth stocks to value.
This might be the reason we are still hanging on to UK stocks in general. With the market now looking cheap compared to its peers, there’s a logic in seeing the upside if we can come away from Brexit negotiations happy and deal with a looming winter of unemployment. But even then, that’s a lot to hang 29% of your portfolio on. And also a lot to wait around for when there is growth to be tapped into outside of dear old Blighty.
Broad demographic changes like a rising middle class in Asia, and the firms springing up to serve them, offer immense potential for investors willing to look. It could be a case of sticking to a core and satellite approach of UK assets supplemented by stock picking opportunities abroad where growth looks attractive.
This can allow you to keep control of just how much attention you are giving to significant structural growth drivers abroad and prompt you to justify the inclusion of UK assets at the same time. Remember, assets should be competing to get into your portfolio, they shouldn’t get a leg up just because you’ve heard of them.
Your personal asset allocation is just that - personal. Our goals are different and our appetite for risk lies on a wide spectrum. But something we all have in common is an innate inability to predict the future. That’s why spreading our money across assets and geographies just makes sense.
And if you’re looking down at a UK-heavy portfolio, remember rebalancing isn’t simply about crude cuts to well-performing stocks and allocations to broad foreign markets. That would be watering the weeds and pulling the flowers, as legendary investor Peter Lynch would say.
But, checking in once in a while to make sure your portfolio accurately reflects the risk you’re happy to take is important. Sorting out the geographies and what they’re adding to your profit and loss is a good place to start.
IA investment management survey 24.09.20
MSCI All Countries World Index 30.09.20
FT Adviser 24.10.19
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