26 Feb 2018
In an ever smaller world should investors be seeking out opportunities beyond familiar markets?
The UK has become a far less insular country over the past forty years or so. Our eating habits, for example, have undergone a revolution. Many Britons are as familiar with Indian or Thai dishes as fish and chips. Yet when it comes to investing, we appear to have little appetite for exploring foreign opportunities. So while UK equities accounted for around 7% of the global equity market in 2017, they accounted for around 25% of the portfolios of UK investors1.
This “home bias” appears even less logical when you consider that the UK accounts for:
Moreover, the best-performing global market has been found outside the UK in every year this decade3.
Research certainly shows that home bias can handicap the ability of investors to maximise investment returns. Investors who focus on the domestic market are likely to be far less diversified than those who hold a portfolio of international stocks. That is because of the heavy concentration of the FTSE® 100 Index in terms of companies and sectors. Just four companies account for 25 per cent of the index, while a few sectors account for over half of the index by value.
Investing internationally, by contrast, gives investors exposure to potentially fast-growing stocks and sectors that are simply lacking in the UK. There are just two technology stocks, for example, in the FTSE®100 Index. Investing overseas allows an investor to harness technologies that are changing the world and could reap vast profits for companies such as Google, Facebook and Tesla. Investing internationally also gives investors exposure to economies with robust growth potential. While we expect the UK economy to grow by around 1.5 per cent in 2018, many overseas economies are forecast to expand at a much faster pace.
The propensity of UK investors to continue to focus on the home market appears particularly perverse given that the world has never been more interconnected. Events in even the furthest-flung corners of the globe are broadcast live on your mobile phone.
The theory of “the butterfly effect”, the idea that a relatively small event can reverberate across the world, has perhaps never been more valid given the speed at which ideas and news now flow across borders.
This is particularly relevant to the UK where an estimated 75% of the revenues of FTSE® 100 member-companies are earned from abroad, and nearly 20% are commodity companies. This means that events in distant parts of the world, such as China, could impact UK shares via the dollar or commodity prices.
The interconnectedness of financial markets is seen every day and everywhere. This creates huge opportunities for investors but also leaves them vulnerable to fast-changing markets. So portfolios need to be constructed to respond quickly to changing conditions and market opportunities.
Figure 1: Our global approach delivers a geographically diverse portfolio
* Multi-asset Funds (MAF) growth portfolio refers to the growth assets of our strategic asset allocation.
** EMD LC = Emerging Market Debt Local Currency, EMD HC = Emerging Market Debt Hard Currency
Source: Aviva Investors as at 31 December 2017. The ‘UK biased portfolio’ is based on the equity allocation of the Investment Association Mixed 40-85% shares sector (pensions).
We avoid a home bias in our multi-asset funds. That’s because, just as many Britons have come to appreciate chicken tikka masala as much as a traditional roast dinner, we believe investors should also adopt a more adventurous approach in terms of their investing habits.
Sources
1 Capital.com, September 2017: https://capital.com/familiarity-bias-examples-equity-home-and-local-bias
2 World Bank, GDP rankings 2016, http://databank.worldbank.org/data/download/GDP.pdf
3 Thomson Reuters, February 2018
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