PA ANALYSIS: Hidden flaws of a UK home bias

Added 11th September 2017

UK retail investors have often been accused of investing too much in the domestic market, and research published today suggests that by doing so they have missed out on significant gains elsewhere.

PA ANALYSIS: Hidden flaws of a UK home bias

While in recent months there have been signs that the love affair for UK funds has been abating - with the IA UK All Companies, UK Equity Income and UK Smaller Companies sectors all witnessing significant outflows - it is still home to a significant portion of investors' portfolios.

According to the IA’s most recent statistics, in June this year the three sectors combined held £245bn funds under management. This is more than double the £108m invested in the IA Global and Global Equity Income sectors, although in June Global funds were the most popular among investors, taking in £465m of net retail sales.

Better off global

However, according to Martin Currie, hidden flaws mean that UK equities have lagged behind global equities in recent years.

According to its research, an investor who had invested the current Isa limit of £20,000 five years ago, would today be £8,300 better off if they had put this into global equities rather than staying at home and investing in the UK. 

Mark Whitehead, manager of the Securities Trust of Scotland - a globally invested investment trust - says while a home bias is perfectly understandable, owing to the familiarity people may have with home-grown firms, he argues it adds a “significant level of risk” and limitations which could be very costly in the long term.

“Even the largest single nation economy can lack diversification and the UK market suffers from a relatively extreme level of concentration,” says Whitehead. “Over 53% of the FTSE 100 is in financials, consumer goods and oil and gas.”

Given the volatility of the latter, and the current pressure on commodity prices, Whitehead says it is clear how an overexposure to the UK could result in “wide swings in value”. 

“By investing globally, we can avoid the risks inherent in single country exposer, but it also opens up the investible universe and allows us to access some of the best companies in the world, regardless of sector or location,” he says.

“Look at the giants of the technology sector and some of the biggest growth stories in recent times: Apple, Facebook, Tencent, Samsung and Alibaba to name just a few. The unfortunate fact is that none of them are UK companies. In fact, the recent sale of ARM holdings to a Japanese company means that there are almost no significant technology companies left in the UK.”

Exposure to risk

The result, says Whitehead, is that investors exclusively in UK funds will have no chance to access the extraordinary growth of these companies, and their portfolio will have lagged accordingly.

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Adam Lewis

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Adam has been a freelance journalist and content editor since 2015. A journalist and editor with over 15 years experience, until 2015 he worked as editor of Fund Strategy for three years, and worked on the same title as deputy editor there seven years. Prior to this he was reporter at Investment Week.

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