Multi Asset June 2017  

Should multi-asset managers avoid a UK bias in portfolios?

  • Understand why UK investors have a bias to UK equities.
  • Learn the benefits of investing globally and allocating to equities across countries and sectors.
  • Comprehend the pros and cons of investing with a home bias.
Should multi-asset managers avoid a UK bias in portfolios?

Sterling has been subject to various political pressures in the past year, which has seen the value of the UK’s currency decline.

As the prospect of Brexit and the UK’s general election weighed on the pound, it fell as much as 0.7 per cent against the US dollar to $1.27 on the 31 May.

In this type of environment the case for multi-asset managers to diversify their regional exposure beyond home soil appears to make sense.

Historically, UK investors have allocated more to UK asset classes than to other regions in their investments.

Close to home

Aviva Investors’ Thomas Wells, multi-asset fund manager, acknowledges it is typical for investors all over the world to prefer to invest in domestic companies, rather than those located overseas.

That innate home bias is certainly in evidence among UK investors and even among UK portfolio managers.

“Investors may worry about the currency risk associated with exposure to foreign markets. They may also wonder if their money invested abroad will be as safe as it is invested in the UK with its established legal framework and solid corporate governance,” he reasons.

“Concerns about geopolitical risk and tax implications are other factors. Or investors may simply wish to avoid putting their savings into companies located in markets on the other side of the world, about which they have little knowledge.” 

He continues: “Whatever the reason, numerous academic studies from around the world highlight the propensity of investors towards a home bias. For example, UK equities accounted for 4.6 per cent of the overall global equity market in 2016, according to Bloomberg, yet they accounted for around 27 per cent of UK multi-asset portfolios.”

Darius McDermott, managing director at Chelsea Financial Services, believes it is a natural bias and one which “hasn't served investors too badly in the past” as it can help avoid currency risk. 

While it may be surprising to learn a number of multi-asset funds are skewed to the UK in terms of geographical exposure, retail funds are starting to shift to allocate globally as the benefits of diversification become clearer.

Paul Ilott, director multi-asset research at Scopic Research, part of The Adviser Centre, confirms: “We track the asset allocation drift over time for the multi-asset funds we research and over the years we’ve certainly seen a reduction in the percentage allocated to the UK. 

“A key reason for this is the sheer volume of opportunities available globally and the ease with which they can now be accessed.”

These factors have certainly helped investors and managers to seek returns from outside of their regional comfort zone.

Relying on energy

Certainly, no one region has consistently outperformed over a long period of time and while many point to the global nature of the UK’s flagship index the FTSE 100, comprised of companies which generate much of their revenues overseas, this too has its limitations, as David Vickers, senior portfolio manager at Russell Investments, reveals.