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

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. 

“The UK equity market is highly concentrated, both sectorally and in terms of stocks,” he notes. “Energy and materials account today for 25 per cent of the FTSE 100 – and this after the precipitous drop we have witnessed in commodity process since the end of the super cycle. 

“Certain stocks also weigh heavily on the index. HSBC, for example, has a 7 per cent weight, and as was witnessed when BP suffered due to the Deepwater [Horizon] spill in 2010, one stock can have a significant effect on the overall index. BP at that time was approximately 12 per cent of the entire income produced by the FTSE, before it fell 50 per cent and cut its dividend entirely.”

Mr Vickers adds it is not just about the stocks investors do own through FTSE 100 exposure but also the sectors and stocks not represented in the index.

There are only two technology stocks in the FTSE 100 accounting for less than 1 per cent of the index, meaning the index does not provide much exposure to the sector nor to media companies.

A bias towards one’s home market obviously has the benefit of avoiding currency fluctuations – to an extent.Andrew Morgan

Some of the best-performing companies in the past few years have been those in the technology space, including Tencent, Google and Apple.

In fact, four companies – HSBC Holdings, British American Tobacco, Royal Dutch Shell and BP – account for 25 per cent of the FTSE 100’s market capitalisation.

Source: FTSE Russell

“Moreover, a few sectors – banking, insurance and financial services, pharmaceuticals, basic resources, and oil and gas – account for over half of the FTSE 100’s market capitalisation,” Mr Wells says.

“So an investor who focuses on the UK will be exposed to a relatively small number of sectors and companies and highly vulnerable to adverse shocks in either.”

Then there is the currency argument.

“A bias towards one’s home market obviously has the benefit of avoiding currency fluctuations – to an extent,” cautions Andrew Morgan, co-manager of the Alpha:r2 fund at Walker Crips.

“But even here that benefit is limited, as we saw last year when the fall in the value of sterling still had a meaningful impact on the value of sterling-denominated shares.”