InvestmentsNov 6 2019

Are your assets truly diversified?

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Are your assets truly diversified?

The biggest difference is China. The second largest economy in the world makes up just 4 per cent of company weight in the ‘All-Countries World’ index.

In this index you are hugely focussed on the US with little exposure in other parts of the world that are doing well, such as China.

US President Donald Trump might like the sound of this portfolio, but is it what you expected? And more importantly, is it sensible?

Home is not always where the heart is

The other area we would encourage investors to examine closer is not just where a company is based, but where it does business.

Just because BP has its headquarters in London that does not mean it only sells oil in Britain. Apple might be American, but iPhones are a global phenomenon.

One way to look at this is to breakdown the sales exposure of the companies in the MSCI ACWI. Where do they actually make their money?

This will show us the amount of sales that the companies listed in a country make from their home market.

Some equity markets, such as the UK, are very global, whereas others such as China or Japan are far more domestic.

The UK has lots of global companies listed there for the London postcode. Some have little or nothing to do with the UK economy. In fact, only 20 per cent of the sales of UK-listed businesses actually come from this country.

With China, the opposite is true. More than 88 per cent of Chinese company sales are in mainland China. With 1.2bn potential buyers, perhaps that is no surprise.

European companies are evenly split, with half of sales internal. Meanwhile the US story is very similar to China, with 75 per cent of company sales inside its borders.

Breaking the ACWI down in this way – by sales rather than country of listing – can help balance things out a little.

Europe accounts for almost the same share of global sales as it does of the global economy, and China becomes a little bit better represented, rising to 9 per cent of the total exposure.

However, even when taking this approach, the US still dominates. If you have a lot of US companies, you will have a lot of US exposure. Even on a sales basis, the US is still 50 per cent of the portfolio – double its share of the global economy.

Deliberately different

What this shows is that it is not enough to just have your eggs in different baskets. The financial world is not always as sensible as the egg-carrying world.