Although awareness of international investing is on the rise, there remains a strong preference for investors to overweight their home country rather than build a well-diversified, international portfolio.
It’s almost a case of better the devil you know, but you only have to look at what has happened to UK equities in the past decade or so to immediately question the premise as Brexit, political turmoil and a lack of exposure to sectors like technology - which have driven growth – have seen UK equities flounder in comparison to their global peers.
As of writing, UK equities now look extremely interesting from a valuation perspective, but tell that to someone who has invested in the region for the past decade. In that time the FTSE 100 has returned 72 per cent, by contrast, US and global equities have returned 315 and 213 per cent respectively*.
The rationale for wider diversification is clear—domestic equities tend to be more exposed to the narrower economic and market forces of their home market, while stocks outside an investor’s home market tend to offer exposure to a wider array of opportunities. Essentially divide and conquer – as we seldom see every region and sector fall at the same time.
With more than 41,000 stocks listed on stock exchanges worldwide** – investing in global equities can be daunting given the excessive choice – but this level of diversification can bring additional volatility control and boost/smooth expected returns. Figures from Vanguard show that in the 50 years between 1970 and 2020, the volatility in returns from global equities was lower than in any other market – the study found that other countries had volatilities that were 15 to 100 per cent greater than the global market index***.
There are a number of things investors must look at to find these diversified returns. One of the first things you have to consider is the allocation any global fund has to US equities. The MSCI World Index, which captures large and mid-cap representation across 23 developed markets has just shy of 70 per cent allocated to the US****. This in itself is not something to worry about, but simply be aware of. The US is the world’s largest market, meaning significant exposure in global funds does not necessarily mean a huge allocation to a number of the tech behemoths, like Amazon and Google, which have dominated returns in the past decade but sit across the majority of portfolios..
Many truly active managers will not pay any attention to the benchmark and will simply invest where they find the best opportunities, regardless of where a company is listed. At times this could mean an even larger weighting to the US, or indeed being significantly overweight or underweight other countries. If the manager picks the right companies – the fund will perform regardless of how markets are doing.
The narrower exposure to a domestic market also hampers exposure from a sector perspective – we’ve talked about UK investors missing out on stellar returns from tech companies in the US. But you can also miss out on Europe’s market leading luxury or healthcare companies or raw materials in emerging markets.
