Whilst intellectually we can (and did) make the case for no home bias, we found that many adviser firms (and indeed their end clients) would be more focused on the FTSE 100 and would want and expect to see a range of UK-focused funds in a portfolio.
On this basis, we alighted on a target 20 per cent UK equity allocation as a mid-point between a “high” bias of 40 per cent or so and no bias (the UK’s global equity index weight).
We incorporate this 20 per cent home equity bias into our multi-asset indices that can be used to evaluate multi-asset portfolios and multi-asset funds.
Crack out the (English) sparkling wine
The UK’s reduced correlation with world equities should be a topic of celebration for asset allocators: it means an allocation within an equity portfolio to UK equities creates genuine diversification which improves portfolio resilience.
Whether that UK allocation is implemented with an active fund, index fund, yield-focused fund or mid-/small-cap fund (or a mix of the above) is then a secondary decision.
From a sizing perspective, we think within equities, that twenty is plenty for the UK, and interestingly the proposed £5,000 UK Isa Allowance would also make up 20 per cent of a total £25,000 Isa contribution.
UK equities have a useful role to play within multi-asset portfolios – but primarily from a diversification perspective.
Henry Cobbe is head of research at Elston Consulting
