24 Jan Why Global Equity Investing is as Important as It Ever Was
Despite a global market available at our fingertips, many investors still favour their home country when it comes to investing.
According to a study1 undertaken by Vanguard, UK investors are heavily biased towards UK companies. A typical portfolio was found to hold around 3.7 times the allocation to UK equities we might expect, considering the UK’s share of the worldwide market.
The same applied to a lesser extent in the US, with portfolios holding 1.5 times the allocation, relative to their global contribution. However, according to the same study, US equities accounted for 55% of the global economy, suggesting that a US investor may hold around 82.5% of their portfolio in American companies. Regardless of political views or forecasts surrounding the US economy, holding this proportion within a single country is risky.
Home bias is understandable. Investors feel more comfortable with companies they have heard of, and an economic system they understand. But opening up your portfolio to global equities can reduce volatility and create more opportunities.
Here are our top four reasons to include global equities within your portfolio.
The importance of diversification is the first lesson that any investor should learn. When you invest in a company, a sector or a country, you benefit from the upside when things are going well. However, you are also fully exposed when the market takes a downturn. We cannot necessarily predict how the market is going to behave or when economic changes will hit share prices. Some investors (including professionals) use their judgement, but the reality is that they have access to mostly the same information as the general public (insider trading aside).
When you diversify, you buy stocks across a range of companies, sectors and countries, as well as other asset classes such as bonds or property. This is done in the knowledge that we can’t predict or time the market. The assets in the portfolio won’t all behave in the same way – some will go up; some will go down. The idea is to benefit from some of the upside, while reducing risk when the market falls.
Investing globally widens the scope for diversification and can help to reduce volatility within a portfolio.
2. Growth Potential
Investing globally can sometimes mean investing in economies that are not as mature as the UK. While this can incur higher risks, the growth potential is significant.
Over the last 10 years, the FTSE All Share has returned 122%. During the same time period, the Global Equity sector has returned 156.3%2.
Even investing 50% in a FTSE tracker and 50% in a global equity tracker could improve returns, compared with investing in UK shares only.
3. Access to Opportunities
By excluding global equities, you discount companies such as Apple, Amazon, Samsung and Nintendo. These companies have benefited from high growth in the past (and may do so again). But the real value is in the earlier stage companies creating innovative products and services across the world.
The world is changing, the population is getting older and we are becoming more reliant on machines. A whole wave of companies is set to benefit, and they are just as likely to be based in Taiwan or Israel as Silicon Valley3.
While some fund managers seek out trends and aim to profit from early investment, this can result in as many losses as gains. By simply widening the regional asset allocation of your portfolio, you can gain exposure to more high growth companies across the world.
4. UK Uncertainty
While we do not believe Brexit will significantly impact portfolios over the long term, there may be short term volatility to consider. Some companies could exit the UK and some investors may decide to remove their money from the market, which could impact on share prices.
Conversely, a weak pound means higher profits for UK companies which trade overseas, or investors who own property abroad.
We cannot predict every eventuality that may arise as a result of Brexit, or how portfolios will be impacted. The safest option is not to take your money out of the market altogether, but to simply widen the range of assets you hold.
With the UK accounting for only around 5.4%4 of the global equity market, a more international outlook could help to reduce risk and improve returns.
Please do not hesitate to contact a member of the team to find out how we can help you construct a globally diverse portfolio.
2 https://www2.trustnet.com/Tools/Charting as of 22/01/2020