Never mind whether back-seat driver Boris is right about Brexit meaning £350 million per week extra for the NHS – or if Prime Minister May might, could or should sack him – now we know what it costs ‘Little Englander’ investors to shun opportunities overseas.
Mark Whitehead, fund manager at Securities Trust of Scotland (STS) reckons an internationally-diversified portfolio of global equities delivered 25% higher returns over the last five years than those obtained by British investors with a UK-only bias. In cash terms that added up to an extra £8,400 on £20,000 invested in 2012, which would have grown to nearly £33,000 in the FTSE All-Share or £41,400 in the FTSE World indices.
You don’t need to be a Brexiteer to suspect Whitehead might be talking his own book, as the manager of a £222 million global equity income trust with a somewhat troubled past before he took the helm last year. But remoaners – like me – and other believers in the importance of international diversification can take some comfort from the fact that other experts share similar views.
Caspar Rock, chief investment officer at Cazenove, told me that a potential problem for investors with home bias is that the British market is heavily exposed to oil and commodities but under-exposed to healthcare and technology shares, compared to many markets overseas. For example, Rock calculates that the energy sector accounts for about 14% of the FTSE All-Share but only 6% of the US Standard & Poor’s and 4% of equivalent indices in Europe ex-UK and Pacific ex-Japan.
Meanwhile, information technology comprises just 1.2% of the British market but 22% of the S&P in America, 6% of Europe ex-UK and 29% of Pacific ex-Japan. The equivalent percentages of market value for healthcare are 8%, 14%, 14% and 2% respectively.
So, without wishing to make the numbers dance, it is clear that taking a ‘patriotic’ approach to asset allocation can have substantial and unintended consequences in terms of your exposure to different sectors. That could be bad news for income-seekers if a relatively small number of high-yield British blue chips disappoint and worse still for investors seeking capital growth if healthcare and tech stocks continue to benefit from global populations getting older and wealthier.
Whitehead points out: ‘Over 53% of the FTSE 100 is in financials, consumer goods, and oil & gas. Given the current pressure on commodity prices and their volatility, it is clear how an over-exposure to the UK could result in wide swings in value.
‘Believe it or not, the top 20 dividend-paying stocks in the UK account for 64% of the total dividends paid out. This compares to just 18% in the MSCI All Country World Index,’ he says.
Rock adds: ‘Many people argue that because of the international nature of the FTSE 100 index you get huge currency diversification away from sterling. The problem is that you also get a very different sector allocation – with a significant underweight to technology and healthcare compared to global equities, while being overweight financials, materials, energy and telecoms. Are these the sectors you really want to be exposed to?’
Since their earliest days, investment trusts have made it easier and more cost-effective for individual investors to obtain professionally-managed exposure to opportunities overseas – and many continue to do so to this day. Digital fund platform tools make it easier than ever to look through trust wrappers and consider underlying asset allocation.
I have no wish to seem unpatriotic, as the father of a son in the British Army, but am aware that my investment strategy and commentary in recent years might sound to some like one long ‘sell’ note on UK Plc. However, recent events demonstrate the value of international diversification to diminish risk and maximise returns – whatever Brexit turns out to mean for investors.
Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.