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    • spotswood
    • By spotswood 18th Jun 17, 12:53 AM
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    spotswood
    Global funds and home bias
    • #1
    • 18th Jun 17, 12:53 AM
    Global funds and home bias 18th Jun 17 at 12:53 AM
    I am new to investing and been looking at various Vanguard funds. I've been wondering why the LS funds allocate more than 50% of their total assets to the UK & US markets and whether this is something I should replicate in my DIY portfolio. Currently I am using a country's share of global GDP as a basis for my asset allocation which gives significantly less exposure to the UK & US markets than LS.

    But this is a more general observation, most global funds follow a similar strategy. Maybe the companies in those two markets are more global in nature? Or they pay more dividends and is worth holding more?
Page 1
    • AnotherJoe
    • By AnotherJoe 18th Jun 17, 6:26 AM
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    AnotherJoe
    • #2
    • 18th Jun 17, 6:26 AM
    • #2
    • 18th Jun 17, 6:26 AM
    The 25% UK bias is there because they think UK investors will want a UK bias.
    If you dont, there are other funds that either have no UK at all (look for "ex UK" in the description, or that are "purely" global so the UK is about 7%.
    re US as a percentage of global funds, it may be that they are invested in the proportion of investable companies per economy, rather than GDP?
    • AlanP
    • By AlanP 19th Jun 17, 2:46 PM
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    AlanP
    • #3
    • 19th Jun 17, 2:46 PM
    • #3
    • 19th Jun 17, 2:46 PM
    Most of the multi-asset / multi-fund offerings work off "size of invest able market" as opposed to GDP value.

    See here http://monevator.com/investing-for-beginners-the-global-stock-market/ for some discussion and comments on relative sizes, and references to above / below GDP based assessment of countries.
    • bostonerimus
    • By bostonerimus 19th Jun 17, 3:12 PM
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    bostonerimus
    • #4
    • 19th Jun 17, 3:12 PM
    • #4
    • 19th Jun 17, 3:12 PM
    The high US percentage reflects the size of the US market and the over weighting of the UK is mostly a home bias marketing thing. If you want to reduce the percentage of UK funds in your portfolio buy some more global or US/European/Asian funds to get the asset allocation you like.

    I'm in the US and I'm basically 50% US equity, 20% International equity and 30% US bonds. There is a strong US home bias, but US Vanguard would like to see me have more International equities and some international bonds.
    Misanthrope in search of similar for mutual loathing
    • greatkingrat
    • By greatkingrat 19th Jun 17, 4:52 PM
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    greatkingrat
    • #5
    • 19th Jun 17, 4:52 PM
    • #5
    • 19th Jun 17, 4:52 PM
    Remember that where a company is listed on the stock market isn't necessarily where most of its revenue comes from. So if you invest in a fund that holds HSBC shares, that will be all counted as UK exposure, even though most of their revenue comes from overseas.
    • dunstonh
    • By dunstonh 19th Jun 17, 5:53 PM
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    dunstonh
    • #6
    • 19th Jun 17, 5:53 PM
    • #6
    • 19th Jun 17, 5:53 PM
    The allocations will depend on the asset model you are building. For example, are you building a portfolio to a target volatility or a target return.

    UK funds don't have direct currency exposure and have a lower volatility. So, if building to a target volatility range, you will usually have a higher allocation for UK. It allows you to use greater allocations to higher risk areas (like asia or EM).

    The higher US allocation is a management decision by Vanguard. One that has done Vanguard well during periods when the US has done better but also one that has held it back when it wasnt.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • bostonerimus
    • By bostonerimus 19th Jun 17, 6:25 PM
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    • #7
    • 19th Jun 17, 6:25 PM
    • #7
    • 19th Jun 17, 6:25 PM
    You might want to read a bit about Fama and French and the use of their 3 factor model for stock returns in designing a portfolio. It usually leads to a portfolio that will overweight small and mid cap stocks relative to a straight market capitalization weighted allocation.
    Misanthrope in search of similar for mutual loathing
    • dunstonh
    • By dunstonh 19th Jun 17, 6:38 PM
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    dunstonh
    • #8
    • 19th Jun 17, 6:38 PM
    • #8
    • 19th Jun 17, 6:38 PM
    You may also wish to avoid internet sites that give example models based on US data and taxation. A lot of models you see online are either US based or have tried to convert a US model to UK. You can often spot these models as they will break UK down to small cap, mid cap and large cap and tend to have a global catchall. Whereas UK models dont usually break down to small, med or large and tend to have allocations to various regions globally.

    US taxation on investments is different to UK and and the UK suffers less drag with certain types and this impacts on the allocations. US investors, in general, tend to be more inward looking than European investors. Models factor in taxation as well as the market they are aiming for. Hence why US models tend to be quite different and why trying to adapt a US model can lead to inefficiencies.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Linton
    • By Linton 19th Jun 17, 8:47 PM
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    Linton
    • #9
    • 19th Jun 17, 8:47 PM
    • #9
    • 19th Jun 17, 8:47 PM

    UK funds don't have direct currency exposure and have a lower volatility. So, if building to a target volatility range, you will usually have a higher allocation for UK. It allows you to use greater allocations to higher risk areas (like asia or EM).

    ....
    Originally posted by dunstonh
    Is this still valid given what we saw after the BREXIT vote when the large companies which dominate the FTSE indexes tended to rise in price as sterling fell whereas small companies didnt?
    • dunstonh
    • By dunstonh 19th Jun 17, 9:01 PM
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    dunstonh
    Is this still valid given what we saw after the BREXIT vote when the large companies which dominate the FTSE indexes tended to rise in price as sterling fell whereas small companies didnt?
    With a global economy, every option has some currency adjustments. I was toying with how to word it and decided to use "direct" but ultimately, it will be affected by currencies. However, the the UK allocation will include companies that have no currency fluctuation issues and where there is, it is Sterling that is the primary currency. If you invest in, say, Japan then as a UK investor you are looking at both the impact on Sterling and Yen. Both could go in your favour and both could go against you. Therefore increasing the potential volatility.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • bostonerimus
    • By bostonerimus 19th Jun 17, 9:41 PM
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    bostonerimus
    You may also wish to avoid internet sites that give example models based on US data and taxation. A lot of models you see online are either US based or have tried to convert a US model to UK. You can often spot these models as they will break UK down to small cap, mid cap and large cap and tend to have a global catchall. Whereas UK models dont usually break down to small, med or large and tend to have allocations to various regions globally.
    Originally posted by dunstonh
    There are many US allocations that don't have separate small, med and large cap categories, examples would be lazy 3 or 4 fund portfolios.

    US taxation on investments is different to UK and and the UK suffers less drag with certain types and this impacts on the allocations. US investors, in general, tend to be more inward looking than European investors. Models factor in taxation as well as the market they are aiming for. Hence why US models tend to be quite different and why trying to adapt a US model can lead to inefficiencies.
    US tax efficient investing emphasizes low turnover funds that don't generate a lot of dividends and capital gains......so those are often stock index funds. Bonds, high dividend funds and actively managed funds are generally kept in tax deferred accounts........that's not so much of an issue in the UK. However, the principals of diversity, simplicity and keeping costs low are universal.
    Last edited by bostonerimus; 19-06-2017 at 9:45 PM.
    Misanthrope in search of similar for mutual loathing
    • dunstonh
    • By dunstonh 19th Jun 17, 10:19 PM
    • 89,513 Posts
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    dunstonh
    US tax efficient investing emphasizes low turnover funds that don't generate a lot of dividends and capital gains......so those are often stock index funds.
    That is one method. However, internally, US funds suffer taxation that UK funds do not. So, models built for the UK factor that into their calculations.

    Plus, dividends/higher yield is a popular option in the UK.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • bostonerimus
    • By bostonerimus 19th Jun 17, 10:34 PM
    • 1,106 Posts
    • 620 Thanks
    bostonerimus
    That is one method. However, internally, US funds suffer taxation that UK funds do not. So, models built for the UK factor that into their calculations.

    Plus, dividends/higher yield is a popular option in the UK.
    Originally posted by dunstonh
    It's interesting to compare US and UK multi asset funds like VLS80 and US Vanguard LifeStratey Growth. Both have 80% equities, but the US fund is made up of 4 index funds and would be held in a tax deferred account because of the bond allocation and VLS80 has 14 funds. Both use a passive indexing approach.

    https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0122

    https://www.vanguardinvestor.co.uk/investments/vanguard-lifestrategy-80-equity-fund-accumulation-shares/portfolio-data-tab
    Misanthrope in search of similar for mutual loathing
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