How much in your home market?

quarky

If investing in equities for the long term (20 years), are there any "rules" around investment amounts in your locality? So being in the UK, does it make sense to have a minimum amount of my portfolio in UK companies (say 25%, which is higher than the UK global equity share)?


I was thinking about issues around exchange rates, and that fact that it makes sense to have some tie-in with the economy where I live doesn't it?

BananaRepublic

Where you invest is determined by your investment goals and attitude to risk. So if you invest in equities, it makes sense to diversify, not just across multiple UK funds, but across multiple geographic areas. I am surprised that the popular Vanguard Life funds are so heavily weighted towards the US, with the UK second. Spreading across multiple areas helps reduce risk, and volatility. Obviously if the whole world goes into a breasts skywards phase, you are stuffed, but quite often one area will outperform others for a few years.

Yes exchange rates are an area of risk. If you have good reason to think that the pound is very weak, and it will strengthen over the next year, then you could delay investing overseas, and take the chance that you are wrong, or you misss good growth overseas.

quarky

Thanks. I guess my question was, is there a legitimate reason to be overweight in regards in a particular market, because you live there?

bigadaj

BananaRepublic wrote: »

Where you invest is determined by your investment goals and attitude to risk. So if you invest in equities, it makes sense to diversify, not just across multiple UK funds, but across multiple geographic areas. I am surprised that the popular Vanguard Life funds are so heavily weighted towards the US, with the UK second. Spreading across multiple areas helps reduce risk, and volatility. Obviously if the whole world goes into a breasts skywards phase, you are stuffed, but quite often one area will outperform others for a few years.

Yes exchange rates are an area of risk. If you have good reason to think that the pound is very weak, and it will strengthen over the next year, then you could delay investing overseas, and take the chance that you are wrong, or you misss good growth overseas.

The vanguard life strategy funds are very much underweight in the us and overweight in the uk. The us market makes up around 55% of the worlds equity markets with lifestrategy weighting being around 35% so this element would probably have underperformed
Compared to a rue world index tracker over the last few years.

AndyT678

quarky wrote: »

Thanks. I guess my question was, is there a legitimate reason to be overweight in regards in a particular market, because you live there?

In my opinion no, not really. It seems psychologically comforting on the face of it but stop and look in more detail at the companies you’re talking about.

Just because a company is listed on the LSE doesn’t mean that it has all or even much of its business actually in the UK. Many are multinationals and even those which do seem heavily UK weighted from a revenue perspective (e.g. supermarkets) may have a large part of their cost base abroad. So you get the impacts of currency risks and reliance on overseas economies anyway they're just hidden.

Similarly, there are plenty of foreign businesses whose products and services and very familiar and understandable to me. I think I kind of know what Microsoft, Toyota and SAP do and how they make money. So why should I avoid investing in them? BHP Billiton or Hikma Pharmaceuticals on the other hand don’t register in my day to day existence very much. Why throw extra money at them?

BananaRepublic

bigadaj wrote: »

The vanguard life strategy funds are very much underweight in the us and overweight in the uk. The us market makes up around 55% of the worlds equity markets with lifestrategy weighting being around 35% so this element would probably have underperformed
Compared to a rue world index tracker over the last few years.

Thanks for the correction, I must have confused it with another fund, I was thinking it was ~60% weighting to the US.

green_man

Yes its a funny one this. I was just reading a financial/investment rag and it quite strongly suggested you should be overweight in your home geography. The two main reasons given were:

1 - You understand the market and economic conditions better (though read AndyT s comments above who clearly doesn't agree).

2 - Removes any currency risk.

bowlhead99

green_man wrote: »

2 - Removes any currency risk.

To me this is a misconception as many UK companies have revenue streams denominated in foreign currencies - oil and resources companies and the HSBCs and Glaxos and SAB Millers and Unilevers and so on, have LOTS of income they earn in dollars, Euros and beyond.

But more importantly, if you look at what drives the prices of the things you buy, many will be from overseas and that proportion will probably rise over time as UK is very much a service economy.

In a decade or few from now you will quite possibly be buying a copy of Windows developed using Indian software developers for your Taiwanese laptop or Chinese tablet, and a Korean smartphone and a German washing machine and Polish-assembled car and some footwear produced in Indonesia. Maybe on your Japanese telly you could stream a New Zealand - produced movie from a US hosted website, celebrating with an Argentinian bottle of red wine and Swiss chocolate the fact that you're retiring and about to go on a months holiday to the Med...

All those things have a price in the world economy which might be set globally but driven by underlying local cost base in the countries whose efforts produce them. The fact that you want to pay for them in pounds doesn't mean you should hoard pounds. To *reduce* currency risk you would be better to have assets in all those different countries and hedge away your potential lack of affordability. Unless you have some sixth sense that the pound will be stronger than the average currency on the planet over the next few decades. Any reason that should be the case?

Sure, your kindly neighbourhood odd-job man or cleaner might come round to decorate or tidy your house, and want paying in good old British Tenners. But the number of tenners he wants depends on how much his grocery bills are for that week. In part, these are driven by what the French-owned logistics firm's truck driver just paid the local esso service station who got the petrol from an Exxon refinery who bought oil from the Saudis who are in a price war with the Russians.

A little "home bias" is natural. A lot of home bias is natural for Americans who produce quite a lot of investment literature - but their stock market is 50% of the world's, by market cap, so that's somewhat understandable, and means they can invest 50% domestically without considering themselves over-invested at home. That would be a lot for a UK investor IMHO, but that's not to say there aren't loads of people at 50% or 100% UK. The question is whether they have really thought it through.

greenglide

In a decade or few from now you will quite possibly be buying a copy of Windows developed using Indian software developers for your Taiwanese laptop or Chinese tablet, and a Korean smartphone and a German washing machine and Polish-assembled car and some footwear produced in Indonesia. Maybe on your Japanese telly you could stream a New Zealand - produced movie from a US hosted website, celebrating with an Argentinian bottle of red wine and Swiss chocolate the fact that you're retiring and about to go on a months holiday to the Med...

We are already there in a lot of ways, not much longer to go ......

Linton

In my view industry sector diversification is more important than geographic diversification, at least as far as large companies in the main mature markets are concerned. The UK stock market cannot adequately provide this as it does not include major world sectors and is overweight from a global perspective in others.

John_Clark

If you were running a UK pension fund, and your liabilities are in Sterling, it makes sense to keep your assets in Sterling too. If the value of Sterling falls, your liabilities will fall in proportion, so the fund still remains safe.
But if you are not committed to producing an income in Sterling, it makes sense to diversify more.