Is the equity region allocation landscape changing.......?

carpy

I'm just wondering if this is a good time to review this in the wake of Covid-19?
My thinking is a lot of funds (popular, 'man in the street', trackers etc.)  are heavily weighted towards North America, and rightly so given it's the world's biggest economy and it's performance over the last decade. However, given how hard they've been hit by C19, unemployment numbers, Trump, upcoming elections, China trade war etc. etc. is now the time to shift the balance slightly....??
My portfolios (pensions) have been overly weighted towards UK (but until recently reading these forums hadn't realised this was a problem as they'd performed well over recent years thought nothing of it) but again in the short to medium term like USA probably isn't the place to be heavily in, given our similar very high death toll etc. plus the unknown of future trade deals post-Brexit.
Then there is the (very real?) prospect of a 2nd wave and an unknown (if at all) period until a vaccine!
I'm wondering if the Far East is the place to shift the weighting towards?
For the following reasons; 
1) Much lower infections/deaths
2) Less chance of major 2nd wave/ongoing problems due to a more compliant society (mass wearing o masks, better observed social distancing etc.) therefore less chance of more lockdowns and distruption to economies etc.
3) If Trump doesn't get re-elected, easing of China trade war?

Obviously in time USA will come back strong but in the short/medium term is my thinking reasonable or flawed? (just what was going through my head whilst lying in bed this morning!) 

Linton

I think it is a mistake to try to adjust your portfolio in line with predictions of the future. Just accept that neither you nor anyone else knows what is going to happen. Any guess is as likely to be wrong as right.  More likely is that something completely unforeseen happens.

However there may be other reasons to adjust your allocations:

1) I Keep my US allocation to 40% or less.  Not because I think that US has a problematic future but rather because I think the 60% or so allocation from the trackers presents too high a risk for any potential single point of failure.  This would apply equally in some future world where China has replaced in the US in world markets.

2) I think you are right to reduce your allocation to UK large companies.  Not because you may fear for its future, but simply because for fundamental systemic and structural reasons the FTSE100 is a poor index in which to invest.  On the other hand UK small companies can provide much greater opportunities.

AnotherJoe

I believe attempting to diversify geographically doesn't work, the global economy is too interconnected and well, global..

Suppose you invested in S Korea, Samsung, well who buys their phones, USA and Europe?  Or Chinese manufacturing, much of that is consumed in Europe and USA .

You'd have to get to the level of perhaps a Chinese company that made noodles only eaten in china.

Better to focus on areas you think will do better in future, a few i'd throw out as ideas, pick your own, non fossil fuel energy, healthcare, tech, biotech, internet. But you might go for banking or pharma or whatever.

carpy

Linton said:

2) I think you are right to reduce your allocation to UK large companies.  Not because you may fear for its future, but simply because for fundamental systemic and structural reasons the FTSE100 is a poor index in which to invest.  On the other hand UK small companies can provide much greater opportunities.

yes, i didn't realise until fairly recently how exposed to UK equity my funds were (as a result of advice from the forum) one of them is 50%!!!
why is it that the FTSE100 in particular is not a good index to track/invest given we are generally a successful economy and in the worlds top 10?

AnotherJoe said:

Better to focus on areas you think will do better in future, a few i'd throw out as ideas, pick your own, non fossil fuel energy, healthcare, tech, biotech, internet. But you might go for banking or pharma or whatever.

i was meaning more in which indices to track/invest rather than individual stock picking

Thrugelmir

UK companies generate much of their revenue from overseas. In the same way that the US majors do.  Invest in companies rather than individual economies. The US weighting is due to the market capitalisation of a few number of companies rather than the overall quality of US companies. 

dunstonh

I'm just wondering if this is a good time to review this in the wake of Covid-19?

Most fluid models update their weightings on a quarterly basis.  So, Covid19 hasn't changed that.

My portfolios (pensions) have been overly weighted towards UK (but until recently reading these forums hadn't realised this was a problem as they'd performed well over recent years thought nothing of it) but again in the short to medium term like USA probably isn't the place to be heavily in, given our similar very high death toll etc. plus the unknown of future trade deals post-Brexit.

Funnily enough, the UK allocations have increased on most of these models in their latest weightings.   That is not unsurprising really when you consider the way sterling has fallen and smaller and medium companies (the bit of the UK that is worth investing in) are deemed to have good value in the right places.

I'm wondering if the Far East is the place to shift the weighting towards?

You forget that most of these pandemics come out of Asia and usually stay in Asia.What happened this time wont be the same as happens next time. Plus, Asia has other issues, such as China. 

You shouldn't react to short term issues by making large changes.

Linton

AnotherJoe said:

I believe attempting to diversify geographically doesn't work, the global economy is too interconnected and well, global..

Suppose you invested in S Korea, Samsung, well who buys their phones, USA and Europe?  Or Chinese manufacturing, much of that is consumed in Europe and USA .

You'd have to get to the level of perhaps a Chinese company that made noodles only eaten in china.

Better to focus on areas you think will do better in future, a few i'd throw out as ideas, pick your own, non fossil fuel energy, healthcare, tech, biotech, internet. But you might go for banking or pharma or whatever.

I dont really get your argument.  Surely Samsung in South Korea gets the profits from sales in the US so if you did not invest in South Korea you would lose out. If you only invested in Chinese mobile phone companies Trump's trade war could hit you seriously. One reason for diversifying globally is to ensure you get a slice of all the profits that are available no matter where they are made.

I disagree that diversifying geographically doesnt work - not diversifying geographically can be much worse.  Look at FTSE100 investors.  In principle the same could happen anywhere else in the world.

Some general points:

1) Geographic allocation is a partial proxy for sector diversification

2) Geographic allocation is a partial proxy for currency diversification

3) SIngle points of failure

4) Currency diversification

5) Political issues

However I would agree that geography is only one of three main criteria in equity asset allocation.  Sector diversification is vital. Company size diversification is perhaps not vital but it is very useful as small companies are less globally correlated than large ones and can be very lucrative.  In designing my portfolios I consider all three.

Prism

carpy said:

Linton said:

2) I think you are right to reduce your allocation to UK large companies.  Not because you may fear for its future, but simply because for fundamental systemic and structural reasons the FTSE100 is a poor index in which to invest.  On the other hand UK small companies can provide much greater opportunities.

yes, i didn't realise until fairly recently how exposed to UK equity my funds were (as a result of advice from the forum) one of them is 50%!!!
why is it that the FTSE100 in particular is not a good index to track/invest given we are generally a successful economy and in the worlds top 10?

AnotherJoe said:

Better to focus on areas you think will do better in future, a few i'd throw out as ideas, pick your own, non fossil fuel energy, healthcare, tech, biotech, internet. But you might go for banking or pharma or whatever.

i was meaning more in which indices to track/invest rather than individual stock picking

You can track sector indices almost as easily as region indices. For example you could build a portfolio that has 50% allocation to tech, 30% health, 10% finance and 10% energy if you felt that was better than regional allocations.

Thrugelmir

Linton said:

AnotherJoe said:

I believe attempting to diversify geographically doesn't work, the global economy is too interconnected and well, global..

Suppose you invested in S Korea, Samsung, well who buys their phones, USA and Europe?  Or Chinese manufacturing, much of that is consumed in Europe and USA .

You'd have to get to the level of perhaps a Chinese company that made noodles only eaten in china.

Better to focus on areas you think will do better in future, a few i'd throw out as ideas, pick your own, non fossil fuel energy, healthcare, tech, biotech, internet. But you might go for banking or pharma or whatever.

I dont really get your argument.  Surely Samsung in South Korea gets the profits from sales in the US so if you did not invest in South Korea you would lose out.

If you invest in South Korea generically then the holding in Samsung becomes diluted though. 

Linton

carpy said:

....
why is it that the FTSE100 in particular is not a good index to track/invest given we are generally a successful economy and in the worlds top 10?

Beacuse the FTSE100 is not really representative of UK industry.  In many areas where the UK is successful the major players are foreign owned and so not included in UK indexes.  Car manufacturing is an obvious example.  Perhaps most importantly for investors there are virtually no tech companies in the FTSE100 - any tech company that looks like it's going to enter the big time is taken over by a foreign competitor.

Then there is systemic problem that has occured to me, but perhaps I havent fully thought it through.....

How do companies leave the FTSE100?  They are successful and get taken over so dont matter any more, they go bust and their investors lose out.   A few slide into the FTSE250 leaving their investors in much the same position as when they entered the FSE100.  Many of the rest just sit there - not bad enough to go bust or just too big to fail and continue to struggle on life support, but really only existing because no-one else wants to buy them.

Compare this with the FTSE250 where the best companies leave for the FTSE100 and so there is a steady rise of good companies up the rankings.

Sailtheworld

Linton said:

carpy said:

....
why is it that the FTSE100 in particular is not a good index to track/invest given we are generally a successful economy and in the worlds top 10?

Then there is systemic problem that has occured to me, but perhaps I havent fully thought it through.....

How do companies leave the FTSE100?  They are successful and get taken over so dont matter any more, they go bust and their investors lose out.   A few slide into the FTSE250 leaving their investors in much the same position as when they entered the FSE100.  Many of the rest just sit there - not bad enough to go bust or just too big to fail and continue to struggle on life support, but really only existing because no-one else wants to buy them.

Compare this with the FTSE250 where the best companies leave for the FTSE100 and so there is a steady rise of good companies up the rankings.

That goes for all indices. The reason the FTSE100 is a poor place to focus one's capital is because it's a massive concentration of risk.