Are UK Equities funds growth linked to general UK economic performance?

Pat38493

My pension funds are invested I think about 20% or so in UK equities if I remember correctly.

What I am wondering is, if I believed that the UK will underperform other countries in general in terms of general economic performance in the next decade or more, should I be moving to funds that don't have UK equities, or is it actually not necessarily the case that the UK equity performance is directly linked to UK economic performance as a country?

For clarity I am not referring to the current short term political turmoil but more in terms of the long term assessment of the UK economy.

gm0

As you have intuited - it depends. What you mean by UK equities.

The FTSE100 (the biggest companies) many of these are international in scope but listed in London at LSE for share dealing and financial reporting. So they have overseas income which gets turned back into GBP so you have other economies and their prospects involved in their outcomes and also currency FX e.g. GBP:USD for a company with US earnings which can help or hurt the nominal performance.

A FTSE100 tracker would have a lot of these
A FTSE250 tracker would be more domestic but not exclusively so
FTSE All Share tracker would include a range of stocks down to some smaller ones but still starting with the big ones.

An investor who just invested the global equities market passively would end up at ~4% or so UK.  Quite a lot of people up this % to a higher value - so called home market bias.  Your expenses are in sterling.  There are arguments both ways about overweighting or underweighting the UK as an active decision and a point of view on hedged and unhedged investments for currencies.  As a UK pensioner it would be unusual to hold none at all. 

That would be a strong statement of intent as an active investment decision.  Also requiring you to decide what that investment should go into instead - USA, Eurozone - Asia etc.

Linton

UK equity performance is onl;y very partially linked to the UK economy.  Many of the largest companies in the FTSE100 do most of their business overseas - eg BP, Shell, HSBC, Glaxo Smith Kline, and some FTSE100 companies that do no business at all in the UK - eg Fresnillo is the worlds largest silver miner and is based in Mexico. 

Conversely much of UK manufacturing industry is foreign-owned - eg all the major car manufacturers. 

Small companies are very different and could be seen as more representative of the dynamic parts of the UK economy - they have outperformed the large companies for many years.

bostonerimus

Expanding on the overseas business and profits earned by UK companies you might think that a weak pound was an indication of a weak UK economy, but it makes the foreign profits of UK companies worth more in pounds and so you often see the FTSE indexes rise when the pound shows weakness against other currencies. The rule is "don't try to be clever", markets and economics will nearly always make a fool of you. So stay diversified in your portfolio and 20% UK equities is an ok amount for someone in the UK.

noclaf

Hope OP doesn't mind me jumping on here, interesting context in the responses above esp the 'overseas' aspect of UK companies earnings and how this muddies the water slightly (well for me anyway!) when it comes to UK equity allocation in a portfolio.

In my work pension I use a Dev world ex UK fund as my core global equities fund alongside a FTSE UK all share fund for UK equities exposure.
My choices of funds are mainly driven by availability in the scheme and fund charges.

If I look at a cross section of active and passive global equity funds I see a varying range of UK equity allocations from the lower end 3-12% all the way upto 20+%.

So how as an average investor do I determine my UK allocation...20% seems quite high and 3% is quite low.....is there a happy medium? 

I have no idea how to judge where the UK is heading long term, am hoping it will come good but it's been a bumpy ride so far post-pandemic/Brexit etc

grumiofoundation

So how as an average investor do I determine my UK allocation...20% seems quite high and 3% is quite low.....is there a happy medium? 

....11.5%?

noclaf

grumiofoundation said:

So how as an average investor do I determine my UK allocation...20% seems quite high and 3% is quite low.....is there a happy medium? 

....11.5%?

Yep that could be one way to do it! My timescale is 15 yrs+....I am thinking 10-12% might be 'safe-ish' allocation....if UK equities perform poorly hopefully rest of the portfolio will counterbalance and if they do relatively well, happy days.

Pat38493

Thanks for the replies which definitely help.  I guess another way to look at it is that my fund is the default fund and the objective is long term growth so it’s the responsibility of the fund manager to select an appropriate allocation of (UK) equities.  If I change that I am actively deciding that I don’t agree with the fund manager of that default fund.  

bostonerimus

Pat38493 said:

Thanks for the replies which definitely help.  I guess another way to look at it is that my fund is the default fund and the objective is long term growth so it’s the responsibility of the fund manager to select an appropriate allocation of (UK) equities.  If I change that I am actively deciding that I don’t agree with the fund manager of that default fund.  

You should be generally aware how your money is invested and that it is sensible for your circumstances. ie a high percentage of UK and World equities if you are young and maybe more cash and bonds as you approach retirement and maybe even annuities.

[Deleted User]

Its not only that FTSE 100 companies derive income from across the world.  Even if they were 100% U.K. based, economic growth would show little correlation to stock market performance.  The latter is ultimately driven by profits in the publicity traded firms, strength of competition, labour market, taxation and a whole lot of other factors which are not directly related to GDP. Countries which grow fast often return very little to investors. And the other way around.