Allocation of funds in Pension

ML2024

Hi all

Interested in opinions and thoughts on the weighting given to funds in pensions. I have a pretty generous scheme with my employer, with 20% of salary going in to my DC pot. The default allocation (I think) is 50/50 Global Equity fund - being made up of 50% Vanguard FTSE Developed World ex UK Pension Fund and 50% Vanguard FTSE UK All Share Index Pension Fund. So payments into this get me an over weighted exposure to the UK market comparative to its global size.

A little while ago, I moved half of my then pot (and half of all payments since) to Vanguard FTSE Developed World ex UK Pension Fund. This obviously duplicates half of the above amounts, so in essence now gives me 25% exposure to the UK. I did this because I felt a full 50% of exposure to UK was too much home bias, but didn't at that time go the full way and reduce it right down.

Both sides of the investment have pretty much moved in lockstep since I changed allocation, and overall my non UK element is worth only a slightly greater amount than my UK 50%. However on a longer performance outlook, the non UK elements have done better - 1 year is 17% vs 7% for UK, 3 year 29% vs 25% and 5 year 79.5% vs 31%. Both rated 6 out of 7 on the volatility rating given I think are fully equity amounts.

Obviously past performance is no guarantee of future growth, but I am wondering whether I shift more/almost all across to the non UK equities. I'm curious as to what other people are invested in, other investments I have are worldwide (HSBC Global Strategy Adventurous) and there isn't a reason bar "general concern" at moving completely away from the default that I haven't done the same in my pension investments. There are also active options (e.g.  BNY Mellon Global Equity Pension Fund) but these seem the simplest "invest in the whole market" approach with the lowest fees. There are also options 

So my question is, what do others do and is there a particular reason or argument for having so much exposure to the UK? I don't think the UK is exactly seen as a huge source of future growth and so whilst I don't necessarily want to remove all exposure to it, does 25% still feel too much? I think it does to me hence asking this question! I appreciate there will be a mix of views, some people will be active, others will have a worldwide passive fund and job done (and ultimately its an individual choice) but curious as to what people think and what the reasons are for how they invest their funds.

Finally, and spotted whilst I was typing this out, there is I think a new option since I last looked, an option to go into Vanguard FTSE Developed World (GBP Hedged) Pension Fund. This includes US, Europe, UK, Japan etc and so seems a more "real" global option...so a simple thing I could do is move everything into this, have exposure to the world in ratio to economic size, and leave it be. I am not quite sure what the GBP Hedged point means though if I am honest - presumably a reduction in currency risk/volatility but I don't quite follow how this would work in practice given looking at FT fund page this is 100% stock so no bonds or anything there.

I'm absolutely fine with the volatility/risk if that impacts anything, I'm 37 currently so plenty of time to retirement and would like to maximize growth. My changing the allocations has meant I've also moved away from any life styling plan which would de-risk me down the line.

Thanks

Albermarle

The amount of UK exposure is a matter of opinion, so there is no definitive answer.
Some will say that as the UK financial sector = 4% of the global one then this is how much you should have.
Others think that there is some positive points to have investments in your own currency/country.
However for sure 50% is a LOT, and more typical of older type pension funds.
25% is quite common. A lot of well known Vanguard funds are at this level, and again would be typical in many pension funds. Often 10 to 20% is mentioned as a compromise but just opinion.

There are some indications that the US bull market has stalled and the undervalued UK market may do well, but who knows ?

I am not quite sure what the GBP Hedged point means though if I am honest - presumably a reduction in currency risk/volatility but I don't quite follow how this would work in practice

Lets say for example you have a fund that is 100% in US equity, so is priced in Dollars.
However as a UK investor you will normally have the same fund but priced in GBP.
So even if the share prices are static, the value of your fund will move up and down with the $/£ exchange rate.
If the fund is hedged then this exchange rate volatility is removed.
However there is a cost for the hedging, so many say over a long period it will not be worth it.

dunstonh

So my question is, what do others do and is there a particular reason or argument for having so much exposure to the UK?

Your reasons are flawed.....

I don't think the UK is exactly seen as a huge source of future growth and so whilst I don't necessarily want to remove all exposure to it, does 25% still feel too much?

UK equity has been outperforming US equity over the last 3 months.   UK equity large cap doesn't have much in common with the UK economy.    So, you shouldn't make that mistake.    The mid can small cap reflect the UK economy and they have been down the pan since the Brexit referendum.

 others will have a worldwide passive fund and job done (and ultimately its an individual choice) but curious as to what people think and what the reasons are for how they invest their funds.

You appear to fancy yourself as a fund manager.   if you didn't, you would go with a global tracker.    So, what do you feel would make you a better fund manager than a global tracker?

I am not quite sure what the GBP Hedged point means though if I am honest - presumably a reduction in currency risk/volatility

It removes currency fluctuations from the equation.   However, hedged funds tend to cost more to cover the method of hedging.

Pat38493

On equities, I am tending to move more and more into global trackers on the basis that, as someone else put it recently, I am an idiot.  

Or as Dunstonh explained it, my chances of judging these things better than a full time professional fund manager (who often get such things wrong anyway), are neglibable.

I still have a bit of overweight in global small cap and emerging markets, but I suspect I will probably run those down over time as well.

You might be able to predict that things are likely to happen at some point in the next year or two, but unless you can predict the timing with some reasonable accuracy you are still not going to do better than just with global trackers.

ML2024

@Albermarle thanks that makes sense. Agreed on 50% being a lot, this is why I moved away from the default in the first instance.

@dunstonh by no means do I consider myself a fund manager although I am learning - hence the questions. My reasons were more that the default was 50% and presumably people with more expertise than me set that. Moving away a bit felt sensible but there wasn't a simple "global tracker" on offer so I went for the middle ground. Feeling that isn't far enough/might remain flawed is the reason for this thread. I'm aware bulk of earnings of large cap are not UK though - but the mental hurdle of what is set when you sign up remains.

As I say, there isn't the option for a global tracker bar the exclude uk option. Feels a bit odd for a large accountancy firm (my employer) and standard life as a well known provider but there you go. I get your point that I can't and don't know more than a fund manager however it does feel rather daunting to move that large chunk of money away from what has been set which is why I only did an element to begin with. I imagine the majority of my colleagues don't and maybe lose out on serious growth as a result - but of course as Albermarle says, who knows.

@Pat38493 thanks and agreed - follow the global economy and see where I'm at in 20 years is probably sensible. As above its just the "what if I'm wrong" fear of changing that allocation but guess nobody knows until down the line if it's the right move or not.

JohnWinder

'So my question is, what do others do and is there a particular reason or argument for having so much exposure to the UK? I don't think the UK is exactly seen as a huge source of future growth '

When asking that question I think your next sentence gets to an issue that should be a tenth order consideration or ignored altogether. The issue is predicting future returns; forget it, unless you're happy for chance to determine the result because the amount of knowledge and skill you or anyone else will have (excluding insider trading or market manipulation) almost certainly won't cut it.

Determine your home bias by how important you see the relevant issues are to you; issues like currency hedging not needed, and foreign power confiscation avoided, what does the history show, how dividends are taxed at home and abroad etc. Here are some sources:

Here is a Vanguard paper. https://www.vanguard.ca/en/investor/insights/Canadian_Home_Bias 

Another analysis tests home bias no more than 43% UK 55% global for UK investors and concludes it hasn’t been a bad mix over a recent 50 years. Readers might conclude less would suit them better from now on based on this analysis. https://www.bogleheads.org/blog/2020/03/02/50-years-of-investing-in-the-world-part-3/

French of Nobel fame says: ‘Home country bias is per se not a bad thing….Canada is 3 or 4% of the world equity portfolio. A home country bias from that perspective would say Canadians have more than 3 or 4% of their portfolio invested in Canadian stock. If that's how we're going to define home country bias and we say, okay, 7% in Canadian stock is a home country bias. That sounds great to me, no problem whatsoever.’ https://rationalreminder.ca/podcast/100  

Discussed here recently https://rationalreminder.ca/podcast/295