Industry Updates

The hidden costs of home market bias


Many UK private investors prefer to stick to London-listed shares, but fortune doesn't favour the timid. Well, not over the last five years anyway.

Look at this table:

Value of £20,000 investment in July 2017 (Investment made in July 2012)

Investment AssetValue after 5 years (before tax)*% gain on original investmentBank account£20,3631.8%UK Corporate Bonds£27,99739.9%FTSE All Share£32,99764.9%FTSE World£41,384106.9%

*All income reinvested

Source: Morningstar/Martin Currie

It's not a great surprise that equities beat cash and corporate bonds over the last five years. More often than not, the stock market delivers a better return than bonds or cash over a five-year period.

But the size of the difference between London's FTSE All-Share index and the FTSE World index is striking. Global shares did a lot better than London-listed shares. (The FTSE World Index comprises more than 3000 stocks in leading stock markets around the globe.)

Now you might say that the FTSE All-Share is a pretty global index because many of its largest constituents are big global businesses such as GlaxoSmithKline, HSBC and Unilever. But the problem with the FTSE-All Share, and the FTSE 100, is that too many of these large global companies are concentrated in just a few sectors. Over 53% of the FTSE 100 is in financials, consumer goods, and oil and gas, according to Martin Currie. And the FTSE 100 comprises more than 85% of the FTSE-All Share by value. So this problem of concentration applies to the All-Share as well as the Footsie.

By just investing in the FTSE All-Share over the last five years, you'd have missed out on the big technology success stories of the last five years such as Facebook, Amazon and Netflix. And potentially you could miss out on other overseas winners over the next five years too.

There's also an issue with dividends. The FTSE All-share currently has a dividend yield of 3.6% which isn't bad in the current investment climate. However, that yield is perhaps less safe than you might imagine. The chart below shows that 64% of the FTSE All-Share's total payout comes from just 20 companies. So if only one or two of those big companies hit trouble, the index's yield could suffer.

Top 20 dividend payers as a percentage of the market

chart, bar chart

Source: Martin Currie and Morningstar

By contrast the top 20 dividend payers in the MSCI All World index only pay 16.9% of the total payout for the index. (The MSCI World Index is similar to the FT World Index and comprises companies listed in both emerging and developed markets - 47 countries in all.)

So far, we've highlighted why it's a mistake to over-invest in London, but the general principle applies to all markets. For example, if you're based in the US and you only invest in the American market, you might well end up over-exposed to the big American technology shares. Especially now after they've had a very strong run.

How to go global

But if you're based in the UK, and you want to diversify away from the London stock market, you have plenty of options.

You could go for a managed fund, and the research we've used in this article comes from fund management firm, Martin Currie. The firm is promoting an investment trust called the Securities Trust of Scotland, which invests in stocks around the world - selected by a fund manager. Trouble is, fund managers cost money and this trust has an annual charge of 0.97%.

Global ETFs are a cheaper alternative and there are plenty of them out there. For example, the db x-trackers MSCI World Index UCITS ETF only charges 0.19% a year.

Or you could invest in particular overseas markets using ETFs - perhaps the US or Europe.

But whatever you do, don't over-invest in your home market - wherever that may be. It's possible that your home market will be a strong performer over the next five or ten years, but you can never be sure, so diversify to reduce the risk.

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