The tendency for investors to allocate too much of their capital in their home markets is called domestic bias and is a well-known phenomenon. For U.K. investors who’ve stuck with indigenous equities in recent years, this proclivity has cost them dearly.
The U.K. investment industry manages about 8.5 trillion pounds ($11 trillion), more than three-quarters of which is on behalf of local customers, according to figures compiled by the Investment Association, a trade body. For the past five years, the geographical asset allocation of the group has barely budged, and domestic holdings have remained stuck at about 30%, compared with 23% in Europe and 22% or less in North America.
That ignores a significant shift in how important — or unimportant — U.K. stocks are to the global equity market. While British equities have remained the third-biggest geographical component of the MSCI World Index, their share has decreased dramatically, to less than 4.5% from about 7.5% in 2015. That’s even as the contributions of Japan and Switzerland, respectively the second- and fourth-biggest participants, have declined much more modestly.
The big winners have been U.S. stocks, driven by outsized gains in the values of the region’s biggest technology companies in recent years. Hence the Norwegian sovereign wealth fund’s announcement a few weeks ago that it’s been missing out by not having enough of its money in the U.S. market, and intends to shift 6.5% of its equity portfolio — more than $50 billion — to North American stocks.
The returns available from U.K. stocks in recent years have also lagged those available elsewhere. Including dividends, the benchmark FTSE 350 index has delivered less than 15% since 2015, compared with more than 60% from the MSCI World Index and more than 80% from the S&P 500 index.
On an annualized basis, that