The benefits of investing globally, however, include: greater diversification; more growth potential; and access to fast-growing sectors and economies such as in the developing world. Indeed, an investor who focuses only on the UK will be handicapped in their ability to maximise returns.
The UK has become a far less insular country over the past 40 years or so. British eating habits, for example, have undergone a revolution. While dried and fresh pasta was not even recorded on the government's National Food Survey until 1998, today's supermarkets are packed with food from across the globe to cater for the increasingly adventurous appetite of modern Britons.
Yet when it comes to investing, the British (and other nationalities) appear to have little appetite for exploring foreign opportunities. In other words, investors across the globe have an apparently innate home bias, preferring to invest in companies based in domestic markets rather than looking abroad. Why home bias should be avoided
There is a large body of research that shows that home bias handicaps the ability of investors to maximise investment returns. Investors who focus on the domestic market will be far less diversified than those who hold a portfolio of international stocks. This is true even in the UK, where an estimated 75% of the revenues of FTSE 100 member-companies are earned from abroad, according to CityWire1.
Overall, UK equities (as measured by the FTSE 100 in local currency terms) rose by 19% in 2016. And yet as Figure 1 illustrates, an internationally diversified investor could have done much better in 2016 than one biased towards the home market.
Why do investors have a home bias?
Common concerns for investing globally include:
Investors may worry about the currency risk associated with exposure to foreign markets.
Concerns over protections of investments
They may also wonder if their money invested abroad will be as safe as it is invested in the UK with its established legal framework and solid corporate governance.
Geopolitical risks and tax implications
Investors may be concerned about geopolitical risks and tax implications. Or investors may simply wish to avoid putting their savings into companies located in markets on the other side of the world, about which they have little knowledge.
The dangers of home bias
In the UK, the index is heavily concentrated in terms of companies and sectors. So, an investor who focuses on the UK is only exposed to a relatively small number of sectors and companies, which makes them highly vulnerable to adverse shocks in either.
With global investments, a common concern is geopolitical risk. However, this is certainly no longer confined to emerging markets as the UK's vote to leave the European Union and the election of Donald Trump as president of the US have demonstrated. There are strong arguments to suggest that investors' fear of emerging markets is therefore unfounded. Indeed, the seeds of the global financial crisis were largely sown by regulatory failures in the US and not among emerging economies, which generally weathered the storm well.
We certainly believe in the importance of taking a global approach at Aviva Investors. In our multi-asset funds, as Figure 2 illustrates, we invest globally to seek out the best risk-adjusted returns.
1 Citywire, 30 June 2016
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