A survey of global investors conducted by Legg Mason found that 79% global investors in the UK are invested only in domestic holdings, despite returns from current investments falling around 2.8% short of expectations.
Simon Edelsten, manager of the Artemis Global Select fund, said: “Equity investing always comes with a risk, and investing in Nestle is no more risky than investing in Diageo.
“A global mandate considers companies on a like-for-like basis, and lately we have seen a significant re-rating of stocks in the UK meaning that they are now comparatively more expensive than their global counterparts, so investors could lose out in terms of value for money.
Currency issues
Reluctance to diversify also leaves investors vulnerable to fluctuations in currency, and having a diversified portfolio can help maintain returns at times when sterling is down.
“Solely UK-focused portfolios will not have benefitted from the recovery of Japan, for instance. In 2013 to date, in sterling terms, the Nikkei has risen 18%, compared to the FTSE at 6%.”
Global uncertainty, and too much risk were the most commonly cited reasons for not investing beyond the domestic market, but again this can be mitigated by applying a cautious approach to investments in higher risk markets.
Edelsten said: “When considering investments further afield in the more ‘exciting’ markets we take a more cowardly approach, but the same investment principles apply and prospects are considered based on their balance sheets, there is always choice over the level of risk we are willing to take.”
Investors in Asia are much more bullish in terms of investing beyond domestic markets, with 33% of those based in Hong Kong already doing so. US-based investors are the least diversified in terms of the geographic spread of their portfolios and just 11% have made foreign investments.
Domestic benefits
While UK-only investors could miss out on the diversifiication benefits of a global equities portfolio, the current outlook for UK equities does suggest that those with a sole focus on the domestic market are set to benefit from its changing fortunes.
A recent survey by Towers Watson revealed that UK equity market returns are predicted to increase from 5% to 6% this year, while data provided by Ignis showed that total returns from the UK equities market have outpaced many other markets in the long term, despite volatility caused by turmoil in Europe. The FTSE All-Share Index was 2% ahead of the S&P 500 throughout 2012.
