2. Reduce risk
Having a few large companies dominate a regional equity index can be a feature of even well-developed markets. This is known as concentration risk, and it is especially prevalent in the UK, where the largest 10 companies account for 42% of the total market capitalisation.4 This exposes investors in the UK market-cap weighted index to potentially significant idiosyncratic risks from the largest securities, something that is greatly reduced when moving to a more globally diversified portfolio.
Table 1: The UK and European equity markets have relatively high concentration risk
Source: Fidelity International, Factset, as of 31 December 2023.
Reducing home bias can also reduce unintended sector and style bias. Every region has its own characteristics, and having a home bias will introduce these into a portfolio compared to a global allocation. While this might be desirable when making active investment decisions in the short term, having a structural home bias is likely to introduce unintended or unknown biases that can lead to investors not getting what they bargained for.
Table 2: UK equities currently tilt towards value sectors such as financials and energy, but not all investors want that
Source: Fidelity International, Factset, as of 31 December 2023.
This is especially true for UK investors over the past decade or so. The UK equity market is weighed towards banks, consumer staples, energy, and healthcare, which also tilts the index towards the value style. But the UK market features almost no information technology or communication services, reducing the exposure that UK portfolios with a home bias have had to one of the main drivers of asset performance in recent years.
Chart 2: All markets have inherent biases that investors need to be aware of
FTSE All Share index vs MSCI World on 31/12/23. Style Skylines™ show benchmark-relative Style Tilts™. Sample Size Adjusted Tilts, calculated from both the size and breadth of portfolio positions, assess the deliberateness of the Tilts and enable comparisons across portfolios of differing structures. Additional analysis factors, sector (and country) adjustments and Tilt Contribution reports may also be informative. Source: Style Research, Fidelity International, January 2024.
A simple investment approach based on diversification
Our analysis shows that over the past 20 years, UK investors with a 60/40 portfolio could have improved returns, reduced volatility, and reduced maximum drawdowns by reducing or eliminating home bias. Investing £10,000 in a diversified global portfolio returned £43,276 compared to only £37,980 when using a portfolio with a 40% UK home bias, with identical volatility and a lower maximum drawdown.
Table 3: UK and European investors could benefit from an increase in global diversification
Analysing a balanced 60/40 portfolio with different domestic/global asset combinations
Source: Fidelity, MSCI, Bloomberg, as of December 30, 2022. Time period from January 2003 to December 2022. The table shows the historical return and risk characteristics of a balanced portfolio comprising of 60% equity and 40% fixed income. UK equity represented by the FTSE All Share gross total return index; global equity represented by the MSCI World gross total return index (in GBP); UK fixed income represented by the Bloomberg Sterling Aggregate index; global fixed income represented by the Bloomberg Global Aggregate GBP hedged index
The Fidelity Multi Asset Allocator range aims to deliver a simple proposition at an attractive price. We have a globally diversified fund with a range of risk profiles and crucially we have no UK home bias. We believe this gives our portfolios greater exposure to the drivers of economic growth, while reducing concentration risk and unintended style and sector biases.
