UK investors have traditionally skewed their portfolios to locally-listed equities because they connect familiarity with low risk. However, investors should broaden their horizons and look globally, as investing internationally can improve portfolio diversification and open up a far greater opportunity set.
The UK accounts for just 3.5% of the world economy, while its stock market represents just 5.8% of the MSCI All Countries World Index. As a whole, the UK accounts for less than 1% of the world's population. Yet despite this, UK investors still typically have a heavy bias towards UK assets.
It is not just personal investors who have traditionally displayed a home bias. A large number of wealth managers also prefer this method of investing, with some allocating more than 40% of a client's equity exposure to the UK. The Wealth Management Association's (WMA) Private Investor Indices, for example, represent disproportionately high weightings to UK equities. Indeed, the MSCI WMA indices currently allocate at least 45% of equity exposure to the UK. In contrast, the ten largest funds within the IA Global sector have an average UK allocation of just 12%.
Faster rates of growth overseas
In the 1980-90s, UK GDP growth generally kept pace with global GDP. However, UK GDP growth has consistently lagged behind global growth since 2001. What's more, the UK economy has significantly underperformed emerging markets and developing economies over this period.
These emerging economies are being driven by powerful and inexorable forces, like rising populations and incomes, as well as the growth of the middle classes. Changes in demographic, technological and socio-economic factors are transforming global consumer behaviour. We map out thematic opportunities we believe will enjoy excellent secular growth, as well as remaining mindful of the areas to avoid. Investing in the UK was once the safe and natural thing to do. Now it potentially inhibits investors from accessing some of the fastest-growing parts of the global economy.
Greater diversification and opportunity
It is often stated that many UK businesses are multinational companies. While this is true, the UK market is heavily concentrated in low-growth sectors facing significant headwinds, most notably energy.
On the other hand, some of the fastest-growing parts of the world economy are heavily under-represented in the UK index.
Information Technology, for example, accounts for only 1.6% of the UK market - compared to 14.9% for the global index. Such sector concentration can lead to poor diversification within a UK-focused portfolio. In addition, there is also a distinct lack of opportunity within the UK stock market. In fact, the global investor has nearly four times the number of stocks to choose from than someone focusing exclusively on the UK. Our global approach means we can pick the very best stocks wherever they may be quoted around the world. This is particularly true for equity income investing.
ServiceNow is a software company selling automation and workflow management tools to large enterprise. At the vanguard of the secular shift in cloud computing that is redefining the corporate landscape, its software is not custom built or hosted at the client's offices; it is centrally located in a ServiceNow data centre (i.e. software-as-a-service or SaaS). The result is faster innovation and a better product for customers. Thanks to a subscription revenue model, which means if customers stop paying the software stops working, it has a rapidly growing base of recurring revenue. Moreover, with a highly evolved product, it not only outperforms competitors by an increasing margin, but has a gigantic revenue opportunity across the US, Europe, Asia and Africa.
Its competitors, older software companies with dated on-premise business models, have struggled to change with the times. For those groups, moving to the cloud means rebuilding the business model, which many have been slow to do for fear of risking legacy revenues.
The stock is not cheap, trading at a high price/sales multiple. However, the combination of attractive unit-economics, a strong competitive position and a very large end-market make for a significant long-term investment opportunity.
Global approach typically enhances returns
Many would argue the true test of an investment philosophy is returns. When comparing the performance of the FTSE All Share and MSCI All Countries World indices, it becomes clear a global approach has delivered superior returns on a short, medium and long-term basis.
The Sharpe Ratio represents the average return earned in excess of the risk-free rate per unit of volatility or total risk. If we look at the last ten years, the MSCI World Index has a higher Sharpe Ratio than the FTSE All Share in every year except 2009.
So, not only has a global approach delivered higher returns over the last ten years, risk-adjusted returns have been superior too.
Jerry Thomas, head of global equities at Sarasin & Partners