I have recently been struck by what seems to be a sea change taking place in UK investment attitudes. Having worked in UK financial services for over 25 years, there is a lot that we can be proud of in terms of setting standards for the rest of the world. Over the years, however, it has always struck me how UK-centric investors and their advisers have been when it comes to investment products, advice and regional asset allocation.
Whether investing in equities, bonds, balanced funds, with-profits propositions or property funds, the dominant theme has always been UK-based investments. This makes a lot of sense. After all, sterling-based investment provides protection from currency risk.
Knowing the investment universe also provides a layer of comfort. It is easier to think one is investing in names which are part of everyday life in the UK. It is easier to access information and do research on investments that are closer to home. Overall, there is a perception that we have more ability to control or influence the outcomes of investments on home turf.
However, it always seemed that these considerations took precedence over the following important factors:
Diversification. A basic principle of investment which is often not applied with sufficient rigour.
Risk management. Pooling too much in one country must expose a client to a concentration of risk which could make risk management of a portfolio hard to implement.
Choice. Having a wider range of choice must give advisers and active managers a better range of options and should impact positively on performance over time.
Country risk. Too many eggs in one basket leave clients exposed to political, economic and social risks.
Correlation. The importance of an investment portfolio including investments which do not always behave in a similar fashion.
Where advisers and their clients have sought to balance their UK focus with some external investment focus, there has been a tendency to add another regional bias to the portfolio.
Investment excluding the UK has very often been based on flavour of the month investing such as Japanese, European or Asia-Pacific equities. This has broadened portfolios but has tended to repeat some of the issues around UK investing in a slightly broader context.
It is heartening to have recently seen the emergence of global themes in various investment propositions that are coming to market.
A number of investment managers have launched global propositions across equities, bonds, balanced mandates and property.
A good example was the recent split of Fidelity’s special situations fund into global and UK propositions. When this was actioned, Anthony Bolton, one of the UK’s best and most experienced investors, emphasised the importance of the split and made a strong investment case around the advantages of global mandates.
Bolton argued that UK investors should not be too UK-centric and should tap into the great investment opportunities which lay outside the UK. But rather than take regional bets for diversification, such as Japanese equities, investors and their advisers should leave it to the experts to diversify their portfolios on a global scale.
It is true that global investing can only be effective where advisers and investors can choose from products where the manager has the capabilities and resources required. A wide ranging and specialist research function which gathers the information needed to be able to assess potential investments is essential to provide on-theground coverage of all markets. This function needs to be complemented by a rounded set of skills in the areas of stock selection, asset allocation, risk management, portfolio construction and currency hedging.
The capabilities required to run truly global portfolios are sophisticated and expensive. Advisers and their clients can draw great comfort that large and well resourced investment houses are now devoting priority time and effort to provide these global portfolios.
I feel confident that this trend will continue to expand. I believe it gives investors and their advisers some great advantages for portfolio planning in the future.
Robert Noach is head of UK financial institutions at Schroders.