Paul Nash, Investment Director, Fidelity Multi Asset
Home bias exists in portfolios for a variety of reasons. However, the evolution of market structures means that many of those reasons have diminished over time. Now many UK investors that have a home bias do so because of historical norms, rather than an investment rationale.
Regulations have shifted to facilitate and encourage the international flow of capital, while the increasing sophistication of the financial system has reduced transaction costs across virtually all asset classes. In other words, many of the historical explanations for home bias may no longer apply – but have become structurally embedded.
What’s more, over the long-term, global investments tend to generate better risk-adjusted returns, implying that domestic investors could benefit from increasing the global diversification of strategic asset allocation decisions.
The potential benefits of increasing global diversification
While investors may have specific preferences in structuring global exposure, we believe there are a number of compelling arguments for increasing global diversification.
Reducing unintended concentration risk
Concentration risk means that a small number of companies could have an outsized effect on overall portfolio performance. This exposes investors to potentially significant idiosyncratic risk from individual securities. For example, at the end of 2022, the 10 largest stocks accounted for 42% of the UK index market cap, but only 16% of globally.
Mitigating unintentional sector or style biases
All market indices have their own characteristics and biases, so investors need to understand where their exposures lie. For example, if you believe value will outperform growth, investing in UK equities is one way to express this as the UK market is tilted towards traditional value sectors such as financials and energy. However, if this is built into a long-term asset allocation, it can introduce unintended biases, meaning careful evaluation and monitoring is required to achieve expected outcomes.
Diversification of return drivers
Running a long-term strategic overweight to a single region means a portfolio has a higher dependency on a narrower set of return drivers and can lead to missed opportunities in other regions. Increasing global diversification could decrease short-term country-specific risk and provide the opportunity to add value more consistently as market drivers change.
Providing cost-efficient access to global markets
While each investor will have their own approach to constructing global exposures- and there is no single ‘correct’ way to build a global portfolio – we believe that from an investment perspective, there are significant benefits to moving to a more global allocation.
At Fidelity, we have a range of multi asset solutions that provide you with access to the world’s major asset classes. We have different solutions for a variety of client needs – for cost-conscious investors, for example, our Multi Asset Allocator range would be most suitable.
Each of the five funds in the range are designed to deliver an optimal blend for a particular risk and return profile. They’re built around a strategic asset allocation model, split between equities and bonds with ongoing charges of just 0.20% across the range*. The range uses passive implementation with a consistent asset allocation that is truly global in nature to avoid any unwanted home bias.
Discover more about the Fidelity Multi Asset Allocator range
This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and clients may not get back the amount invested. The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment policy of these funds means they invest mainly in units in collective investment schemes. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0823/382199/SSO/NA
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