Relying on "UK based" investments for drawdown?

[Gilgongo]

I'm mulling over the balance of my currently rather too numerous holdings and thinking: should I re-balance away from my circa 40% UK-based holdings (23-holding HYP, some ITs and ETFs) before setting out on the (hopefully!) long drawdown road?

I'm guessing the answer to the question, "Is the UK a good bet for long term growth?" is largely one of faith and political views. So let's AVOID those, and look at whether, FTSE 100 holdings or an IT like City of London is really "UK" in the sense that most (all?) of the members trade internationally.

What are the pros/cons to large-cap UK holdings in a drawdown portfolio? If it's merely diversification, then should I aim for, say, 10% UK, 60% international, and 10/10/10% (global) bonds/gold/cash?

[JohnB]

80% of FTSE 100 income comes from abroad. If you want more UK, you need FTSE 350. If you want individual stocks I can't help you.

[xxd09]

Crossed this bridge many years ago
Global equities index tracker and global bond index tracker did the job for me
Minimising the US never mind the rest of the world is not for me
Home bias is a very human reaction but not necessarily a good investment policy
xxd09

[Gilgongo]

OK so if 80% of FTSE 100 income comes from abroad, then if I have 60% of my portfolio in "UK" stocks like the usual HYP FTSE-100 candidates, and in UK equity ITs like CTY or MRCH - then in reality I have about 20% reliance on the UK's economy?

[Dod101]

The standard run of the mill UK income shares (as held by many HYPs) have been a very poor investment over several (I could I think say many) years now, at least on the capital front so were I starting out now I would think very carefully. ITs like City of London have simply echoed that, which is not in the least surprising since that is mostly what they invest in. OTOH, there are UK shares with a lower yield than some which have done quite well both in income and growth of capital such as Unilever and Diageo. Going overseas and you may get the likes of HFEL which is a great income trust in the Far East but which again has shown very little capital growth. Over the years, I have modified my approach a bit, still mostly in the UK market but I have been prepared to look at slightly lower yields but with a real prospect of capital growth as well. Some will say that holding non UK shares gives a currency risk but on the whole it is sterling which has depreciated and so helped these non UK shares. My only foray into an overseas holding is a Canadian bank with a good yield and a remarkable capital growth as well. Were I starting out today? I would certainly look for overseas income shares but probably no more than say 25/30% max simply because they are a bit more difficult to monitor even with the internet.

Most high income shares are so for a reason and often that is because they are ex growth such as say the tobaccos. OTOH you will be aware of the rash of takeover offers around this sector at the moment so you never know they may well generally revive, partly in anticipation of an offer and partly because directors may sharpen their game. In the end you pays your money..........

As for the argument abut UK shares deriving much of their income from overseas, that may be true but there is often a different mindset or culture between a London based company investing say in many countries and say a Singapore or Atlanta based company doing so.

I should have added that I do not make too many judgements about the UK, the US or any other economy. I tend to look at individual companies and let the directors decide where to invest.

Dod

[TUK020]

Home bias gives rise to 2 problems:
- over-reliance on the UK economy
- too few industry sectors represented.

The overseas earnings of the top of the FTSE100 companies goes some way towards counteracting the lack of geographic diversity.
A bigger problem is that the FTSE100m is stuffed full of Tobacco, Oil, Pharma, Banks, Miners. But where is your exposure to Semiconductors, Electronic devices, Online retailing, Software, Social Networks, Online Advertising, Biotechnology etc etc etc.

I have chosen to add to my selection of UK hyp stocks and ITs a selection of ITs focused on different geographic regions, and industry sectors, and also some global growth ITs as a long term capital value insurance.

[gryffron]

Home bias gives rise to 2 problems:
- over-reliance on the UK economy
- too few industry sectors represented.

But the FTSE100 ISN'T particularly reliant on the UK economy. Indeed, because so much of the income comes from abroad, but is usually reported in sterling, the FTSE100 is NEGATIVELY correlated to sterling. If the UK economy goes down relative to RoTW, sterling falls, Foreign earnings worth more pounds, FTSE100 goes up!

I agree about too few sectors. All the huge gainers over the last 20 years have been tech - completely missing from the FTSE100.

Best to think of the FTSE100 as an all-world old-economy fund investing in financials and miners. But not really UK.

To the OP. Add a NASDAQ tracker you've just about got it covered.

Gryff

[1nvest]

Home bias gives rise to 2 problems:
- over-reliance on the UK economy
- too few industry sectors represented.

But the FTSE100 ISN'T particularly reliant on the UK economy. Indeed, because so much of the income comes from abroad, but is usually reported in sterling, the FTSE100 is NEGATIVELY correlated to sterling. If the UK economy goes down relative to RoTW, sterling falls, Foreign earnings worth more pounds, FTSE100 goes up!

I agree about too few sectors. All the huge gainers over the last 20 years have been tech - completely missing from the FTSE100.

Best to think of the FTSE100 as an all-world old-economy fund investing in financials and miners. But not really UK.

To the OP. Add a NASDAQ tracker you've just about got it covered.

Gryff

Next 250 (FTSE250) isn't much better either, as I recall of the order 75% of FT100 earnings sourced from foreign, 50% of FT250 earnings sourced from foreign. Little of British left, primarily services serving financial, law, accounting for others who'd rather English based expertise behind that. The French in taking over the EU presidency next years have ambitions to transition the EU over to using French as its primary language for finance/law/accounting.

[merluzzo]

Late to this thread, but the issue of valuations has not figured prominently here.

I have no tendency for home bias, and no preference for high dividend yields, but I do like my CAPE ratios low and slim.

FTSE 100 has CAPE ratios lower than most markets in the advanced economies. This is my reason to own more of it than its capitalization would imply. I am also overweight ex-UK European shares, value shares and emerging markets.

Time will tell if it is a good strategy at all, but this is my rationale.

[BT63]

Late to this thread, but the issue of valuations has not figured prominently here.

I have no tendency for home bias, and no preference for high dividend yields, but I do like my CAPE ratios low and slim.

FTSE 100 has CAPE ratios lower than most markets in the advanced economies. This is my reason to own more of it than its capitalization would imply. I am also overweight ex-UK European shares, value shares and emerging markets.

Time will tell if it is a good strategy at all, but this is my rationale.

I agree FTSE looks better value than other markets. Probably Brexit fears and never-ending dithering have been a large factor in the FTSE lagging other markets. Then add in the common investor tendency to extrapolate recent performance into the future, with a reluctance to buy something which hasn't gone up much.

I think there's a very good chance of looking back in 10-15 years time and seeing the last few years and the present as a good time to accumulate a modestly overweight position in UK PLC.

[Lootman]

I think there's a very good chance of looking back in 10-15 years time and seeing the last few years and the present as a good time to accumulate a modestly overweight position in UK PLC.

UK equity market cap is 4% of global equity market cap. So a modest over-weighting might be 5%?

The problem I most often see here is a massive over-weighting in the UK - maybe 50% or more.

[JohnW]

We don't know what the best proportion for 'UK based' assets will be, and probably shouldn't get worked up about too much fine tuning. And..
If 4% is market cap, 5% surely isn't over-weighting in the spirit of the previous sentence? One percentage point out of kilter is noise, nothing more.
Looking at home bias for a dozen or more countries, this analysis concluded: 'Long story short, based on such multi-criteria assessment, the 80% global and 20% domestic approach appears the most optimal from both an emotional/risk standpoint and a performance/reward standpoint. A few more observations:...' https://www.bogleheads.org/blog/2020/03 ... ld-part-3/
Vanguard make similar conclusions in their research paper 'Global equity investing' which tries to counter too much home bias.