The practice of keeping your money close to home isn't a new phenomenon, and investors in Britain are not alone in wanting to invest their capital into something they're comfortable with. But home bias can come at a cost.
“People start investing in things they are familiar with," says Frédérique Carrier, head of investment strategy at RBC Wealth Management in London. “It's a good starting point, but you forgo other opportunities. You would say that investors are not diversified if they only have a portfolio of UK equities,” she adds.
According to research by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 63 percent of high-net-worth investors in the UK say they have savings or cash holdings in Europe. Younger generations* are more likely to invest this way (68 percent), versus 56 percent of older generations.
The New wealth rising survey, which targets high-net-worth individuals (HNWIs), adult children of HNWIs and high-earning professionals across the UK, Canada, U.S., China, Hong Kong, Singapore and Taiwan, explores the future of wealth, what it will be invested in and how it will be invested.
With the largest transfer of wealth in history underway, major attitudinal shifts are emerging. Interests are swinging from local to global, smart philanthropy is taking hold, and impact- and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.
Facing headwinds from global markets, 73 percent of younger HNW investors say they are far more attentive to their portfolio now than in the past, due to the current market cycle, according to EIU data.
The power of diversification
Casting a net across a broader geographical area can allow for a smoother ride through the investment process. "Stocks don't go up in a straight line," adds Carrier. "It could be that UK stocks are being sold off, but if you are diversified, then that will cushion the negative performance." Diversification doesn't harm long-term investment returns, but it can help reduce portfolio volatility.
A recent case in point is the performance of the UK market relative to foreign markets. "If you had all your eggs in the UK basket you would have had assets in a weaker currency and an underperforming market," says Carrier. "Being 100 percent invested in the UK would not seem optimal at the moment."
Since the Brexit referendum on June 23, 2016, the value of investments in the UK stock market has fallen behind those of other key markets. In the period from June 2016 to July 2019, the FTSE 100 index gained around 10 percent. This is compared to the S&P 500, which increased 38 percent, according to Yahoo data. Both figures exclude dividends.
While that difference in returns is considerable, it doesn't tell the whole story. Over the same period, the value of sterling dropped relative to the U.S. dollar. Prior to the Brexit referendum, one pound would fetch around US$1.44. Yet more recently, the currency was trading 16 percent lower at $1.21, according to data from Bloomberg.