Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
It’s no bad thing to know and understand the companies you invest in.
If you can see a company working, perhaps if you use it yourself, then you should be able to make a more informed and - hopefully - more successful decision about whether to invest in it. This logic is part of the reason that we tend to favour companies in our home market, especially here in the UK.
Home bias in investing means holding a higher proportion of money in your domestic stock market than is justified by that market’s size. The UK stock market, for example, makes up just 4.1% of the global stock market by valuation, so any weighting higher than that technically shows a home bias.
Yet many UK investors would see that as too little exposure to their home market and opt to hold more. Does that mean they are overexposed to the UK at the expense of other markets? Not necessarily.
Features of the stock market here mean the risk from home bias is reduced somewhat. The UK market includes many large companies which earn their money around the world - as much as 70% of the earnings of FTSE 100 companies are made overseas - so when you buy a slice of the UK market you are actually getting exposure to the growth in many other economies as well.
Another feature of the UK versus other stock markets is its relatively high level of dividend income. The market includes high exposure to sectors like commodities, financials and consumer staples which have historically paid a good income. That adds to its appeal to many small investors, either because they want to use investments to provide income or because they like the stability that dividends provide to a total return when they are reinvested. For several years after the financial crisis their defensive characteristics also made these sectors, and the UK market generally, an attractive place to be from a capital gain point of view - home bias worked in your favour.
The picture has become less rosy in the past few years as Brexit, the rise of US tech and then the pandemic each counted against the UK. More recently, however, fortunes are looking up again with Britain among the first countries to roll out vaccines and see a big bounce back in economic activity as a result. The UK stock market is trading on a valuation that seems at odds with the country’s immediate prospects and the IMF expects a 5.3% rise in GDP this year, faster than for advanced economies generally. UK shares are cheap on various measures, meaning home bias to the UK may not be the worst idea at the moment.
Long-term investors should always aim for a balance of exposure to different regions, even if an element of home bias is natural. Between 5% and 10% is a typical allocation to the UK. If you’re confident that the recovery here can continue then bear in mind that it may be most evident not among the global giants of the FTSE 100, but more among the domestic facing companies in the FTSE 250 or Small Cap index.
Our Select 50 list of favourite funds contains nine which focus on the UK. Two of those, Fidelity Special Situations and Threadneedle UK Mid 250 concentrate most on the domestic medium sized companies that best reflect the performance of the UK economy generally.
More on the Select 50
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Special Situations Fund can invest in overseas markets to a varying degree, so the value of investments could be affected by changes in currency exchange rates depending on the exposure each fund has to those markets. Currency hedging is used to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful. Hedging also has the effect of limiting the potential for currency gains to be made. The Threadneedle UK Mid 250 Fund invest in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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