Is now a Bad time to buy global Funds?

[Mike88]

As heading. My portfolio is so heavily weighted towards UK shares I feel the time has come (belatedly) to diversify. Is now a bad time to invest in global funds given the low value of the pound or should I wait and see how BREXIT pans out?

I was tempted to buy the Lindsell Train global UT to avoid the IT premium or even Terry Smith's Fundsmith but have held back due to my concerns.

Any views out there? Thanks

[Brodes]

The bulk of my UK based HYP was bought 2011-2015. Since then I’ve been reinvesting the dividends into more global funds. Pension into whole world ex UK. Children’s funds into 50:50 VUSA:VWRL. Lately I’ve been selling down the HYP and more UK or Europe focussed ITs (Aberforth smaller companies, law debenture) and moving into the same 50:50 VUSA:VWRL. Split. I agree that the timing does not feel good. What with the low pound. However, I can’t help but think the USA will do better than the UK in the long run. And technology and disruptive businesses do seem to be responsible for the lion’s share of gains. The US seems to rule on that front. Certainly compared to UK/Europe.

[Dod101]

You can get a lot of global exposure by simply holding many of the big UK shares and of course investment trusts. Whether this is a good time or not, only time will tell but I suppose it is no worse than most other times.

Dod

[Lootman]

You can get a lot of global exposure by simply holding many of the big UK shares and of course investment trusts.

You can, but there are still some single country risks that you take if you try and get all your overseas exposure from solely UK companies. Examples:

1) Tax risk, particularly if we get a Labour government
2) Nationalisation risk (ditto) although Corbyn's initial targets are mostly domestically oriented
3) Regulatory risk
4) Unpredictable fallout from Brexit

So I think it is better to add genuinely foreign shares or funds to a purely UK portfolio. I've been doing this for a number of years now, in recognition of the fact that the UK market is now only about 6% of global marketcap, and that trend has increased as the Brexit/Corbyn risk has materialised. The ever declining pound has boosted this strategy.

Also, when I look at UK companies, I can find something better overseas in most cases. I think Exxon is a safer bet than BP. Merck is stronger than Glaxo. JP Morgan is better than HSBC. And of course sectors that are small in the UK but significant elsewhere e.g. tech and manufacturing. So I have been selling off most of my FTSE-100 names and using VUKE as a proxy. I still hold individual UK mid-cap and small cap shares, although more for speculation. I just can't get excited about the FTSE-100 and at this point hold only a handful of UK largecaps where I like the story e.g. Unilever (also hold Nestle), Diageo, Smith & Nephew. I'm done with the yield hogs and avoid several UK sectorsaltogether (utilities, retail, support services, finance).

And is it just me but I am noticing a lot of commentary on TLF along the same lines - a relative disullisionment with HYP-like and FTSE-100 strategies, and a desire to go more international and more for growth? If so, global ITs and ETFs can add value, and also the direct holding of US shares.

[Dod101]

You can get a lot of global exposure by simply holding many of the big UK shares and of course investment trusts.

You can, but there are still some single country risks that you take if you try and get all your overseas exposure from solely UK companies. Examples:

1) Tax risk, particularly if we get a Labour government
2) Nationalisation risk (ditto) although Corbyn's initial targets are mostly domestically oriented
3) Regulatory risk
4) Unpredictable fallout from Brexit

So I think it is better to add genuinely foreign shares or funds to a purely UK portfolio. I've been doing this for a number of years now, in recognition of the fact that the UK market is now only about 6% of global marketcap, and that trend has increased as the Brexit/Corbyn risk has materialised. The ever declining pound has boosted this strategy.

Also, when I look at UK companies, I can find something better overseas in most cases. I think Exxon is a safer bet than BP. Merck is stronger than Glaxo. JP Morgan is better than HSBC. And of course sectors that are small in the UK but significant elsewhere e.g. tech and manufacturing. So I have been selling off most of my FTSE-100 names and using VUKE as a proxy. I still hold individual UK mid-cap and small cap shares, although more for speculation. I just can't get excited about the FTSE-100 and at this point hold only a handful of UK largecaps where I like the story e.g. Unilever (also hold Nestle), Diageo, Smith & Nephew. I'm done with the yield hogs and avoid several UK sectorsaltogether (utilities, retail, support services, finance).

And is it just me but I am noticing a lot of commentary on TLF along the same lines - a relative disullisionment with HYP-like and FTSE-100 strategies, and a desire to go more international and more for growth? If so, global ITs and ETFs can add value, and also the direct holding of US shares.

I agree with what you say (mostly anyway) By holding foreign shares, we also get exposure to maybe a different style of management as well as, in the case of the US at least, a much bigger domestic market for shares domiciled there. I am certainly one who has gone off HYP like shares to a large extent although I have moved more into international invested ITs rather than buy overseas shares directly. But then I have never really been a devotee of pure HYP.

Dod

[EthicsGradient]

Is now a bad time to invest in global funds given the low value of the pound or should I wait and see how BREXIT pans out?

You might equally say that Brexit could end up with No Deal, or a Labour government, which might weaken the pound even more, in which case buying
global funds before that would be a good move.

Perhaps a partial purchase before, and after, Oct 31st would mean less worry about the timing?

[Pendrainllwyn]

Global diversification is a good thing in my opinion but most investors exhibit strong home country bias in their investment allocations. We should be alert to it. I think there are more interesting companies outside of the FTSE 100 than there are within it. Whether it is good timing now to be more global I have no idea but I have read recently research from a respected global institution that believes the USD will depreciate in the next few years against most currencies (including sterling) and that equity markets are the least attractive they have been for 5 years. Forecasts are notoriously difficult and they could be completely wrong but the double benefit a UK investor has got from investing in a rising US market and appreciating US Dollar may not go on forever. If I strip out Investment Trusts with foreign holdings, UK Equities constitute about 8% of my equity allocation currently.

Pendrainllwyn

[Lootman]

If I strip out Investment Trusts with foreign holdings, UK Equities constitute about 8% of my equity allocation currently.

As a historical footnote, the last time I checked how large the UK market cap was relative to the whole world, it was about 6% of global market cap. I kept some records of this during the 1990s and back then it was about 10%.

The implication is that the UK index has significantly under-performed the rest of the world, although some allowance should be made for the 20 years or so of higher dividends. That is a feature of the UK market versus most of the others - UK investors seem to crave and demand high dividends, so UK companies pay out more of their earnings than elsewhere, crimping growth.

Of course you might regard that relative under-performance as a trend that should revert to a mean. Or you could take the view that the UK has been in relative decline, versus the US and Asia, for as long as most of us can remember!

[mc2fool]

As a historical footnote, the last time I checked how large the UK market cap was relative to the whole world, it was about 6% of global market cap. I kept some records of this during the 1990s and back then it was about 10%.

The implication is that the UK index has significantly under-performed the rest of the world...

No, that doesn't necessarily follow. Firstly, indices don't measure the size of markets, indeed they are specifically designed to exclude the effects of "non organic" additions and removals. E.g. if Apple decided to delist in the US and list in the UK instead, the levels of the NASDAQ and the FTSE 100 wouldn't change at all as a result (at the instant of the de/listing), despite the market caps of the two indices dropping/increasing significantly, respectively.

Secondly, the % share of global market cap is a reflection of the relative sizes of markets, not levels of indices, and one of the big factors affecting that over the past 30 years is the increase in size of emerging markets due to the volume of new entrants. The number of companies listed in emerging markets has increased massively.

It may (or may not, dunno) be the case that the UK index has under-performed others, but that can't be necessarily inferred from the change in the UK's % of global market cap...

[Lootman]

As a historical footnote, the last time I checked how large the UK market cap was relative to the whole world, it was about 6% of global market cap. I kept some records of this during the 1990s and back then it was about 10%.

The implication is that the UK index has significantly under-performed the rest of the world...

No, that doesn't necessarily follow. Firstly, indices don't measure the size of markets, indeed they are specifically designed to exclude the effects of "non organic" additions and removals. E.g. if Apple decided to delist in the US and list in the UK instead, the levels of the NASDAQ and the FTSE 100 wouldn't change at all as a result (at the instant of the de/listing), despite the market caps of the two indices dropping/increasing significantly, respectively.

Secondly, the % share of global market cap is a reflection of the relative sizes of markets, not levels of indices, and one of the big factors affecting that over the past 30 years is the increase in size of emerging markets due to the volume of new entrants. The number of companies listed in emerging markets has increased massively.

It may (or may not, dunno) be the case that the UK index has under-performed others, but that can't be necessarily inferred from the change in the UK's % of global market cap...

I see what you are trying to say but I don't think that explains away all the relative changes. A simple example:

Thirty years ago the Japanese market was in the ascendant. The Nikkei Dow almost hit 40,000 and, at that time, Japanese equities were about 40% of global market cap.

Its market collapsed and, some years later, that index was below 10,000. Even now, after a partial recovery, that index is still well below 40,000 and Japan is about 10% of global market cap.

So yes, the relative weight of market indices do not totally explain changes in your portfolio returns. But they are hardly uncorrelated either. If the UK proportion has declined from 10% to 6%, then it is highly unlikely that being in a UK index fund would have out-performed being in a global index fund, aside from dividends in any event.

One might now look at the US, whose market cap is currently over 50% of global market cap. If that were to be 25% in a decade's time, would you bet that a US index fund would have performed a global index fund? I'm guessing not.

[mc2fool]

One might now look at the US, whose market cap is currently over 50% of global market cap. If that were to be 25% in a decade's time, would you bet that a US index fund would have performed a global index fund? I'm guessing not.

Maybe, maybe not. It is inevitable that the US % share of global market cap will shrink over time, as other markets grow, but not at all inevitable that the US indices will underperform the world indices (this is not a prediction either way ).

This article from Schroders exactly illustrates the point. It is looking at the changing country weights in the MSCI Emerging Markets Index -- which is, of course, a mkt cap weighted index and so reflects the countries' % share of the total emerging market mkt caps -- between 1998 and 2018.

"...the most striking feature is the colossal rise of China from a weight of just 0.8% [of emerging markets] in 1998 to 31% today. The main driver of this transformation is the addition of Chinese companies to the index; China has performed broadly in line with the MSCI Emerging Markets Index over the past 20 years." https://www.schroders.com/en/insights/e ... -20-years/

So, China's massive increase in the % share of emerging markets has been by accretion, and indeed hasn't resulted in any relative out-performance against emerging markets in totality at all.

BTW, according to DMS in the Credit Suisse Global Investment Returns Yearbook 2018 the US % share of global market cap peaked in the late 60s at some 67%, from eyeballing their evolution of equity markets over time from end-1899 to end-2017 chart on page 8.

Download copy: https://www.credit-suisse.com/media/assets/corporate/docs/about-us/media/media-release/2018/02/giry-summary-2018.pdf
View in browser copy: https://topforeignstocks.com/wp-content/uploads/2018/02/credit-suisse-global-investment-returns-yearbook-2018-en.pdf

[Lootman]

One might now look at the US, whose market cap is currently over 50% of global market cap. If that were to be 25% in a decade's time, would you bet that a US index fund would have performed a global index fund? I'm guessing not.

Maybe, maybe not. It is inevitable that the US % share of global market cap will shrink over time, as other markets grow, but not at all inevitable that the US indices will underperform the world indices (this is not a prediction either way ).

This article from Schroders exactly illustrates the point. It is looking at the changing country weights in the MSCI Emerging Markets Index -- which is, of course, a mkt cap weighted index and so reflects the countries' % share of the total emerging market mkt caps -- between 1998 and 2018.

"...the most striking feature is the colossal rise of China from a weight of just 0.8% [of emerging markets] in 1998 to 31% today. The main driver of this transformation is the addition of Chinese companies to the index; China has performed broadly in line with the MSCI Emerging Markets Index over the past 20 years." https://www.schroders.com/en/insights/e ... -20-years/

So, China's massive increase in the % share of emerging markets has been by accretion, and indeed hasn't resulted in any relative out-performance against emerging markets in totality at all.

BTW, according to DMS in the Credit Suisse Global Investment Returns Yearbook 2018 the US % share of global market cap peaked in the late 60s at some 67%, from eyeballing their evolution of equity markets over time from end-1899 to end-2017 chart on page 8.

Yes, the accretion of emerging markets, and China in particular, has meant that other markets have declined in relative terms. That is mathematically inevitable. So it is entirely possible for a market to do quite well in absolute terms, whilst declining in its global ranking.

As an example the FTSE-100 is currently higher than it was 20 years ago, albeit not by much, whilst its share of global market cap has declined from 10% to 6% as noted earlier. Japan has declined in absolute terms for 30 years so it was a double whammy - its share declined both because of market falls and because of the emergence and accretion of market cap elsewhere.

Even so, where the changes in rankings are large then I'm not sure it can be completely explained away by what you are saying. For instance, in 1999 the S&P 500 varied between about 1,250 and 1,500. Today it is around 3,000. So we know the US market has doubled, ex dividends. Over the same time period, the UK market is only up a sliver - 10% or so. Clearly this divergence in performance would also be reflected in the UK and US's relative rankings. The UK percentage has declined whilst the US has held its own or perhaps inreased (I don't have the numbers for that).

So I'd agree that other factors can drive the moves. I already noted that dividends aren't reflected. There may be movements of listings from one market to another, as you noted previously. And the emergence of new markets skews things too. But in the main, significant changes in ranking, like Japan's from 1989 to 2019, and the UK from 1999 to 2019, will most likely be a reasonable indicator of the relative returns from that market.

Finally I share your view that the current US weighting appears excessive, even if it has been even higher in the past. But there are sound reasons for that, and in fact the US market has also proven to be quite defensive in bad markets (relatively speaking again) as well as being boosted by the USD's strength when times are bad. My global weighting in the US is probably somewhere between 50% and 60%. I do not track it precisely, however.

[mc2fool]

Even so, where the changes in rankings are large then I'm not sure it can be completely explained away by what you are saying.

Well, the changes in ranking of China in the EM index with no difference in relative returns, as shown in the Schroders article referenced earlier, were pretty large by any measure!

But, of course, there's no one factor that can completely explain the matter, and I never claimed any did. What I said was that relative returns can't necessarily be inferred from changes in rankings (or vice-versa).

There are clearly a number of factors, organic growth (returns), accretion and, as you say, dividends etc, that will be at play simultaneously and in varying degrees.

If you'd care to find the necessary data and do an attribution analysis I'm sure readers would be most interested ... please do show your workings.

Failing that, I suspect that between countries with well established markets, e.g. the FTSE Developed World index, that organic growth (returns) would be the major factor, as those have (relatively) little in the way of accretion, and I'd agree that'd be the case for the Japanese boom-bust 30 years ago you're citing.

However, for the global view in more recent times I'm much less sure that's the case and I think that going forward accretion will become the major factor, and the idea that changes in rankings reflect relative returns will become much more unreliable (if it isn't already).

There's some interesting charts at https://seekingalpha.com/article/4205959-3-charts-emerging-vs-developed-market-equity-allocations, where it points out that:

"Though EM economies account for more than 55% of global GDP, EM equities account for less than 15% of world equity market cap." [Sep 2018]

Methinks there's likely to be awful lot of accretion in the coming years!