Don’t just stay at home, travel the world instead.

VT Tyndall Global Select Fund

Don’t just stay at home, travel the world instead.

One of the many mysteries of investment management is why so many investors default position is to have a heavy weighting of their equity portfolio in their home market as quite often the market leader is domiciled elsewhere. By investing on a global basis, be it through direct equities or through global funds (here the author must declare a self-interest), allows an investor, regardless of their country of residence to have exposure to companies that have better innovation, growth and profitability than can often be found by having a home-bias.

The chart below shows in Sterling terms how the United States, Europe and the UK have performed relative to each other since the fall of the Berlin Wall. As is immediately apparent a UK investor with a preponderance of UK listed companies would not only have significantly underperformed those who put their funds into US listed equities but also, more surprisingly those who placed the majority of their wealth into European equities.

One of the likely reasons as to why the US has outperformed over the past 23 years, can be founds by looking at the percentage of GDP that it has invested in research and development (R&D). Innovation is not only found in Silicon Valley, but the North Americas has been the birthplace of many of the disruptors and technology leaders, embracing digital innovation much more readily across multiple sectors than their peers in Western Europe.

While China is quicky catching up from a low base, most counties have steadily increased their spending on research and development, and the US has overtaken Japan in recent years to be the world leading region by terms of percentage of GDP; in monetary dollars spent it has been the world leader for many more years. Sadly, the UK paints a sorry picture, however much the government may try and proclaim that it is ‘open for business’ and that it will ‘build back better through innovation’, it has only seen a slight reversal of the downward trend in spending as a percentage of GDP and still lags well behind the rest of the major trading blocs.

The picture in Europe is a little opaque as the collective number in rather disingenuous to some of the member nations. It is probably of little surprise that Germany and the Scandinavian counties invest significantly more than the European average in R&D. Elsewhere counties like Switzerland spend a similar percentage to Germany and Austria on R&D and South Korea stands head and shoulders against any of these counties having increased R&D from 3.3% of GDP in 2010 to 4.6% by 2020.

The decline of manufacturing and rise in technology and support services has led to distinct differences in the sector weightings across the regions of the world. Again, technology is the sector with the largest variance between the US, Europe and UK, and is part of the backbone to the argument why the European Union is rapidly drawing up laws to reign in the dominance and power of the US mega-caps over their peers and competitors on the other side of the Atlantic.

There are times, however, when a region that is heavily skewed towards energy and materials will outperform, and thus far 2022 has proved to be such an occasion. At time of writing, the FTSE 100 index has outperformed being up 2.2% (the FTSE UK All-Share index is down 0.5%), compared to the FTSE Eurofirst 300 ex UK index which has fallen by 11.7% and the S&P 500 index has dropped 12.8%.

Despite this huge diversion in performance over a five-month period, we would continue to argue that investing in growth and best-in-breed will outperform over time and that all investors should shy away from being too wedded to specific region, especially if it is owing to a home bias. Global equity funds provide a lower cost way of ensuring diversification than investing directly in overseas listed companies and are not wedded to investing in the entire index like ETFs, thus enabling their managers to avoid entire sectors or investing in companies with unfavourable characteristics should they so choose.

4th May 2022
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This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
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