There is always a temptation to play around with an investment portfolio’s structure, in other words, to attempt to position it for potential short-term global events, such as Brexit.
Irrespective of what might happen in the future, including any of the potential outcomes of Brexit, as investors we can rely on a number of truths: markets work pretty well and are hard to beat, so capturing the market return on offer using lower-cost, well-structured products makes good sense; spreading our assets broadly to ensure the risks we face are well-diversified will always sit at the core of a successful long-term strategy; balancing out the risks of shares by owning high quality, short-term bonds provides a good insurance policy; being patient and being disciplined are fundamental to achieving the returns we need to fulfil our lifestyle and financial goals.
As we are faced with short-term uncertainty, and possible anxiety, over Brexit, let’s focus in on diversification. There are many ways in which an investor can be diversified, however, owning a portfolio that includes many thousands of companies, all market sectors, spread across developed and emerging economies, reduces the risk of being caught out by material negative impacts in specific markets, such as the UK. In the UK a few names dominate; the top 10 shares represent more than 35% of the total UK market and the largest, HSBC, weighs in at 5.3% of the broad UK market.
A market-capitalisation weight to shares across all developed and emerging markets shows a very different, well-diversified picture. The largest listed company in the world is Microsoft at 2.2% of the market. It is worth noting that Microsoft’s market capitalisation is over US$1 trillion, compared to HSBC’s US$150 billion. In a global market capitalisation weighted portfolio, HSBC’s weighting is greatly reduced to under 0.5%. It is astute for investors’ portfolios to hold material allocations to non-UK shares and the majority of companies that this represents.
Sector diversification also makes good sense. Owning a material allocation of global shares ensures that sector exposures are diversified. The UK has some large sector allocation differences compared to the world as a whole; in particular it has no major technology companies like Microsoft, Amazon and Google, despite technology shares representing around 15% of global equity markets. UK exposure to technology shares is less than 3%. The UK is also materially overweight in the energy and basic material sectors.
If you are a client of Wells Gibson, you will have an investment portfolio which is as well-positioned as it can be to weather Brexit uncertainty and whatever lies ahead. As a member of the Evidence-Based Investment Solutions group, our recent Investment Committee Meeting in September concluded that, of the thousands of funds available to UK investors, the funds our clients are currently invested in, are all excellently managed and represent some of the best available to give our clients exposure to global asset classes such as short-dated bonds; commercial property; and developed market and emerging market company shares.
Brexit and the political chaos that we see before us, combined with the polarisation of politics between quasi-Marxist policies on the left and populist rhetoric on the right is unsettling for all. We are where we are, unfortunately, whatever one’s Brexit views or political persuasion.
Please don’t hesitate to get in contact if you have any questions.