Investors across the globe are grappling with a range of challenges, from the Covid-19 rebuild and ongoing threats of further outbreaks and lockdowns, to record levels of fiscal and monetary stimulus driving down yields and rates. 
Looking at the global landscape in 2021, several similar portfolio trends and themes are present regardless of where in the world investors are based. Focusing on the UK IFA market in the coming year, there are four key considerations for investors which should not be ignored as they have the potential to improve the efficiency and returns of portfolios.
UK equity home bias
It is a universal phenomenon to have a myopic focus on your immediate surroundings. Unsurprisingly, UK investors love their local equities. Although UK equities are only 3 per cent of the market capitalisation of global equities (measured by MSCI All Country World), our proprietary database of UK IFA portfolios shows the average weight to UK equities is 27 per cent. However, too much local loyalty can work against one’s long-term portfolio goals.
In isolation, a significant bias to UK equities can result in a drastic discrepancy in Sharpe ratio versus the rest of the world, especially the US. The US has a notably higher exposure to the technology sector which has outperformed the rest of the market year to date. A concentration in cyclical sectors, such as energy, coupled with an overweight to financials and the prolonged uncertainty around Brexit, led to an underperformance of UK equities and less confidence in the economic growth of the UK market.
Secondly, in the context of a broader portfolio over the prior five years, accounting for cross-correlations with the rest of the portfolio, UK equities have tended to contribute the most portfolio risk relative to portfolio return compared to other regions.
We believe the answer to home bias is not as simple as an “optimisation” that would be undigestible to many investors because it would often cut out 20 per cent or more of most portfolio’s UK equity weight. Investors should take a global perspective while at the same time not taking on “maverick risk” and veering too far from the peer investor UK equity weights.
Global equity that isn’t globalising
While UK investors continue to tilt their portfolios towards their home market, global strategies are popular as a balancing mechanism: within our UK client portfolios, we see an average weight of 18 per cent in global equity funds over the first half of 2020.
By adding global exposure to portfolios, clients can broaden diversification and lower the idiosyncratic risk of a single country. Therefore, we must look behind the curtain of global equity funds to see if they are indeed globally diversifying. In some portfolios, the allocation to the UK markets in global equities portfolios can be significantly larger than the UK’s global market capitalisation weight.
Global equity funds have very limited ability to truly balance a concentrated portfolio: once you cut through the actual holdings in a global equity allocation, the overall portfolio actually can often have a higher UK equity weight than the already high starting point investors are aware of.
The excess risk hidden in allocation funds
Multi-asset allocation strategies have an average portfolio weighting of 8 per cent in UK investor portfolios – larger than the average weighting to US or emerging markets equities. The myriad advantages to using multi-asset allocation strategies within a portfolio – diversification, outsourcing timing decisions – must be balanced against their opaque nature and, occasionally, the addition of unintended risks.
The ubiquity of these strategies in the UK, combined with their potential to invest across the entire risk spectrum, from low-risk sovereign bonds up to high-risk emerging equities, means that a “moderate” portfolio overly reliant on “moderate allocation” strategies might often be unpleasantly surprised by large pockets of hidden risk.
Not only can occasional spikes in certain risky asset classes cause unwelcome surprises in the broader portfolio, but different allocation funds within the same category tend to show certain biases in different directions, leading to a wide variety of potential results.
Undiversified fixed income
Since the global financial crisis, traditional lines in fixed income investing have been blurred by low rates, large price swings, high duration risks and a proliferation of new strategies. There has been too much focus on finding a single fixed income solution when the best solution is probably a mix, dependent on an investor’s goals.
Even in the face of today’s low-rate environment, core fixed income’s role is as essential as ever: core bond allocations are strategic, intended for capital preservation during a crisis. However, the post-Covid environment will require that forward-looking investors pursue a new level of due diligence across multiple destinations of capital within their fixed income allocation.
Adam Hetts is global head of portfolio construction & strategy at Janus Henderson Investors and Sabrina Geppert is a senior portfolio strategist. The views expressed above are their own and should not be taken as investment advice.