In defence of home bias – how a more patriotic portfolio could protect your advice business

Question: How will your clients react if, having caught regular snippets about “the stock market” going up, their annual investment statement says they still have less money than they did seven years ago?

This is a plausible future for many advice firms that stems from what seems a rational thing to have done: Removing ‘home bias' from a CIP.

As the name suggests, home bias is the tendency for investors to have more exposure to their own domestic market than some consider rational. It’s a topic that’s been bubbling around in the background for years, but it made headlines in 2023 when it emerged our MPs’ pension scheme had a patriotically modest 1.7% invested in UK-listed companies. Cue cries of ‘shame!’, along with calls to punish them by making them hold more British stocks. My view? Don’t force them: They’re taking a risk that might bite them right in the SIPP, so let karma do its job.

In the lingo, this portfolio set-up is known as the ‘global’ model. This is based on the global stock market, of which 3.5% is currently held in UK stocks. The alternative is called the ‘classic’ model, which has an inbuilt home bias. This can vary, but I’d say ‘standard’ UK exposure within a classic equity bucket is currently about 20% to 28% (and falling).¹

The Evolution of ‘Home Bias’:
Since 2009, mixed asset funds have reduced UK from around 65% to less than 25% of equity exposure

There are plenty of rational reasons for removing home bias, most of which make perfect sense. I’m not getting into them here though. Instead, I’m going to highlight an irrational reason why you may want to review your UK exposure, and – depending on what you find – reconsider it.

This is the problem: For most of your clients, ‘the stock market’ equals ‘The Footsie’ (the UK’s FTSE 100 Index). This is because, in the absence of a widely accepted global index with a catchy nickname (there’s no ‘Worldsie’), it’s the Footsie that gets mentioned on Classic FM’s hourly news (or any other mainstream radio/TV station’s equivalent).

This has never been an issue for you. When the Footsie’s been rising, so have your clients’ portfolios. In fact, given the poor performance of the UK market compared to global markets in recent years, your globally diversified portfolios have probably been rising faster than the Footsie. Pleasant surprises all round.

What could be a problem, is a situation in which the Footsie rises nicely into the black, but the portfolio you’ve given them stays firmly in the red. Is this possible?

Yes. And if history is a guide, it might even be likely.

It last happened 20 years ago in the aftermath of the tech bubble burst. And though it smarted plenty, you – and your clients - probably didn’t feel the full force of it. This was because you were insulated by two things: Firstly, you were home biased up to the gills. And secondly, it’s unlikely that all of your equity exposure was through a global tracker; much of it would have been through active funds (which naturally hold more small and mid-caps). These turned out to be very good things, but much of this insulation has since been removed, so a similar turn of events could prove more painful for British investors.

Setting the scene

Here’s what the last six years of the nineties looked like (I’d show you seven but my data doesn’t go back that far):

For context, here’s how it looked over the last three years of that period (1997 to 2000) - worth knowing as the three-year numbers always have a strong influence on how people feel, and therefore invest, at any given time:

Basically, everything made money. When this happens, the bulk of your clients will be happy enough. Sure, a few were grumbling because you didn’t stick it all in the thing that performed better; in this case, large American tech companies, or because they were paying fees to that active fund manager – Anthony Bolton – only for him to underperform the tracker, but you’ll always have a handful of those.

Here’s what happened over the next seven years:

Pretty much all stock markets lost money over the next three years, so most of your clients got the hump (although note that the previously under-fire active manager didn’t lose money in that bear market). There’s not a great deal you could have done about this – bear markets are bear markets. But seven years into the new century – and this really is the key point – if your clients had been on the ‘global’ model they’d still have been underwater.

You probably got a taster for what this might be like in 2023, when poor bond performance left many clients in the red for three years. Now imagine adding another seven years of that because of what your equities have done.

But for UK clients in the noughties, this was less of a problem. Firstly; most advisers’ portfolios had a massive home bias (I’d finger-in-the-air estimate it was around 60 to 70% on average), and the UK market recovered more quickly.

And secondly; their UK exposure was generally held in active funds (passives were nowhere near as popular as they are today). That active UK exposure tended to be a mix of popular funds, like Anthony Bolton’s Fidelity Special Situations or Lord Voldeford’s Invesco Perpetual Income, which contained small and mid-caps alongside large caps, as well as some boring UK equity income funds and a few small-cap specialists too. A lot of this stuff defended, and then attacked, better than pure UK or global passive exposure did.

All of these things, as the chart above shows, would have resulted in a positive seven-year outcome, while investing purely in the global index, as many do today, would not.

From what I’ve seen, most advisers’ CIPs still have a level of home bias, albeit considerably less than 25 years ago. But I’ve also seen a fair few with home bias eradicated, putting all clients on the global model. It’s these clients I worry about.

The tyranny of logic

To me, the removal of home bias chimes with a trend we’ve seen in our wider society: The logic-driven quest to drive efficiency up and costs down. Take healthcare – it’s hard to accuse British hospitals of being too efficient, but it’s clear the NHS was run on just enough capacity to see us through most ordinary years. And sure enough, that just about worked. But then we hit an extraordinary year like 2020, and things fell apart.

It’s hard to argue that CIPs in the early noughties weren’t messy, inefficient and overly expensive: They simply weren’t logical. In ordinary years, that probably leads to a sub-optimal outcome (albeit not a disastrous one). However, in extraordinary years - like the ones that followed the tech bubble - that inefficient-looking portfolio, filled with accidental diversification, proved more resilient than the global ones that, in 2025, the Spok-like rationalists suggest we all adopt.

Can history repeat?

The question is, can we see a repeat of the post-2000 years? And is it likely?

Well, it’s certainly not a shoo-in – I’m highlighting all this as a risk, not a prediction. But I think there’s enough that rhymes with the tech bubble to suggest a repeat isn’t a crazy thing to consider.

I’ve discussed this before (see previous letters here), so I won’t go deep into it today. But here’s one chart from GMO that certainly looks like 2000 over again: It shows how expensive US mega-caps are versus US small-caps. I’d suggest you could produce charts showing similar trends between US mega-caps and just about anything else on the planet (bar crypto, of course).

You might even suggest, as I’m about to, that things could turn out worse than they did in the noughties.

Why?

Because today’s global market is far more concentrated than it was in 2000. Back then the US made up about half of the global stock market, whereas today it’s around three quarters. And within the US itself, the index is more reliant on its biggest companies, as the chart below shows: On this measure, if there is a pullback in American mega-caps, it could be longer and deeper than the noughties experience.

To summarise: Given their increased concentration, a pullback in US equities could be even steeper than it was in 2000, and it could strike at a time when many British advisers have considerably more exposure to the US built into their portfolios: Double bubble (toil and trouble).

The long short-term

To be clear, I buy the arguments for reducing home bias: I think the old levels were too high. I’m also not blindly patriotic. I’m a proud Brit, but I know we’re just a small island on the edge of a continent that doesn’t much like us. Our long-term prospects are pale compared to those of our American cousins (they have so many advantages over everyone else, us included).

However, the long term never unfolds in a straight line: It’s made up of loads of consecutive short terms, and some of those short terms might see the America-wins trend temporarily reverse. Now, you might think you’re a long-term investor, so forget the short term. But remember, the short term has, in the past, gone on for as long as seven years². Even steel-eyed professionals struggle with looking wrong for seven years, and I’d wager your clients, many of whom base their investment opinions on five-second soundbites from Radio Two, would hate it.

My suggestion, therefore, is to review how concentrated your CIP is to the US, and to US large caps in particular. Many CIP products, be they multi-asset funds, DFMs or MPSs, have been caught in the market’s gravitational pull towards the global model. So you might have more than you think.

Only you can judge if your level is right or not. But forewarned is forearmed, and you might think it prudent to diversify away from the US a little. Much as I prefer using free-range active funds to do this, you could also - oxymoronically - actively switch into passive diversifiers too. Yes; it might dampen your returns if the current trends continue. But if they reverse? I’m sure you’ll be pleased you added a little irrationality back in to your business.

Good luck out there,

Simon Evan-Cook

Fund Manager, Downing Fox

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References

¹ Other allocations are available, particularly if you’re a DIY investor, but these are emerging as the two ‘default’ models. The average UK exposure varies by sector too – the chart shows the 20 to 60% Shares Sector, but in the 40 to 85% equivalent, the UK exposure is a few percent lower (and always has been) - it’s currently 19.9%.

² I have seen data, like the top chart on this webpage, that suggest historical periods of waning American dominance have lasted more than twenty years (which was after the late 60s/early 70s peak in concentration shown above). But I think seven years is long enough for us to grapple with today.

Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice.

Important notice: this document has been prepared for professional investors and has been approved as a financial promotion by Downing LLP (“Downing”). Capital is at risk and investors should note that their investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a reliable indicator of future performance. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street London EC3R 6AF.