What can equity investors learn from Ronaldo?

Pick from the world's best

Is your investment portfolio too reliant on one star player?

In some ways, an investment manager is like a football manager – and some managers have more freedom of choice than others.

A manager of a single country portfolio is like a national coach taking a team to the World Cup - the choice is restricted to selecting the players eligible for that country.

Even with the world's biggest and best footballing superstar in one position, they are often forced to fill other positions with players regardless of talent - simply because they are the right nationality.

And in some positions they may have to make-do, or pick players that are past their peak.

On the other hand, a manager of a club like Real Madrid, is free to sign the best players in the world for each position, regardless of nationality. They may already have Ronaldo, but also a star-studded host of ‘Galacticos’ all over the field, with strong competition for places.

At no point are they forced to pick weaker players to fill positions purely on the grounds of nationality.

A global portfolio offers you the same opportunity.

The investment manager has the freedom to select the world's best companies - irrespective of their nationality - and combine these into a diversified portfolio of their best ideas.

And this is an opportunity you can play through Securities Trust of Scotland, the global equity income trust.

But there are more reasons to invest in a global portfolio...

Despite the myriad of options, many UK investors are overexposed to British companies - and this could be adding hidden risks

The hidden risks of home bias

It has never been easier for you to access the global stock markets, especially following the rise of online fund supermarkets and investment platforms in recent years.

Despite the myriad of options, however, many UK investors are overexposed to British companies - and this could be adding hidden risks.

A home bias is perfectly understandable - the familiarity we have with home-grown firms could be one reason, but this adds significant levels of risk and constraints that could be very costly over the long term.

To illustrate, an investor who had invested the current ISA limit of £20,000 five years ago would now be over £9,900 better off if they had invested in global equities as opposed to just UK equities.

Of course, there is absolutely no guarantee that this performance will be replicated in the future.

Source: Martin Currie and Morningstar to 30 November 2017. Bid to bid basis with net income reinvested over the periods shown in £. Index performance figures are sourced from Bloomberg, quoted in £. Fund performance shows total returns and is quoted in £ net of fees, except for indices shown; LIBOR 3-month rate has been used to represent a bank account. Subject to certain limits, the money in your bank account is not at risk, while in this investment trust your capital is at risk. These figures do not include the costs of buying and selling shares in an investment trust. If these were included, performance figures would be reduced.

Source: Martin Currie and Morningstar to 30 November 2017. Bid to bid basis with net income reinvested over the periods shown in £. Index performance figures are sourced from Bloomberg, quoted in £. Fund performance shows total returns and is quoted in £ net of fees, except for indices shown; LIBOR 3-month rate has been used to represent a bank account. Subject to certain limits, the money in your bank account is not at risk, while in this investment trust your capital is at risk. These figures do not include the costs of buying and selling shares in an investment trust. If these were included, performance figures would be reduced.

That said, £9,900 is a significant amount over five years - so what could the reasons be for that outperformance?

Let's look at the reasons that may lie behind this outperformance - and some of the other risks that overexposure to a single market may add.

The concentration of the UK market means income investors could be vulnerable to dividend cuts in the future

Concentration risk can lurk beneath the surface

Single nation markets often lack diversification and the UK market, in particular, suffers from a relatively extreme level of concentration.

Take the FTSE All-Share index in the UK. Over 55% of the companies represented come from just three sectors - financials, consumer goods and oil & gas.

That's a huge concentration risk.

And given the volatility of the oil & gas sector - and the current pressure and uncertainty around commodity prices, this imbalance could result in wide swings in share prices, and therefore the value of UK-centric portfolios.

A global view is particularly important if you are investing for income, like those in retirement.

The UK market is dependent on a tiny number of companies to maintain and grow their dividends.

Believe it or not, just 20 dividend paying stocks in the UK account for a whopping 63% of the total dividends paid by all companies in the FTSE All-Share.

Source: Bloomberg 30 November 2017

Source: Bloomberg 30 November 2017

This compares to a global index - the MSCI All Country World Index (ACWI) for example - which is much more diversified. The top 20 dividend payers account for less than 17%.

Put simply - the UK market has a lot of eggs in very few baskets compared to the global equivalent.

This means that if something goes wrong with just one of those UK giants, it could have an very adverse effect on an investor’s income stream. If several 'fail' - like in 2008 when the banks and many large companies collapsed - it could be catastrophic.

Incredibly, some companies actually borrow money simply to inflate their dividend and pass it straight on to shareholders. This type of behaviour is very risky and usually unsustainable.

This was the predicament facing BP and Royal Dutch Shell, two of the UK’s giants, until just recently. Both pay a large dividend, but the low oil price meant that the level of dividend they were paying was not covered by free cash flows.

Thankfully, this is no longer the case (at time of writing) but another big player, satellite communications company Inmarsat is now in that position - this means that it faces the real prospect of cutting its dividend.

Ouch!

UK specific funds have missed out on the explosive growth in Technology companies

Corporate nationality is less relevant

The world's leading companies are based all around the globe.

By investing globally, you can avoid the risks inherent in single-country exposure, but it also opens up the investible universe and provides access to some of the best companies in the world, regardless of sector or location.

Look at the giants of the technology sector and some of the biggest growth stories in recent times: Apple (US), Facebook (US), Tencent (China), Samsung (Korea) and Alibaba (China) to name just a few !

The unfortunate reality is that not a single one of them is a UK company.

In fact, the sale of ARM holdings to a Japanese company in 2017 means that there are almost no significant technology companies left in the UK.

The result is that the investors who are exclusively in UK funds will have had little chance to access the extraordinary growth of these companies, and their portfolios will have lagged accordingly.

Political surprises and economic bombshells - do you have your eggs in one basket?

All your eggs in on basket is fine until...

The astonishing outperformance of global equities also highlights another limitation of investing purely in one country: political risk.

While nearly every country in the world may have an element of political uncertainty or surprise (President Trump is a case in point), Brexit looks like it could overshadow the UK for years to come.

We still have little sense of what a 'post-Brexit' UK will look like, and this uncertainty has very real consequences for businesses and the economy.

The weak sterling may feed through to high-street prices, with rising inflation fuelling demand for wage increases. The fiscal deficit could deteriorate as the UK economy slows, and there are already many signs of the latter.

While the fall in sterling has been helpful for companies which derive a large portion of their revenues from overseas, Brexit still holds the prospect of seriously worsening the UK’s trade deficit.

Although there are no guarantees, a global portfolio has the widest opportunity set and, if managed wisely, can avoid some of these potential pitfalls.

It has the freedom to invest around the world, and potentially shift allocations away from companies that are facing specific adversities in countries or regions, in favour of those facing more favourable backdrops.

Importantly, even the best fund manager running a UK-only portfolio faces these additional risks and constraints that will all be present - risks that can be mitigated by widening the investment remit, and a global portfolio is the widest of all.

So, with a global remit, you can have Ronaldo - in fact, with a global portfolio you could have a whole team of the world's best!

Introducing Securities Trust of Scotland

The global equity income trust

Securities Trust of Scotland is an investment trust that aims to deliver a rising income and long-term capital growth from a portfolio of global equities.

So, if you are looking for income and growth potential – the best of both worlds – Securities Trust of Scotland may be worthy of consideration.

The company benefits from a global investment remit. This provides the widest opportunity and the freedom to invest in some of the world's best companies, irrespective of location.

Also, the inherent diversification offered by global products means that they are often referred to as 'one stop shop' portfolios and are used as a core holding, supplemented by other niche or regional products.

Led by Portfolio Manager, Mark Whitehead, a global equity income specialist, shareholders can rest assured that every company in the portfolio has been thoroughly researched by a team of skilled investment analysts, and then hand-picked on the basis of their individual characteristics and potential to perform in all market conditions.

It is available for your ISA, SIPP or as a stand alone investment.

There are many ways to find out more about Securities Trust of Scotland. You can visit the website or find out more on our How to invest section.

Past performance is not a guide to future returns.

This information is issued and approved by Martin Currie Investment Management Limited. It does not constitute investment advice or represent an inducement to invest. Market and currency movements may cause the capital value of shares,and the income from them, to fall as well as rise and you may get back less than you invested.

Please note that, as the shares in investment trusts are traded on a stockmarket, the share price will fluctuate in accordance with supply and demand and may not reflect the value of underlying net asset value of the shares.

Depending on market conditions and market sentiment, the spread between purchase and sale price can be wide. As with all stock exchange investments the value of investment trust share purchases will immediately fall by the difference between the buying and selling prices, the bid-offer spread. The value of investments and the income from them may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested.

Investment trusts may borrow money in order to make further investments. This is known as 'gearing' and can enhance shareholder returns in rising markets but, conversely, can reduce them in falling markets.

The majority of charges will be deducted from the capital of the company. This will constrain capital growth of the company in order to maintain the income streams.

The document does not form the basis of, nor should it be relied upon in connection with,any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.

The information contained in this document has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided only incidentally, and any opinions expressed are subject to change without notice.

Martin Currie Investment ManagementLimited, registered in Scotland (no SC066107) Martin Currie Fund Management Limited, registered in Scotland (noSC104896). Registered office: Saltire Court, 20 Castle Terrace, Edinburgh EH12ES. Tel: 0808 100 2125 Fax: 0870 888 3035 www.martincurrie.com. Both companies are authorised and regulated by the Financial Conduct Authority. Please note that calls to the above number may be recorded.