International diversification: a globally diversified portfolio

With so many areas around the world to invest in, the key is finding the right mix for your portfolio. International diversification lets you balance the potential benefits and risks of various areas, whether you’re investing for income or growth.

It can be comforting when investing to gravitate to the familiar. However, there can be real advantages to looking across the globe for investment ideas. Each country’s stock market has its own individual flavour and looking beyond your home market can bring new opportunities for capital growth and income. It can also help with risk diversification.

The UK’s flagship FTSE 100 index is dominated by large global banks such as HSBC and energy giants like Shell, alongside healthcare groups including AstraZeneca and consumer giants Unilever and Diageo. Together these five companies make up just under one-third of the index. 

They also share a certain investment profile as mature businesses with multiple business lines that tend to pay reliable dividends. Growth may be stodgy but returns tend to be reliable.

The US S&P 500, by contrast, has its largest weights in Apple, Microsoft, Amazon, Alphabet (owner of Google) and Tesla. It is around 28% invested in the information technology sector.

It’s also worth noting that Amazon and Tesla count as consumer discretionary stocks (entertainment or leisure for example) rather than technology.These companies have a very different investment profile, tending to be fast-growing and not paying dividends.

Neither market is right or wrong, but they will perform differently in specific market conditions. The technology sector can be vulnerable in an environment of rising interest rates, while the UK market can lag at times when investors have an appetite for faster growing sectors. Either can be affected by specific events. Brexit, for example, held back the UK market, as international asset allocators adopted a ‘wait and see’ approach to the final deal.

China, for example, looks set to become the world’s largest economy by 2030. It is home to some of the world’s most innovative technology companies and is also a leader in green energy. Many emerging markets will have a growing middle-class and dynamic consumer sector. These bring exciting opportunities for investors willing to take the risk. 

In the UK, income tends to come from a handful of sectors. The vulnerability of this approach has been shown multiple times: the banking sector weakness in the wake of the Global Financial Crisis, for example or the problems of BP after the Macondo oil spill disaster. More recently, UK dividends proved particularly vulnerable in the pandemic, dropping more than 40% in 2020. Looking globally for income can offer investors greater resilience. In 2020, dividends in the US actually rose by 2.8% year on year. In emerging markets, they only dropped by 5.5%, far less than Europe (32%) or the UK. In the fourth quarter of 2021, emerging market dividends rose 48.6%, while Europe ex UK rose 88.3%. In other words, dividends can bounce around. It’s worth making sure you build global diversification into your investing approach. 

While the US, Europe and much of Asia have similar governance standards to the UK, other countries may not have the same disclosure requirements and structures in place. Equally, it can leave investors vulnerable to unexpected shocks, such as Russia invading Ukraine. While Russia forms only a tiny part of the MSCI Emerging Market index, its weakness has had an impact on the wider emerging market complex.

However, as Brexit made clear, these shocks are not confined to other countries and it is often difficult to predict where and how they will materialise. A globally diversified portfolio can help lessen the impact of these shocks. This type of risk diversification - spreading your portfolio across a wide range of countries and sectors – can lead to greater resilience over the longer term.

A diversified actively managed global fund is one option. An investment trust can be a good place to start, such as those found in the AIC Global Growth sector. Alternatively, there are index options, such as the MSCI World, though these will tend to have very high weightings in the US. The Global Equity Income sector will have a range of options for those who want an income from their investments.

All these options are available on the Fineco platform, where you can upgrade to serious investing. 

Fineco’s broad investment range means you can invest globally, directly in more than 20 local currencies with the true exchange rate.