Why Domicile Doesn’t Matter When It Comes To Investing

Is UK Bias important for UK Investors

Regarding investments, UK investors often find themselves in a quandary, irrespective of the tax wrapper they choose. Whether you are reviewing your pensions or investments, the question that looms large is: how much of my equity investment should be directed towards the UK, and how much should be diversified outside the UK?

Is investing more in the UK better, as I am a UK investor?

How Much UK Investment should your Portfolio hold

 When we look at global stock markets, the UK represents about 4% of their value. This means that 96% of the global stock market is outside the UK, offering many opportunities for UK investors. The infographic below illustrates the proportions for each country’s stock market as of the end of 2024.

With the UK representing only 4% of the global stock market, it’s clear that 96% of the market lies beyond the UK’s borders. To put this into perspective, Apple’s market capitalisation is equivalent to the entire UK stock market, underscoring the global scale of investment opportunities.

Should Investors have a UK bias investment philosophy?

One theory is that UK-based investors should hold more than the UK market capitalisation percentage when investing in global stock markets due to local market and currency fluctuations.

Asset allocation remains the primary factor determining portfolio risk and return variability. A groundbreaking 1986 research paper by Gary Brinson revealed that 93.6% of the average return variation in US pension plan portfolios could be attributed to asset allocation, such as how much was invested in stocks, Bonds, cash, etc.

This philosophy reinforces the importance of a consistent, well-thought-out asset allocation strategy. The aim is to give the investor a sense of security and confidence in the investment process and the decisions being made on their behalf.

Multiple subsequent studies have reinforced this finding: Asset allocation drives returns, specific stock selection can have a negative impact, and market timing consistently destroys value.

The crucial asset allocation decision revolves around the split between equity and fixed-income investments. A Financial Adviser will usually ask investors looking for pension or investment advice to complete an attitude to risk questionnaire to establish the client’s risk profile, tolerance, and capacity for loss.

Questions have been raised about the quality of the risk profiling software and the asset allocation outputs. I’ll address this in another post later.

In the UK, there has traditionally been a tendency to concentrate growth portfolio allocations heavily in UK equities, with a smaller portion dedicated to overseas investing and world ex-UK markets.

This is evident in the abundance of UK-only equity funds alongside numerous “world ex-UK” or “international” funds.

This phenomenon isn’t unique to the UK. Many overseas fund managers operate a similar approach to investing in their own country.

Global Companies with Global Revenue

The table below presents the top ten stocks in the MSCI World index, the premier global equity benchmark. While these companies are all US-listed and incorporated, the majority generate, on average, only 50% of their revenue from the US market. In practice, they could be listed in any jurisdiction.

Figures as at June 2025

In the UK, the top ten FTSE 100 companies generate an even bigger percentage from outside the UK.

Figures as at June 2025

The country of listing is not the country of exposure.

While clients naturally gravitate towards investing in familiar domestic markets with recognisable high street names, this home bias has become increasingly irrelevant in today’s global capital markets.

The forces of globalisation mean that companies now have economic exposures far beyond their domicile, providing them with broader diversification of financial drivers. This reaffirms that UK investors should base their investment decisions on global factors rather than domestic biases.

A company’s country of listing or incorporation has become increasingly disconnected from the markets that drive its performance. Having a portfolio concentrated in UK or US stocks does not necessarily mean those respective economies will primarily determine investment outcomes.

Any sense of security that UK investors might derive from investing in “domestic” companies is merely an illusion; global factors fundamentally drive these firms’ performance. This is perfectly exemplified by the valuations of Shell and BP, which surged by 49.5% and 28.4%, respectively, in 2022. Their performance correlated with the increase in global oil prices.

Fundamental differences in listing location

The location of a listing significantly influences currency exposure for investors. UK investors buy foreign stocks and deal with equity risk and changes in exchange rates between the pound and other currencies.

Remember that we’re talking about the country where stocks are listed. When businesses want to raise money through an Initial Public Offering (IPO), they can pick from different exchanges to list their stocks, and this choice has a significant impact in the real world. The decision often hinges on how rigid each exchange’s listing rules are.

Most exchanges are open to foreign companies, which means that where a company is based or where most of its business is based doesn’t hold it back.

However, not all listing choices are identical; exchanges’ rules and expenses differ greatly.

 A notable example is Alibaba, one of the world’s largest e-commerce companies, which, despite being based and conducting most of its business in China, opted for a US listing, raising $25b in 2014. Traditionally, Chinese companies had favoured the Hong Kong Stock Exchange (HKSE). At that time, the New York Stock Exchange offered the advantage of weighted voting rights through different share classes, often preferred by founders seeking to maintain stronger voting control to resist short-term market pressures. The HKSE later modified its requirements.

Exchanges must stay competitive in the lucrative IPO market. In December 2021, the Financial Conduct Authority approved modifications to the rules governing companies listed on the LSE to streamline the process of getting to market at an earlier stage of development. These changes mirrored the previous adjustments regarding dual class structures, including lowering the free float requirement from 25% to 10% and raising the minimum market capitalisation threshold from £700,000 to £30 million.

This demonstrates that a company’s choice of listing location extends beyond mere financial prospects or business considerations.

However, what about the impact of local currency

The location of a listing significantly influences currency exposure for investors. UK investors buying foreign stocks deal with two risks. They handle both equity risk and changes in exchange rates between the pound and the dollar.

Short-term currency movements can often overshadow the underlying investment performance. For instance, while the S&P 500 remained flat in dollar terms over the twelve months to 30th May 2022, UK investors enjoyed a 12.5% return due to sterling’s weakness against the dollar.

How Do Companies Mitigate Currency Risk?

Companies with international exposure actively manage exchange rate risks. Since stock markets react negatively to disappointments in short-term earnings, businesses implement sophisticated hedging strategies. Consider how commodities, predominantly traded in US dollars internationally, create significant currency exposure for companies like BP and Shell. These firms employ complex foreign exchange hedging mechanisms using financial derivatives to help meet their earnings targets.

While stocks typically exhibit greater volatility than currencies, they are the primary driver of global equity portfolio volatility rather than currency exposure. Research shows interesting long-term patterns. Evidence suggests that although foreign currency exposure increases short-term volatility in global equities, hedging this exposure typically reduces returns. This explains why global equity funds generally avoid hedging their sterling positions, as equity investors inherently accept higher volatility levels in pursuit of better returns.

Companies often factor currency exposures into their calculations, with research analysts thoroughly examining company accounts to incorporate these considerations into valuations.

Traditional “country” classifications have become increasingly less relevant for analysing equity markets in today’s interconnected global markets. Often based simply on listing location or incorporation details, these classifications fail to capture companies’ accurate investment profile or behavioural patterns, particularly in overseas investing.

In Conclusion

As many businesses operate globally today, we believe investors should invest in companies offering the best risk versus reward.

Our recommended portfolios focus on market value weightings instead of country-based distributions.

Please get in touch with us if you would like to discuss this in more depth.