We have a guest post today for you by Sam from Money Nest, in Sam’s own words:

‘Sam Jefferies is the creator of Money Nest, a UK Personal Finance Blog Focused on 20-30yr olds in the UK.’

This subject is an interesting topic to me so it was interesting hearing his thoughts on it, many thanks to Sam for getting in touch with me! I won’t spoil it by letting on any further so please read on and be sure to comment with your own thoughts on it! Over to you, Sam…


I’m going to let you in on a secret. I’m both an investor and British, yet I actively avoid investing in the FTSE, in fact, I’ve gone as far as deliberately exiting funds (and paying the related charges) simply because they invest in the FTSE.

Whatsmore if you read the following, I’m almost sure you’ll take the same approach.

So why so anti-FTSE? well, for the following reasons…

Increase your diversification by reducing home bias

To begin with, it’s worth understanding that we have a natural tendency to want to invest in our national market indices, so if your British you tend to want to invest in the FTSE, whilst our American cousins broadly prefer the S&P 500.

Next, take into consideration you’re pension provider/investment fund provider knows and understands this (they spend A LOT on market research!) so the funds you are naturally funneled into investing in are dominated by investments in UK companies.

The same is true in other countries where US residents, for example, are funneled into investing into primarily US stocks.

Let’s look at an example of this; Scottish Widows (SW) represents one of the biggest workplace pension providers in the UK, primarily they funnel your hard earned cash into four different funds depending on your age (the older you are the less % of equities within the fund), this works great in theory as the funds are aimed at capturing worldwide economic growth and reduce risk as you approach retirement age.

A 29yr old, for example, would have his money auto invested in: ‘Pension Portfolio Two Pension Series 2’ (I know this because I happen to be a 29yr old with a workplace pension in SW! Anyway, enough about me…), let’s take a look at the holdings:

SW - Pension Portfolio Two Pension Series 2

SW Pension Portfolio Two Pension Series 2 – Asset Class Breakdown (via Trustnet)

We can see investments in UK and EU totals up to a whopping 44.62% of the fund. Compare this to the MSCI World Index (market cap weighted stock market index of companies throughout the world) and you’ll find the UK represents a mere 6.64%, 85% less than in the Scottish Widows pension plan:

MSCI World Index - Country Weightings

MSCI World Index – Country Weightings (via MSCI)

So what’s the issue with this? Well, if like me you wish to invest in equities to capture worldwide growth (not just growth in a Brexit looming country), by investing in these auto funds you are both reducing your ability to do this and possibly setting yourself up for reduced future returns…

Why is the FTSE underperforming against the S&P 500?

By living in several countries, I’ve developed an international mindset towards investing, this led me to explore the difference between the FTSE 100 and S&P 500 and to say I was a surprised would be an understatement:

As referenced by the Motley Fool, despite enduring similar economic challenges the FTSE 100 rose just 3% between 2005-2015 (pre and post financial crisis), whilst the S&P 500 boomed 54%.

Furthermore, between 1984-2015 the S&P 500 beat the FTSE 100 by 682% meaning a £1,000 investment would have grown by an additional £6,820.

So why is this? Partly this is due to the S&P 500 having a larger quantity of high growth tech stocks (such as Apple, Amazon and Google etc) which tend to have higher P/E ratios (price divided by earnings) meaning the entire index is priced higher when viewed through a P/E metric.

On the more anecdotal side, I can’t help but feel the higher S&P 500 returns are part due by a more entrepreneurial culture, take for example the hotbed of start-ups that emerge from Silicon Valley incubators such as Y Combinator which continues to attract entrepreneurs from around the world, plus they are not influenced by often heavy European rules and regulations (*cough* GDPR!).

Ok, so now we know the UK doesn’t make up much of the ‘world stock market’ (as represented by MSCI) and underperforms against the S&P 500, what if we want to invest in the FTSE 100 simply because we feel it benefits the nation as a whole since we’re putting our cash to work in homegrown companies rather than US ones?

Royal Britannia – Nationalism in the FTSE

An uncomfortable truth to many UK investors is that the FTSE isn’t terribly nationalistic, take the following statistics:

  • 53.9% of the FTSE 100 is owned by overseas investors (possibly much higher when you take into account unit trust ownership)
  • At least 14 companies in the FTSE 100 are based outside of the UK
  • 71% of the companies based in the FTSE 100 generate their revenues from outside the UK

When you take the above into account alongside the lag behind the US, there is really only one other reason you may prioritise investing in the FTSE:

Tax benefits for investing in the FTSE

One of the unbelievable benefits we have as UK citizens is access to the ISA wrapper, this really is a benefit many of our European cousins could only dream about!

Yet even more surprising is that the investments we can wrap tax-free within this wrapper extend beyond the British borders. Want to invest in South American Commodities in a tax-free wrapper? No problem, go ahead…Japanese equities? Go for it!

This is fantastic for UK investors, yet not so much for the FTSE which gets no benefit for non-UK investments (of course lots of home bias in pension funds makes up for that). If however, this was re-regulated to allow only UK investments to be held within the wrapper, I could see a reason but for now, no tax incentive exists (to my knowledge).

So, in conclusion, I hope I have been able to share my own thoughts with you. As we have explored the UK tends to lag behind the US in performance, offers little to no nationalistic benefits and comes with no golden tax incentives. Meaning passive investors like myself may wish to explore whether they too are overweight in UK holdings.