International Diversification from a UK Perspective

Apr 1, 2009

The market turmoil of 2008 highlighted the importance of risk management to investors in the UK and worldwide. Realized risk levels and risk forecasts from the Barra Europe Equity Model (EUE2L) are both currently at the highest level for the last two decades. We explore the historical diversification effects of an international allocation for UK investors. We illustrate that investing only in the UK market can be considered an active deviation from a global benchmark. A UK domestic strategy has high concentration, leading to high asset-specific risk, and significant style and industry tilts. We show that an international allocation resulted in higher returns and lower risk for a UK investor in the last one, three, five, and ten years. In GBP terms, the MSCI All Country World Investable Market Index (ACWI IMI) — a global index that could be viewed as a proxy for a global portfolio — achieved higher return and lower risk compared to the MSCI UK Index during these periods. The decreases in risk represented by allocations to MSCI ACWI IMI were robust based on four different measures of portfolio risk.