≡ Menu

10-year retrospective: UK-dedicated passive investors pay the price of home bias

This post is one of a series looking at returns in the decade after the financial crisis.

The more you tilted towards the UK stock market over the past decade, the more you lagged a globally diversified investor. Not one of our domestic UK funds matched the MSCI World’s 12% return.

Trustnet provides the chart that tells our story1:

UK equity returns 2009 - 2019

Digging deeper, smaller caps outpaced the wider UK market, with iShares MSCI UK Small Cap ETF (cyan line C) on 11% annualised versus its mid cap FTSE 250 cousin (magenta line C) on 10.7%. The large cap dominated FTSE All-Share (orange line E) sloped in with 8.3%. As for the mega cap FTSE 100 fund (dark yellow line F), it brought in just 7.6% annualised.

The results are close between the top two of my selections because holdings in the UK Small Cap ETF overlap significantly with the FTSE 250.

Smaller cap funds earned you at least 2.5% annualised more than the broad UK market over the period, which is significantly more than you’d expect from the small cap premium.

Risk factors can’t always be relied upon to deliver a higher return, of course. The value orientated options disappointed UK focused investors over the past ten years – for instance the high dividend Vanguard UK Equity Income Index fund delivered 7.9% and the Invesco FTSE RAFI UK 100 ETF trailed the pack on 6.7%.

Returns made in Britain

Younger passive investors – or newcomers at any rate – may be bemused to see this quick review of the performance of UK stocks.

True, some model portfolios include an overweight to British equities but this is becoming less fashionable. The trend nowadays is to get all your equity exposure via a single world tracker fund.

It’s worth reflecting though that even ten years ago this thinking – and suitable global tracking products – were far less widespread. A decade ago even The Investor found himself recommending UK-tracking funds as the easiest way for new investors to get started. That wouldn’t be the case today.

Many pundits suggest UK shares are cheap, and that the pound is depressed. They suggest that if and when Brexit is resolved there will be a reversion to the mean.

Maybe, maybe not. Passive investors are best off ignoring such speculation, and sticking to their plan. There’ll surely be plenty of other ways to get your fix of Brexit excitement in the months ahead.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

{ 21 comments… add one }
  • 1 Mr Optimistic October 22, 2019, 10:34 am

    Interesting article. I grew up in the era when the UK was ‘ the sick man of Europe’ and there was much soul searching so I never had a home bias. My view now, and to some extent then, was that UK cultural values and class biases produced poor company management. Still think we are not very good at it.
    However, for completeness, what is curve B ?

  • 2 A October 22, 2019, 1:46 pm

    Question: I’m currently using the Vanguard LifeStrategy 80 fund, which is approx 26% UK based. Do you think it’s worth changing to a different fund to reduce the UK weighting?

  • 3 Neverland October 22, 2019, 1:52 pm

    Investing books and articles advocating passive trackers have been widely available in the UK for at least 25-30 years.

    There were funds retail investors could invest in too. The vehicles were unit trusts with annual charges of about 0.3-75% p.a depending on the market.

    Since they predate the internet all of this history is now invisible.

  • 4 The Investor October 22, 2019, 3:26 pm

    @Neverland — We’re not talking about passive funds not being available. We’re talking about one-shot global trackers.

  • 5 Ben October 22, 2019, 6:48 pm

    The reason the UK has lagged world trackers is that world trackers have been buoyed up by the outperformance of the US. If you strip out the US stocks, the UK isn’t a laggard – it’s on a par with Europe.

    I think investors need to proceed with caution when choosing world trackers right now as they are dominated by the US stockmarket, which is very peaky. Past performance does not guarantee future returns. The UK might actually be a better bet than global trackers as it’s relatively under valued, and it doesn’t expose you to currency risk.

  • 6 Berkshire Pat October 22, 2019, 7:01 pm

    MSCI World not plotted ? Would have been useful to make the point. Also, what is line “B”, and ‘mid cap FTSE 250 cousin (magenta line C)’ should be line “D” ??
    Perhaps I’m just tired after work…

  • 7 The Borderer October 23, 2019, 12:04 am


    A very good point regarding currency risk. Although I generally invest in passive, nevertheless I am ‘active’ in respect of currency – Given the choice I have invested in $ denominated trackers v £ demoninated trackers, taking the long view that the £ will inevitably fall against the world reserve currency.

    I’ve had a very cold bath these last few weeks with the £ rise.

  • 8 Mr Optimistic October 23, 2019, 12:54 am

    No do not go into battle against the FX market.

  • 9 The Borderer October 23, 2019, 1:03 am

    @Mr O
    Wise words.

  • 10 JimJim October 23, 2019, 7:06 am

    “The reason the UK has lagged world trackers is that world trackers have been buoyed up by the outperformance of the US. If you strip out the US stocks, the UK isn’t a laggard – it’s on a par with Europe. ”
    I am in broad agreement with you. I was of the opinion two and a half years ago that the U.S. was expensive, that opinion, as it turned out that was the wrong call. To paraphrase a little, – the market can remain irrational longer than you can remain solvent. – I hold a little U.S through a MSCI world tracker which is a sub 5% portion of my portfolio but remain pitifully light otherwise. A strategy gone wrong or a strategy to protect from the fall of an expensive market? Time will only tell, and only if I stick to my beliefs, which I may or may not depending upon factors yet to play out.
    If we were all sure of the future, investing would be a piece of cake. Who among us would not have settled for a near 11% annualised return from the FTSE 250 if we had known that outcome back in the day?

  • 11 The Investor October 23, 2019, 9:22 am

    I’d agree @TA has rather glossed over currency impacts throughout this series. However he is writing from the perspective of a passive investor who wouldn’t usually dive into such. More esoterically, we might expect the swings and roundabouts of currency moves to even out over the long-term. (For example, a persistently strong USD should/might (over years/decades) impact the earnings of US companies / the US economy).

    Bottom line: I definitely agree and see currency loom in some of the results (“loom large”, if I put my active hat on) but I’m not sure the retrospective would have been improved by discussing currency much, especially if allied to undignified pundit-esque commentary about the whys and wherefores. 😉 (E.g. If one believes particular returns have been ‘boosted’ or ‘depressed’ by some particular currency move, as opposed to a neutral ‘affected’ then one might need to start looking to the period before the 10-year review date commences and take a view on the currency moves up to that date, etc.)

  • 12 Duncurin October 23, 2019, 1:13 pm

    @A. In an interview in the Daily Telegraph in June this year, a Vanguard spokesman said that they would probably reduce the home bias of the LifeStrategy funds “in the not-too-distant future”. One reason they haven’t done so yet is that with Brexit going on they don’t want to be accused of making a tactical decision based on currency.

    Could be a little while before they make that change. 😉

  • 13 A October 23, 2019, 2:16 pm
  • 14 Mr Optimistic October 23, 2019, 3:37 pm

    Going back to the 1980s when I got started with all this ( thank you m&g extra yield or whatever you were), I can’t recall any index funds being available, nor any discussion of passive investment ( which wouldn’t make sense without index funds).
    Standard fees then were 1.5% with a 5% bid offer spread, so we were motivated to look.
    Things are so much better now.

  • 15 ZXSpectrum48k October 23, 2019, 8:15 pm

    Regarding currency movements. GBP has depreciated by around 21% over the last decade against the USD. On a trade-weighted basis (i.e. against a basket of currencies) GBP has hardly depreciated at all. The big depreciation in GBP occurred during the financial crisis and was over by end 2008. It then strengthened between 2009 and 2016, only for Brexit to cause it to weaken again.

    In contrast, if you look at the USD against a basket of major currencies (using the dollar index DXY) it has appreciated by around 29% over the last decade. That appreciation represents the outperformance of the US economy and the fact that the USD is now a “high-yield” currency compared to many G10 peers. It also, however, represents a mean-reversion of the prior decade where the Dollar index depreciated by around 23%. The last decade has been a decade for holding USD assets vs. RoW. The prior decade was the reverse.

  • 16 The Borderer October 23, 2019, 8:59 pm

    So are you suggesting that we may see another mean reversion to ROW in the future?

  • 17 ZXSpectrum48k October 24, 2019, 12:29 am

    @Borderer. I’m not saying anything about the future. I’m pointing out that if we look at the USD against a basket of major other currencies over the past 50 years (so we capture the period since the end of Bretton-Woods), then the USD reached one of it’s weakest levels (sub 75 in the DXY index) in 4Q09. Anyone looking at a 10-year return will be sampling with the USD starting at an extremely weak level.

    The DXY index is currently around 97. Most of the time in the last 50 years it tended to range around 80-100 but it went as high as 120 in the early 70s and 2000s and up to 160 in the mid 80s. So the USD looks strong vs. a 10-15 year back history but it’s had periods when it was a lot stronger than this.

    I’d also point out that in total return terms, in USD, the S&P went precisely nowhere between Oct 1999 and Oct 2009. It was a lost decade for US equity investors. Meanwhile the MSCI EM equity index returned over 200% during that same period. Compare that with the period Oct 2009 to Oct 2019, where the S&P destroyed EM equities.

    So I think there has been an element of mean reversion going on in the S&P and USD in the last decade. They were both coming from “cheap” starting points. It does not follow, however, that either are now “expensive” vs. RoW or that mean-reversion was the only factor involved (FAANG stocks were clearly another major element).

  • 18 Fremantle October 24, 2019, 9:48 am

    Been some juicy changes at Vanguard, fee reductions, expansion of accumulation class ETFs. Be good to see some comment in this week’s reading/update of cheap tracker funds.

  • 19 The Borderer October 24, 2019, 12:17 pm

    @ZXS (17)
    Yes, I see, and thanks for that.

    Nevertheless, I invest in £, I will spend in £, and so my investment pot is measured in £.

    During the period from Mar 1971 (the earliest I can find data for) and to date, the £ has fallen against the $ by some 46%. During the period that I have been ‘seriously’ investing, it’s fallen by some 33%. This fall is obviously do to a plethora of reasons, but it’s real to me. I cannot see any good reason why, over the long term, the trend will not continue, can you?

  • 20 ZXSpectrum48k October 24, 2019, 8:21 pm

    @Borderer. GBP has been devaluing vs. the USD since 1914. GBP/USD was 4.93 in 1914, when the outbreak of WW1 forced the suspension of the gold standard. It sank to 3.66 by the end of the war. The gold standard was readopted in 1925, only for it to be abandoned in 1931 during the Great Depression. Sterling was pegged to the Dollar at 4.03 in 1940 but the cost of WW2 meant this rate was unsustainable, and the currency was devalued to 2.80 in 1949. When Bretton-Woods collapsed in 1971, and the era of free floating fiat currencies was born, GBP/USD continued it’s trend lower. So in nominal terms, you’re absolutely correct. It’s been trending lower at a pace of around 1.25%/annum for 100+ years.

    In real terms (adjusted for inflation differentials), however, the pace has been much slower, at around 0.25%/annum. GBP has been broadly unchanged in real terms since around 1950. It’s just that inflation in the UK tends to run at about 1% more than in the US and over time that is reflected in exchange rates. In much of that period this was compensated for by higher interest rates, but clearly at the moment that is not true.

    As much as I think GBP is currently somewhat undervalued, I do tend toward your view that long-term the trend is probably your friend when it comes to GBP/USD.

  • 21 The Borderer October 24, 2019, 9:12 pm

    Thanks for your response and the effort you put into it.

Leave a Comment