What caught my eye this week.
Every time a US financial pundit talks about the long bull market or sky-high equity valuations, remind yourself they’re almost invariably talking about US shares.
The US comprises roughly three-fifths of the global equity market by value. Handy for North American home bias fans.
And of course the global tracker funds that passive investors are well advised to use will therefore be very exposed to the US market, too.
Finally, where the US leads, others tend to follow – directionally if not in lockstep.
So the dearness or otherwise of US shares matters.
Still, it’s interesting to compare Uncle Sam’s rip-roaring equity-ganza with our own domestic damp squib.
US versus UK shares in terms of returns
The latest edition of the Barclays Equity Gilt Study summarizes returns from the US and UK markets in its usual tables.
Here’s the returns from US assets:
Click to enlarge the US returns
And here’s the returns from the UK:
Click to pump up Britannia
Over the past 20 years US shares have delivered real returns of 5.5%. That compares to just 1.7% for their UK counterparts.
And in the last year covered, US shares clocked up over 19% in gains.
Whereas UK shares delivered worse than 10% in negative returns.
The old switcheroo
If you wonder why US shares are all the rage after seeing these numbers, you need a new hobby.
And if you don’t appreciate at a glance why the tech-heavy US index pulled ahead during a stay-at-home pandemic, you’ve got some reading to do.
However I believe it’d be a huge mistake – as so many seem to do – to think US shares will continue to outperform anything like so heavily, for decades to come, while the UK market slides into irrelevance.
These things have a habit of correcting themselves. I expect over a very long period US shares will still put up higher returns – for various structural reasons – but I’d be surprised if the UK doesn’t have the edge over the next 20 years.
Unfortunately, that’s a hunch, not a scientific fact. Over the long-term starting valuations matter, but they don’t explain all of subsequent returns.
And in the short run, anything could happen.
Still, if you’re one of the vanishing breed of stock pickers who hunts your quarry on the London Stock Exchange, you might breathe a little easier.
Also if I was a passive investor in the Vanguard UK LifeStrategy funds that slightly overweight UK equities, I’d not lose a moment of sleep over it.
If there was ever a time to be a mildly (tilted, never all-in or all-out) nationalistic UK investor, it would seem to be now.
Have a great long weekend everyone!
From Monevator
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News
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FCA to ban car and home insurance ‘loyalty penalty’ in January – Which
Value of UK house sales to leap 46% this year as boom continues – Guardian
Axing ground rents on new build properties a step closer – ThisIsMoney
Hedge funds surpass $4 trillion in assets – Institutional Investor
Sandwell Bitcoin mine found stealing electricity – BBC
Members club Soho House gives leg up to entrepreneurs – ThisIsMoney
What are the odds? – Indeedably
Products and services
Premium bond plutocrats: 50% held by 4.3% of savers – ThisIsMoney
Nationwide launches £1m draw for all customers – Your Money
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
New flexible train tickets to go on sale from 21 June – Which
Meet the man who decides which town gets an ATM – ThisIsMoney
Homes for sale near docks, in pictures – Guardian
Comment and opinion
The future of UK inheritance tax [Search result] – FT
Am I old or am I onto something? – Klement on Investing
Staying wealthy – Humble Dollar
Four lessons from the crypto crash – A Wealth of Common Sense
How to do long-term – Morgan Housel
Getting to your first one million – Banker on FIRE
Teeth are deeply socially divisive – Guardian
This couple retired in their 30s – CNBC
Tempo – Enso Finance
I’m retired and I don’t want to travel [Few weeks old] – via Medium
Value and momentum factors: combine or separate? [Nerdy] – Alpha Architect
US market valuations mini-special, again
Low interest rates don’t justify today’s high [US] valuations – Compound Advisers
Talking bubbles with Jeremy Grantham [Search result] – FT
Don’t count on another roaring ’20s stock market… – Bloomberg
…still, the odds favour equities over bonds – Morningstar
Naughty corner: Active antics
ARK and the downsides [for active funds] of an ETF structure – Validea
How I misapplied my trader mindset to investing – Party at the Moontower
Portfolio construction in venture capital – Factor Research
Calculating a buy and sell price for Dunelm – UK Value Investor
Bill Ackman’s SPAC deal remains elusive – Institutional Investor
Covid corner
Scientists claim to have solved vaccine blood clot puzzle [Search result] – FT
Johnson & Johnson single-shot vaccine approved for the UK – Guardian
Glasgow: the City that has been locked down for nine months – BBC
Wuhan lab staff sought hospital care before Covid-19 outbreak disclosed – Reuters
Expert who helped change No 10 Covid policy in first wave warns over risk of easing – Guardian
Kindle book bargains
Lab Rats: Why Modern Work Makes People Miserable by Dan Lyons – £0.99 on Kindle
The Unexpected Joy of Being Sober: Discovering a happy, healthy, wealthy alcohol-free life by Catherine Gray – £0.99 on Kindle
What It Takes: Lessons in the Pursuit of Excellence by Stephen Schwarzman – £0.99 on Kindle
The Future Is Faster Than You Think by Peter Diamandis and Steven Kotler – £0.99 on Kindle
Environmental factors
Clean energy stocks are as crowded as tech before dotcom crash, says MSCI [Search result] – FT
Bitcoin and the planet: has anything changed? – WisdomTree
The Dutch people versus Royal Dutch Shell – DIY Investor
Off our beat
Data centres, crypto miners, and gamers are all competing for semiconductors [Podcast] – OddLots
How to age without apology or regret – Roger Reid via Medium
Don’t let employees pick their working from home days – Harvard Business Review
And finally…
“Don’t look for the needle in the haystack. Just buy the haystack!”
– John C. Bogle, The Little Book of Common Sense Investing
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“Premium bond plutocrats”
With premium bonds you should either put in the minimum for a refundable lottery ticket or tens of thousands for statistically reliable wins that approach the advertised interest rate. I’m glad relatively few people are trying to hold intermediate amounts that will do nothing for them.
Yup. The FTSE 100 appears to be filled with yesterday’s companies not tomorrow’s companies whilst the FTSE 250 seems to be being acquired by private equity (I believe it’s five in the last couple of weeks). And yet I am overweight through life strategy as one of my holdings that feeds to the active itch to tinker without likely causing too much overall harm. My only slight quibble is where you write slightly overweight, LS100 is 25% in the UK and market weighting is about 3.5% so that’s a material difference I would say. But I’m quibbling, it’s a great article. I bet there’s a decent chance. relatively speaking UK outperforms the US over the next decade due to valuations. But I’ve not got a clue.
p.s. the cnbc couple who retired early should change their informercial website to I’veluckedoutwithpositivesequenceofreturns.com!
To be honest we call to many things “tech” – it’s almost like calling television and the combustion engine “technology”. At most many of them simply use tech as infrastructure.
Facebook – marketing company
Amazon – retail
Apple – some sort of fruit company (to quote Forrest gump)
Netflix – entertainment
Microsoft – ok maybe that’s tech
Google – marketing
Also US/UK is international exposure in itself. I would not want to choose.
@seeking fire – I understand vls20-80, which is where lifestrategy shines, but vls100 is marginally done better imho by the global all cap. That said I wouldn’t be out of the market trying to correct it.
@Matthew – Innovation is at the forefront of the ‘tech’ companies you listed and they are tech companies engaging with digital, machine learning, AI, data science, amongst many other areas too vast to list and backed up by extensive patent portfolios. IMO they’re driving the modern trend towards digital revolutionising the world we will live in…Innovators.
My Lisa is all VLS100 and home bias was on my mind reading this article. Glad to read the last part sounds like we’ve got some catching up to do!
Probably my (and many others) biggest financial mistake has been investing in UK stocks.
Lured by high yields in the likes of BP, BAT, BAE and the FTSE in general, it’s led to long term comparative losses when compared to US stocks.
And the difference between 5.5% and 1.7% over a decade or more compounds into the difference between middle age financial comfort and sitting with almost as much as you started with.
Amazon – Retail – Yes, but only about half of its revenue. Don’t be fooled just because that’s the bit you see. It’s AWS cloud division contributes most profits and is growing rapidly, as is it’s advertising arm.
Ahem – Dunelm, not DuneElm!
@Matthew (3) Somewhere along the way we dropped the ‘new’ from ‘New Technology’. Television and combustion engines are technology, possibly more so than the modern tech companies. Amazon AWS is technology, even if Amazon the retailer is just using technology.
Similarly bits of Alphabet are real new technology, even if the search/marketing engine is just using tech.
During the 31 years I have been investing I can’t really remember a time when US markets were not expensive compared to UK ones. As for the 250 it is small cap by US standards. There is a ruthless implacability about the US economic system that is much more dynamic than what I have experienced in the UK.
During my long travel through investing firstly via the opaque world of insurance companies,then investment trusts etc to index trackers I began to realise the place of the US in investing
I decided I wanted to share in this outstanding performance-in equities and therefore logically in bonds also
Changed and widened my investment outlook
World index trackers did the job for me so far…….
The US underpins the free world-it would be good for us all if it continues to outperform as seems to be doing
“Don’t bet against America “still seems to be a viable investment strategy for the foreseeable
“It’s different this time “ not cutting it at the moment
xxd09
I’ve tried, really tried, to give the UK indexes a chance, but over 12 yrs of underperformance and the comparative explosion of my ex UK (LGITI) holding has left me completely cold. The odd punt aside, I’m sticking to VWRL for now.
re. PE, as an interested insider I can tell you that there’s a lot of dry powder and the mythical days of PE having a Midas touch are largely over. There are as many dud GP vehicles as there are winners.
Now a big fan of Morgan Housel. Her explanation of what makes playing the long term game difficult for most is very persuasive. I did wonder before, why, despite unanimity that sitting tight is the best strategy in the markets, was it so difficult an approach for many to follow.
It’s hard with US equities and, mostly specifically, tech stocks. That’s because while I can argue they are overvalued, it’s harder to argue something like the UK is undervalued. Instead I come to the conclusion that if the US is overvalued, everything is overvalued, so I just need to get out of equities full-stop.
But govt bonds are overvalued. Corporate bonds are bonkers overvalued. Property prices are 75-80% due to long-duration bonds yields, so, by corollary, are overvalued. Cash is at negative real yield and I don’t want a sizeable position in cryptocrap.
That’s the problem. If you decide you don’t like US Treasury bonds and you don’t like the S&P/NASDAQ, I think you’ve sort of decided that you don’t like conventional assets.
So I’ve added nearly 100% to alts. But, as TI has put in another link, they are seeing big inflows and you should always buy alts on outflows, never inflows. Yes, the funds I own are closed, so they are not growing per se, but more industry AUM = more competition = less opportunity.
I just find it very hard to feel good about the next two decades of returns but you’ve got to invest in something or perhaps of bit of everything. So yes, I even own some UK equities here. Desperate times means desperate measures.
“mildly tilted” – I love it when you talk active @TI 😉
@ZXSpectrum48k – yes the total allocations to alts / closed ended funds is being driven by the search for yields. Your experience is a microcosm of what the large LP allocators (pensions, insurance firms, SWFs) have been doing over the last 5yrs. With too much money chasing too few opportunities most funds can’t deploy capital fast enough, you end up with asset inflation as the few good transactions get bid up massively. For some funds (Infra, priv debt) you also have massive cash drag and managers resort to juicing returns with risk-on derivatives or leverage. I’d say that the headline PE performance numbers now are overstated by 5-10% and real returns are in the single digits. Not great, but what else is there…
Equities could potentially go from being expensive to cheap without capital loss, by increasing their *not fixed* income.
When we consider how much allocation we have to US Vs UK, remember the relative population and economic sizes of these countries too – the UK is like a large US state (financially but not geographically).
It is entirely plausible that a US with lots of momentum behind it pretty much becomes a bigger proxy for the world economy itself, and that it has the money to grow, it has consumers who can spend.
Tech does indeed innovate, I suppose the definition of new tech is innovation in itself, although you can have far more boring forms of innovation elsewhere. Also we might see some kind of 3d houseprinting in the future represented among theml, maybe even sewage related tech.
You can see though how categorising can get difficult and one day the “new tech” label might fade
A company like Tesla – tech / motor?
Renewable energy – tech / energy
Crypto marketplaces – tech / financial?
Mobile phones – tech /infrastructure
Etc.
Timely blog for me – thanks for the reassurance for my future investment plans. Thanks.
Are the ruminations about the US v the UK equity markets and the Kindle book recommendation on giving up alcohol connected?
I would love to invest my pension into UK companies however I would be working to 67 if I had. Pension wealth and UK nationalism do not go together if you want to FIRE at anytime before your state pension age.
This might sound harsh however to me those that do well investing in FT100 stocks are the grossly over paid CEO’s and UK equity fund managers. Funny thing is the darling of the FT 100 is Scottish Mortgage who are an investment vehicle that invest in the likes of Tesla.
Thatcherism was taken to the extreme over the last 30 years and anything of any value was sold off by the city. World leading companies such as ARM were plundered and with consecutive governments having no industrial strategy we are left with an FT100 that only marginally performs above the inflation rate.
The Americans have a desire to generate a succession of world class and scale able businesses such as Amazon, Netflix, Visa, MasterCard etc. We end up with the likes of Marks and Spencers which is a business Brits obsess about. In 30 years they missed the mail order advances of Next and the Next Catalogue. They then refused to accept credit cards. Failed to development a successful e-commerce business and failed to capitalise on a switch to move with the times to be coming more food orientated and doing home deliveries. With every change and threat they did not embrace it but just insisted they were M and S. So in 2021 their strategy is to close shops! M and S are no different to most in the comfortable and lazy FT100 and are now facing an existential threats.
There is finally the other elephant in the room which is the two trillion national debt as we as a country have no idea of how we can pay this back. Holding global stocks means you are hedged against the inevitable rise of UK inflation. Somebody once said to me about buying shares in the company I worked at you do not want to be on the Titanic and also own it.
I am sorry if this sounds negative and unpatriotic however where was the patriotism when Chobham, Cadbury’s and GKN were assets stripped and the City make a quick buck.
Reading these comments has left me a bit panicky. The vast majority of mine and my wife’s investments are in VLS 80, and I’ve wondered for some time if this fund is performing as well as the ones touted on US based sites, such as MMM and bogleheads…
Found this which I found interesting, that there hasn’t always been an inverse correlation between yields and valuations in bonds:
https://compoundadvisors.com/2021/do-low-interest-rates-justify-high-valuations
@Dave – well with a controlled home bias like in VLS there may be a few years where the UK might do worse, but over many years it probably wont notice. I think the home bias probably gives you some minor degree less of currency risk, bearing in mind how you could’ve easily have selected more bonds anyway. You could consider that maybe you can take on slightly more equity exposure in VLS because you’d have slightly less currency risk, although that’s shaky reasoning.
I wouldn’t worry about it and wouldn’t sell up to change it because being out of the market could hurt you more, just make future purchases totally reflective of the market, if you can be bothered (there’s a lot to be said for the convenience, auto rebalancing and low cost, and VLS keeps stricter to its target allocations than some of the others).
Matthew, thanks for taking the time to reply. When you say to make future purchases totally reflective of the market, what fund would you suggest, if any?
Dave, no need to panic, VLS is basically sound. It may or may not be optimal but it is sound. The time to panic is when you’ve got the bulk of your wealth in something unsound.
@Dave – I was thinking 2 funds – vanguard global all cap + vanguard total bond market fund, rebalancing yourself, therefore being able to keep using vanguard’s platform if you are – but maybe auto rebalancing inside VLS is quicker and more fruitful for rebalancing bonuses than trying to do it ourselves, as well as easier, so to be honest, I wouldn’t do it myself.
According to:
https://monevator.com/passive-fund-of-funds-the-rivals/
Your only stable alternative is fidelity, which means not using vanguard’s platform, probably again not worth the cost.
Perfection is the enemy of good, you will do well.
To my woe I have been overweight in U.K. for ever. I agree that choosing anywhere to put money at the moment is a risk however we still need to park it somewhere and even stashed in a mattress has more than a few risks. I am weighted towards the 250 in my U.K. holdings and, according to a quick google, The 250 index returned an average annual return including dividends of 8.77% between March 2005 and April 2021 so I can’t complain too much. My much smaller holdings in the 100 have not been as sparkling. As for valuations (and I love John’s CAPE articles, I wait for them every year.) I ask myself why they have not risen higher with the ever increasing CAPE valuations of the American markets, as we tend to follow both on the way up and then on the way down. I take the point that Crypto could be the emperor’s new clothes and that the likes of some (not all) of the constituents of the FTSE100 are the emperor’s shabby slippers that have served him well for the last century so hard for some to give up (but this must be priced in due to efficiency of the markets?). I also wonder if the innovation in the U.K. markets is not mainly in the 250 and it actually deserves it’s slightly higher than average CAPE. My next buy will be more diversification – probably-, but I am human and could change my mind with one convincing argument at any time. The more I apply rational thought to movements in markets the more I realise that it is not rational to do so.
JimJim
@Dave
I would echo what others have said about not worrying too much about being in VLS80. However, if you want to gradually reduce your home bias, one option might be to put some future investments into Vanguard’s Developed World ex UK fund. It is cheaper, which is also nice. It’s what I have done as a “fix” and I think my UK exposure is now about 10% rather than the 25% or so in VLS. It does mean, as others have also said, that you lose some of the benefits of auto-balancing, and it does feel a bit like neither fish nor fowl at times. I keep reminding myself it’s all passive diversified global funds and therefore basically sound!
@Dave – You’d do much better to focus on TI’s actual article, rather than some of the comments which, to put it politely, amount to naive performance-chasing.
How people can blindly overweight (or frankly, market-weight) US equities at a CAPE of 37 is beyond me. Valuations certainly don’t explain everything as TI says, but they explain more at the extremes, and the US is at an extreme right now.
To ZX’s point, there isn’t much that is obviously undervalued, but there are equity markets that seem at least fairly valued – the UK, Spain, HK, Singapore to mention a few developed markets; some emerging markets look reasonable or cheap though with varying degrees of extra risk. It’s perfectly possible to stay fully invested in globally diversified equities at reasonable valuations, though it isn’t as simple as just buying VWRL.
I’m not sure we can say that the US is necessarily more expensive because their tax system is different, so they reward shareholders more through capital gains than dividends. We have more of a dividend culture (as well as cash cows which are debted up to be milked which are more towards value by nature).
Very interesting blog and comments. My own experience was that my portfolio was skewed towards FTSE 100/250/AIM with a chunk of safe US . In the last 3 years have moved very skewed towards US with both FAAMG and high level of Tech and IPOs. 2020 was crazy with 80% + uplift in US and my stakes in UK Trusts which were all Global went very well i.e. SMT.L etc. So do I think UK will have the edge for next 20 years? – regrettably No because UK investors just want the money and then run i.e. ARM. There are very high spreads in the UK market so it is hard to get reasonable prices and worst of all fewer new IPOs and Placings. Private Equity Funds are the order of the day in buying up new businesses. So overall I am pessimistic on UK market going forward. The US market in contrast is vast and expanding by the day even though many will go bust eventually. There are lots of sources of info on the US market stocks now unlike 5 years ago so my view is that I will keep fishing in that pond.
Dave-I arrived at Global Equities Index Tracker Fund and Global Bond Index Fund hedged to the Pound before the Life Strategy and Target Funds appeared
I did think about changing from 2 funds to one fund only for simplicity’s sake especially as I am getting older but the U.K. bias stopped me-have to do my own rebalancing-not onerous because in Accumulation phase this is achieved by your new investment money( same system operates in reverse with Withdrawals)
I would not worry to much as other posters have said-you are invested in good vehicles
You are just acquiring more investment knowledge with all that that entails!
xxd09
Likewise in deaccumulation you can rebalance by what you sell too.
If your portfolio got too big for that to work I’d wonder what someone’s spending plan is
Equity is one thing, but I’d personally be interested in UK vs US returns on property.
The returns on UK property over the last 20 years have been staggering.
Personally property leaves me cold as as a savings vehicle
A property is a necessity (like a car for rural dwellers) -to keep you out of the rain and therein create a home and raise your family
I bought a small house that I could heat and maintain
I didn’t build a house for a car-ie garage
Property is illiquid and unusable -you cannot sell the bathroom or a bedroom to raise some cash!
I then put all money in savings as much as I could
Property is like teaching-everyone has a house so “understands” property as does everyone who has a child “knows” about teaching -mostly they don’t!
However I do notice that one of my better off children looking for somewhere to stash the extra cash having used up pensions and ISAs has property investments-that I understand
I hope it works -tenants are something else!
xxd09
@xxd09
I don’t know how anybody in the UK can frame buying property as anything but a mandatory part of retirement planning.
I pay 40% of my take home salary in rent for a 2 bedroom flat, after already sacrificing 25% of my gross salary in to my pension.
When I retire in 25 years I hope to have ~12x my gross salary in my pension pot (based on 5% annual growth). At a safe withdrawal rate of 3% that will give me 36% of my current gross income in retirement… so not even enough to pay my rent in retirement all other things being equal and relative (the rent itself, inflation, tax etc).
Unless at some point soon I buy a property and exchange rent for a mortgage, I will have a lower standard of housing in old age.
@Andrew – {have been} staggering – property gained from falling rates like bonds as buyers have been able to borrow more and landlords have accepted lower yields, it could all unwind if rates increased, although I imagine in that scenario there’d be “funding for lending” QE again to avoid mortgage lenders going bust if people had negative equity and defaulted (which would mean another expensive bailout!).
Property prices might be tethered to wages via mortgages and shouldn’t be expected to exceed that, you can’t really crowd larger families into smaller houses much more.
Also demographically you might see more release of empty nest boomer houses as they start to go into care homes, pass on, etc.
Anyway the return on property itself is something you can easily beat, it’s just that renting is very inefficient and loaded with middlemen since you’re effectively paying the landlords taxes, their more expensive mortgage, insurances that owners don’t need, estate agents fees, maybe their inefficient leasehold charges, before we even get into the landlords profit. Also a tenant is borrowing an entire property month in, month out, whereas an owner occupier is only borrowing part of a house.
It’s a leveraged investment, no margin calls but it does carry risk.
We started in an inadequate 1 bed flat just to not rent, that was our foothold, our chance to save, and in 5 years we moved on, even though the lease extension wiped out my capital gain, it was cheap living. I’m sure you can buy -something-, even if it’s less than what you’re currently living in.
I see the stats and my instant reaction is wow, to get back to average we have to have some serious under performance as growth is way to high so I need to do something.
Then my simplistic view says there must be considerably more people buying equities today (and in the future) than in 1970 plus governments literally print more money every day. In the UK we’ve switched over the decades from defined benefits pension to everyone by default invests for their pension.
I know the taxonomy of investing is very important and people spend an awful amount of time building technical models to try and make sense of it all, but is it really just describing what has happened rather than being useful for the future. You only have to look at crypto to see all the pseudo- technical language being used to see how bull crap is used to sell something that fundamentally only value because people believe it does. I wonder if it really is as simple as is there enough money in “the system” to sustain the level of buyers willing to purchase equities.
“If there was ever a time to be a mildly (tilted, never all-in or all-out) nationalistic UK investor, it would seem to be now.”
Sadly, we’ve been hearing this for (the lost) decades…