Articles - UK equities is it time for with profits funds to go global

 By Chris Pritchard, Principal and Co-Head of Insurance Investment and  Amit Lad, Principal, Insurance and Longevity Consulting at Barnett Waddingham

 In particular, we encourage with-profits funds (and other insurers) to consider whether any significant home bias within their equity portfolios remains appropriate, or whether they can benefit from increased returns without materially increasing capital requirements and meeting their other investment constraints.

 It’s important to recognise that the average UK with-profits fund is a balanced multi-asset fund, of which listed equities are only one component. Any impacts we talk about will be diluted for individual funds, reflecting that listed equities are just one part of a balanced asset allocation.

 The performance cost
 With-profits funds have a material overweight to UK equities relative to the global equity market. Whilst this home bias has decreased in recent years, the average UK with-profits fund allocated 35% of their listed equity allocation to the UK (at 31 December 2023) compared to the UK’s size in global equity markets of 3.5%. This overweight position has acted as a performance drag in recent years.

 Using the FTSE All-Share (UK equities) versus FTSE All-World ex UK (global equities) as benchmarks, UK equities have underperformed global markets in eight of the last ten years. Only 2022 and early 2025 showed relative outperformance.

 The culprit is sector composition. Global equity markets have been dominated by technology sector outperformance, particularly in the US. In contrast, the UK equity market remains heavily weighted toward sectors that have experienced slower growth such as financials, energy, and consumer staples.

 Figure one: sector returns ranking by year. Source: FTSE, LSEG Workspace

 Sector highlighted in GREEN is the most underweight in UK relative to the global market cap in that year.

 Sector highlighted in YELLOW is the most overweight in UK relative to the global market cap in that year.

 The UK equity market maintains a significant underweight exposure to the technology sector - an area that has delivered exceptional returns over the past decade, consistently outperforming sectors where the UK is overweight, such as financials, energy, and consumer staples. Although the first half of 2025 has seen a modest shift - driven in part by the relative resilience of UK-dominated sectors amid global uncertainty following Donald Trump’s election victory and the introduction of new tariffs - the broader trend remains one of persistent underperformance. This reflects fundamental structural differences in sector composition between UK and global equity markets.

 The cumulative impact is substantial. Over the past decade, this home bias has created meaningful performance drag compared to global market cap weightings.

 Figure two: performance drag for the average UK with-profits fund compared to investing in-line with global market cap over a ten-year period. Source: FTSE, LSEG Workspace

 The performance gap in earlier periods will not have been as extreme given the UK equity market generally kept up with the wider market during the 1980 and 90s, representing the period in which large volumes of UK with-profit product were sold.

 Why the bias persists
 Despite these performance headwinds, the average UK with-profits fund continues to have a significant home bias.

 Our discussions with with-profits committees and investment committees from the participants in our annual with-profits survey reveal three main themes for persistent bias:

 Recent government initiatives encouraging institutional investment in domestic assets may slow funds’ departure from this bias in the near future.

 The capital analysis
 Our analysis demonstrates that the average UK with-profits fund’s market SCR, expressed as a percentage of the fund’s assets, would increase by only 2.6% by aligning with the global cap. This is illustrated on the chart below.

 The modest impact is due to listed equities being just one component of a balanced portfolio, and most listed global equities attracting the same type one capital charge as listed UK equities.

 The increase in capital can be partially mitigated by currency hedging global equity investments as shown in the chart below.

 Figure three - chart showing the standard formula market SCR for an average UK with-profits fund, with the listed equity allocation varying between UK and global equities.

 To estimate this, we have assumed that the fund is using the standard formula. The standard formula assumptions are set out in the next table.

 In addition, we have not considered any liability offsets or management actions, we have assumed the symmetric adjustment is nil, and a well-diversified portfolio is held such that there is nil concentration risk.

 Looking forward
 Looking ahead, in our opinion, sector allocation will remain the primary driver of equity index performance. Regions with higher exposure to strong-performing sectors - particularly those tilted toward growth - are likely to continue benefiting. Indices weighted toward growth sectors have historically outperformed their peers, regardless of geographic focus. We see little reason for this trend to reverse.

 Employing a global market capitalisation weighted index offers the broadest range of investment opportunities for investors, adequately diversifying risk amongst sectors. Limiting exposure based on geographical borders can unintentionally concentrate portfolios in sectors with slower prospects. Whilst sectors like financials, industrials and other consumer staples play an important role in the wider economy, they generally lack the characteristics needed to drive long-term growth.

 Therefore, in our opinion, shifting away from a bias towards UK equities will be beneficial for all equity investors.

 Our recommendation
 UK with-profits funds should review their equity home bias. This review should critically assess the historic rationale for home bias, whether the reasons for this bias remains appropriate, and the impact on both customer outcomes and fund strength of moving to a global cap approach.