As human beings, we are naturally attracted to things we find familiar; accepting change and the unfamiliar can be more complicated. This holds true for investments. For example, someone born and bred in the UK is more likely to invest in British companies, whereas a French national is more likely to invest in French companies. Very often, be it directly or indirectly via a fund, people will invest in the biggest (and thus, arguably, the best) companies, as represented in national stock indexes. But what does this mean when it comes to diversifying asset allocation in France?
Individual countries tend to specialise
What people may not realise is that investing in this way means a portfolio is unlikely to be diversified enough. This is because individual countries tend to specialise economically in one or two specific sectors. To illustrate my point, let us look at some examples:
I am sure that most readers will be familiar with the FTSE 100, a stock index of the leading one hundred UK companies. Lesser known though, is that energy and financial companies represent around 35% of the index, whereas the technology sector counts for next to nothing. So, what about France?
In France, the leading stock market index, comprising of forty companies, is called the CAC 40. France is most definitely a global leader in the luxury goods sector, which therefore holds notable weight within the CAC.
The heavyweight is LVMH, which is actually Europe’s most highly valued company; quite apart from Moet, Hennessy and Louis Vuitton, LVMH also owns numerous household name brands such as Dior, Tiffany, Givenchy, Kenzo, TAG Heuer and Dom Perignon champagne! Nice!
When we factor in that the CAC is also home to brands such as Hermes, Gucci and L’Oréal, we readily accept that France really does boast the who’s who of luxury brands, whom, combined, represent approximately 35% of the CAC 40.
In Germany, we see the same sort of thing, with automobiles being highly represented thanks to Daimler, BMW, Volkswagen, Porsche, Continental and Mercedes Benz.
Finally, of course, we have to mention the US, “home’ to technology, including companies such as Amazon, Apple, Google, and Microsoft, to name but the most well-known.
So, what is the main takeaway from this?
To be truly diverse, invest in different countries
As investors, we are always told to diversify, but if you only invest in your national index, I would argue that you are not diversified enough. Moreover, is it logical that the French, as a whole, are effectively making the bet that luxury brands will outperform other companies?
I would actually go even further and state that investing only in Europe would still lead to insufficient diversification. The US, for instance, has for decades been a major driver of global growth, most recently thanks to the dynamism and dominance of its tech titans.
Thinking logically, why should one be more heavily weighted to one country versus another, or one continent versus another, simply based upon where we are born? And what happens if, for example, we move from the UK to France?!
Clearly, it makes much more sense to have a balanced global portfolio that will work perfectly for you, whether you live in France, the UK, or anywhere in the world for that matter.
What about Assurance Vie?
In France, the most common tax-efficient “wrapper” for long-term saving and investing is an Assurance Vie. The good news is that it is absolutely possible to hold a low-cost portfolio of global stocks and bonds within an Assurance Vie. This means spreading the risk over thousands of different companies and governments (in the case of bonds) around the globe.
This level of diversification significantly reduces the risk of underperformance by a specific sector or country. Conversely, it notably increases our chances of participating in the next driver of the world economy.
We do not know where future growth will come from, but we do know that we will participate in it if we hold a truly diversified portfolio.
This article was first published in the Connexion January 2023