Tariff turmoil: what is the right exposure to the US?

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One side effect of the ‘American exceptionalism’ of recent years is that many ostensibly ‘global’ funds have ended up with most of their money invested in the US. For example, a passive fund that tracks the popular MSCI World index will have about 72% of its money invested in American stocks (data as of 31 March). Allocations to Japan, the UK, Canada and France were just 5.4%, 3.7%, 3% and 2.8% respectively.

Investors may have been happy to see their portfolios dominated by American shares when they were rising; recent turmoil on Wall Street may be giving them second thoughts. Fidelity’s Tom Stevenson said the day after the announcement of the new tariffs that they made the case for diversification. But what is an appropriate proportion of your money to invest in America? There is no single answer for all investors, but here are some pointers. 

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What type of investor are you?

Your age, your income from sources other than investments and your attitude to risk all influence the portfolio you need. For example, investors in their 20s will expect to work for the next 40 years, so they will not want to take income from their portfolio and will focus on capital growth. Retired savers by contrast will want a reliable stream of income from their investments. The 20-somethings can afford to ignore today’s apparent upending of the global economic order and its unknowable effects on stock markets, interest rates, inflation and currency exchange rates; the 70-somethings cannot.

The former’s allocation to America (and to other overseas markets) will therefore typically be much greater than the latter’s. In view of the high dividend yield of the London stock market, and to avoid risks posed by fluctuations in exchange rates, retired savers may want to keep the bulk of their money at home and have low exposure to the US and other overseas markets.

• Read: Is it finally time to buy British? 

I’m still investing for growth. How should I split my portfolio? 

For younger savers who want to build up wealth, exposure to overseas stock markets makes perfect sense. While the London market produces a good income, its record of growth is less impressive. For example, over the past 35 years the FTSE 100 has produced a total return – that is, with dividends reinvested – of 1,207%, whereas America’s S&P 500 has grown by 3,054% on the same basis (figures in respective currencies and from Refinitiv Datastream). 

But if having 70% of your money on Wall Street is too much, what would be a better figure? One answer is to look at funds that avoid excessive concentration on one country’s stocks. For example, there is a version of the MSCI World index – the one we mentioned above that has 72% exposure to America – that includes the same stocks but does not make bigger allocations to bigger stocks; instead, every constituent makes up the same percentage of the index. For example, whereas Apple made up 4.9% of the standard MSCI World index at the end of March, it was just 0.1% of the MSCI World Equal Weighted index. Because so many American companies are so valuable, disregarding constituents’ value in the construction of the equal-weighted index takes its overall US exposure down to 41.7%. Other country exposures are Japan 13.9%, Canada 6.1%, UK 5.5% and France 4.4%. 

But the MSCI World index excludes emerging markets, which means there are no Chinese or Indian companies, for example. There is another index, the MSCI ACWI Equal Weighted (ACWI means all countries world index), that does include emerging markets. This index has 22.2% exposure to America, along with 21.3% for China, 7.4% for Japan, 6.7% for India and 3.2% for Canada. Other countries make up smaller proportions of the index. 

What are professional investors doing about US exposure? 

Global investors have cut their holdings of US stocks by a record amount in the past two months, a Bank of America survey reported this week. And the trend seems likely to continue because a record number of managers said they planned to keep cutting their exposure.  

James Harries, manager of the STS Global Income & Growth Trust, said this week: ‘Valuations in the US market are stretched in absolute terms and relative to government bond markets at a time of economic and policy uncertainty. With the US now about 70% of the global index and the Magnificent 7 about 35% of that [the US index], the pain of such a reversal [in US valuations] could be material to both investors and the economy.’ His trust has 46% of its money in North American assets, 29% in Britain and 19% in the rest of Europe.  

Fidelity’s Select 50 list of recommended funds includes five actively managed global funds. Their US exposure figures, according to the latest factsheets, are as follows: Fidelity Global Dividend (29.7% in US), Schroder Global Recovery (33%), Dodge & Cox Worldwide Global Stock (52%), BNY Mellon Long-Term Global Equity (65.8%) and Rathbone Global Opportunities (68%). 

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