WHY on earth do we bother with investing overseas? The chart here only represents a snapshot, of course, but it suggests that sterling investors have gained virtually nothing by investing in the US, Japan or on the continent of Europe over the past five years.
Japanese equities have created much excitement in the past six months as the benchmark indices have jumped in value by 40 per cent. The sharp — albeit smaller — reversals in the past couple of weeks has kept the Tokyo stock market in the limelight.
But before one adjusts for currency movements Tokyo shares are up by only 15 per cent since January 2001. That net performance glosses over several turns on the swings and a couple of rides on the roundabout. However, the net change over the past five years equates to no more than a couple of percentage points of annual outperformance of the FTSE all-share index.
Investors that decided to take the lower risk option of investing in the US or Europe have lost ground. Every £100 invested in the FTSE all-share index in January 2001 is worth roughly the same amount now.
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While a £100 investment in the Japanese market five years ago is worth about £115 in local currency terms, a similar sum invested in a basket of US shares would be worth about £103 now. A £100 nest egg saved in a basket of shares reflecting the make-up of the FTSE EuroFirst index of continental European shares, meanwhile, would have shrunk from £100 to £75.
Adjust for currency movements, however, and the picture changes. The Japanese gains all but disappear and the £103 sum in US shares turns into just £88. Yet while the value of Japanese and US shares have lost ground when expressed in sterling terms, European stocks claw back some value. A £100 sum invested in 2001 would have a currency adjusted value of £85 to the sterling investor rather than the £75 mentioned above.
It is worth emphasising that the observations here are made in terms of relative performance. They are relative to the FTSE all-share index and relative to the movements in the value of sterling vis-à-vis other currencies. But it is hard to avoid the conclusion that UK investors whose base currency is sterling have little to gain from roaming overseas.
Even the neutral position regarding Japanese equities is soon rubbed out when dividends are taken into account. Japanese companies have a longstanding aversion to paying dividends. Yields are often minuscule where they exist at all. But dividends, and the reinvestment thereof, have added about 15 percentage points of performance to UK shares in the past five years. Without the benefit of dividends a UK equity investor is no better off than five years ago. It is investors in London-listed shares that have reinvested dividend income that are showing gains.
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The five-year picture makes the “stay home” point well. One, three, five and ten-year patterns are not as neat, but the arguments in favour of going overseas remain uncompelling.
Over one year the Japanese Nikkei 225 index has climbed 10 per cent — relative to the FTSE all-share index and expressed in sterling terms. The EuroFirst 80 reflects the UK picture almost exactly, while US shares have underperformed to the tune of 8 per cent since this time last year.
These would be worthwhile gains to have — and losses that it would have been handy to avoid. But back in the real world is there any way anyone would have made precisely the right calls? If you think so, just imagine trying to make similar calls now about how shares and exchange rates might move in the next 12 months. Then ask whether the right answers would come thanks to luck or judgment.
The three-year, exchange-rate adjusted returns are similar to the one-year picture. The Japanese market has done 10 per cent better than the FTSE all-share index since early 2003. Continental European shares have currencyadjusted returns in line with the UK while sterling investors in US shares would have been worse off by about 25 per cent.
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Is this a trend? Not really. Over one, three and five years the Japanese market may have done slightly better than the UK while the US and European bourses seem to have done worse. But the ten-year record shows the roles to be reversed. To a sterling investor a £100 investment in Japanese equities in 1996 would be worth about £65 now. That same £100 invested in the FTSE all-share index would be worth £157. But the same amount put in an index-tracking US fund would be worth £185 and the value of £100 invested in continental European equities a decade ago would be worth £205 now.
It is hard, even impossible, to make reliably robust riskadjusted returns from betting on currencies. But while currency movements may be too hard to call, the gains and losses that come from exchange rate movements are as real as any that are visited upon investors.
This little trip through the history books suggests there is little point trying too hard. It is not as if the UK investor will miss out on growth in other parts of the globe. Such is the diversity of companies using London for a listing that there is no end of opportunity to get involved. Those London-listed companies bear their share of currency gains and losses. But given the opaque, volatile and uncertain nature of exchange rates, UK investors have little to lose buying British.