Should patriotism play a role in investment decisions? Pick a financial adviser at random, and the answer they are likely to give is “no”. In a world of mobile money, multinational businesses and endless options for allocating capital, the framing feels almost quaint.
That doesn’t mean there aren’t parallels between buying shares in a company and buying into a nation. A desire to win, belief, and an appreciation for the outsized role of fortune are hallmarks of both stock picking and one classic form of patriotism: supporting your national sports teams.
But on balance, most investors’ big aim is to strike a healthy long-term balance between returns and risk. In this country, few professional investors would argue that a patriotic spirit should determine this balance. Geographic diversification – the practice of spreading the economic exposure of your assets across countries and continents – is widely seen as a virtue rather than a sin.
Of course, where our original question is asked matters a great deal. In 1900, when the British Empire was at its height, UK stocks accounted for 24 per cent of the global equity market, according to research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School. Today, that share is 4 per cent. Over the same period, US stocks have climbed from 15 to 60 per cent of the total by value.
Today’s American investor can, in other words, afford to be provincial, patriotic, or just US-centric. While high prices explain some of that proportional heft, US equity capital markets are also the deepest and most liquid in the world and stuffed with many of the most promising and profitable businesses you can hope to find. Over the long run, US stocks have also generated the most value. Since 1900, the US market has posted annualised real returns of 6.7 per cent a year, greater in dollar terms than any other market.
By contrast, the average non-US stock-picker is probably more inclined to think in international terms (which often amounts to buying US stocks).
It would be a little misleading to describe this week’s stock screen as ‘patriotic’, per se. Granted, our Best of British screen both selects exclusively from the FTSE 350 index and insists that its selections make most of their sales in the UK. But its criteria are also focused on quality and momentum factors, neither of which are in and of themselves ‘British’ characteristics.
Regardless, there are a few good reasons why UK investors might want to think domestically.
For a start, there is the question of familiarity, and the informational advantages this might provide. If you want to build a degree of due diligence into your stock-picking process, then it can help to have first-hand knowledge of a company’s key market, corporate culture, product appeal and competition. For example, while there is a lot a Birmingham-based investor can learn about Walmart (US:WMT) by reading the US retail giant’s annual report, there is probably more she can learn about Tesco (TSCO) by also visiting her local branch.
Second, while the relative importance of the UK’s economy and financial markets has diminished – especially, one might argue, in recent weeks – that doesn’t mean it should be ignored. On most measures, the UK’s annual economic output comfortably exceeds $3 trillion. For all its current troubles, its consumer base is also one of the wealthiest in the world. These factors, together with many other geographic, financial and infrastructural advantages, create a decent and proven backdrop for great businesses to grow rapidly.
A third reason – that Brits have a moral duty to invest in the country – has been championed by the likes of Legal & General (LGEN) chief executive Nigel Wilson. To some, it will feel contentious. But the notion of prioritising domestic capital investments over others is both a rare point of agreement between the main political parties and not as charitable as it might sound, assuming that those investments in some way serve to improve the economy on which British investors ultimately depend.
This lens can sometimes become distorted. A lack of technical and economic feasibility (not to mention intense local opposition) mean fracking is unlikely to make a big difference to the UK’s energy system, let alone turn it into a new Permian Basin – no matter how fevered the political championing gets. But after decades in which companies travelled the world in search of the lowest-possible input costs, the growing focus on economic self-sufficiency and resilience means talk of a home investing bias is likely to grow louder in the years to come.
I’m not sure any of these impulses is reflected by our Best of British screen, which looks at stocks trading in the secondary market and selects for certain financial and market data points. Either way, the stocks which our Best of British screen picked out a year ago horribly underperformed the market.
| Company | TIDM | Total return (5 Oct 2021 - 30 Sep 2022) |
| SSE | SSE | 2.1 |
| Rightmove | RMV | -28.0 |
| Howden Joinery | HWDN | -40.2 |
| Pets At Home | PETS | -43.2 |
| Liontrust Asset Management | LIO | -61.5 |
| FTSE 350 | - | -3.2 |
| Best of British | -29.0 | |
| Best of British Top 5 | -34.2 | |
| Source: Refinitiv Eikon Datastream | ||
In turn, that has put a big dent in the screen’s long-term performance. In the 11 years we have been running it, the cumulative total return for a version of the screen focused on the top five picks now stands at 189 per cent, while the total return from all the screen’s picks stands at 114 per cent. Factor in an annual dealing charge of 1.5 per cent, and those returns dip to 139 and 81 per cent, respectively, versus 97 per cent from the FTSE 350.
Methodology
Despite the valid reasons for focusing on homegrown names outlined above, I will admit to being slightly sceptical of the screen’s methodology. Not only does selecting stocks by their geographic revenue breakdown feel like a somewhat arbitrary test, but I fear it could be actively excluding features that an investor might sensibly look for in a business.
For example, while companies tend to start out focused on one country, the decision to expand abroad is often a logical and smart step in the pursuit of growth. When done well, companies can step into new international markets with a developed understanding of a customer base and having already anticipated the issues they are likely to face.
An insistence that most sales are generated in the UK also leaves investors more exposed to sterling, which is struggling against most major currencies. Because few large domestic-focused UK businesses source all of their overheads in the currency, those businesses either have to find more customers or raise prices to prop up margins.
Our screen, which uses the internationally focused FTSE 350 index as its benchmark, is especially exposed to both the geographic and currency dynamics. Its original criteria are as follows:
■ At least three-quarters of revenue from the UK.
■ Three-month share price momentum better than the FTSE 350.
■ Return on equity of more than 10 per cent.
■ One-year beta of less than one.
■ Forecast EPS growth in this and the next financial year.
■ Better than average five-year compound annual growth rate (shorter periods used when a full five-year record is unavailable).
■ Net debt of less than 2.5 times cash profit.
Unfortunately, no companies passed every test this year. To widen the results from zero, I have weakened the first and fourth criteria so that only two-thirds of revenue need come from the UK, and for a stock’s one-year beta to be less than 1.2. Neither change strikes me as a massive compromise. For the reasons mentioned above, I see little need in punishing homegrown companies for making a stab at geographic diversification.
Diluting the criteria reveals allows one company, software retailer Bytes Technology (BYIT), to pass all tests, while a further three – Moneysupermarket.com (MONY), Rightmove (RMV) and Kainos (KNOS) – passed all but one of the tests.
Such a bias to tech stocks is somewhat rare for these pages, but clearly a reflection of the companies’ growth profiles. If recent M&A trends are anything to go by, these are also exactly the sort of UK businesses that are likely to snapped up by international investors keen to roll out the technology into other markets.
| Name | TIDM | Mkt cap | Net cash/debt (-)* | Price | Fwd PE (+12-mths) | Fwd DY (+12-mths) | FCF yld (+12mths) | PEG | Net debt/ Ebitda | Op cash/ Ebitda | Ebit margin | ROCE | 5-yr sales CAGR | 5-yr EPS CAGR | Fwd EPS grth NTM | Fwd EPS grth STM | 3-mth mom | 3-mth fwd EPS change% | TEST FAILED |
| Bytes Technology | BYIT | £999mn | £66mn | 417p | 23 | 1.1% | 4.7% | 2.9 | - | 135% | 9.4% | 126.0% | - | - | 10% | 9% | 0.4% | 12% | - |
| Moneysupermarket.com | MONY | £1,010mn | -£56mn | 188p | 13 | 6.5% | 8.3% | 1.2 | 0.8 x | 80% | 23.2% | 28.8% | 0.0% | -6.2% | 15% | 15% | 7.8% | 5% | Long-term EPS gth |
| Rightmove | RMV | £4,013mn | £33mn | 483p | 20 | 1.7% | 5.3% | 2.7 | - | 103% | 72.4% | 206.2% | 6.7% | 9.1% | 6% | 10% | -14.5% | 0% | Mom > FTSE350 |
| Kainos | KNOS | £1,618mn | £73mn | 1,304p | 30 | 2.0% | 2.7% | 4.7 | - | 101% | 14.7% | 44.0% | 29.4% | 26.8% | 10% | 18% | 17.7% | 3% | Beta < 1.2 |
| source: FactSet. * FX converted to £ | |||||||||||||||||||
