Jon Spain is a legend of our Government’s actuaries and one I have missed on this blog for some months. While Jon objects to HMG’s power grab on principle, he thought it would be interesting to look at how returns from US equities would have compared with UK equity returns. The results are briefly summarised in the attached piece. I am delighted to give him space to explain
At present, HMG are trying to gain the power to force UK pension scheme trustees to invest in UK companies rather than elsewhere. While I think such a power is inappropriate, I thought I’d look at what would have happened, comparing £1,000 either invested in UK equities (FTSE All Share Index) or invested in US equities (S&P 500 Index) and repatriated to UK. The timeframe considered is 15 years from end 1971 until end 2025. No allowance has been made for investment expenses or currency exchange fees (taken from St Louis Fed). Nor have I even tried to allow for the impacts of exchange control and the “dollar premium” before 1979, which would have lowered the returns from investing overseas even further (thanks, Con Keating).
Simple Example At the end of 1971, £1,000 is invested in UK equities for 15 years and the final fund is £9,769. The £1,000 is exchanged for $2,571 which accumulates to $11,787 which is then exchanged into £7,830 at the end of 1986. That the annualised US return of unfavourable. On the other hand, the reverse exchange rate from dollars to sterling almost doubled from 0.3890 to 0.6643, partially reducing the relative investment loss.
Exchange Rates These are charted as the picture above. Over 54 years, the end-year exchange rate varied between 1.1271 (end 1984) and 2.5705 (end 1971).
Local Equity Returns Over 15 Years These are charted as above. The UK {US} annualised equity returns fell between 3.86% {4.19%} and 27.53% {18.80%}, averaging out at 11.49% {11.31%}.
Final Fund Comparisons These are charted as the third picrure. In sterling, the UK {US} final fund amounts fell between £1,765 {£1,961} and £38,403 {£14,105}, averaging out at £7,053 {£6,449}. The grey figures show the statistics for the ratio of US to UK, which I would like to have added as a line related to the right-hand axis but I couldn’t work out how.
In 18 out of 40 cases, the US investment would have been less favourable than for the UK.
Jon Spain
Jon Spain 24 Mar 2026
I’m not sure what the practical
point of this extreme, stylised illustration is.
18 unfavourable out of 40 suggests 22 were favourable.
UK pension schemes tended to invest predominantly in the UK up until 1986.
By coincidence I became a trustee from 1987.
We stuck with domestic bias until the early 1990s when we started to overweigh overseas in a mix of global (by choosing a value manager like Templeton we avoided Japan altogether, which represented 50% of global indices when the US was lower, more like one-third) and Europe ex UK (as euro entry was then a possibility).
UK schemes which invested in Japan lost quite a bit of value after 1989.
UK schemes which invested in a mix of UK and overseas generally enjoyed double digit annual returns during the 1990s, beating a UK only alternative.
Into the 2000s and most UK schemes began to overweight UK gilts, which worked until the 2020s.
But UK schemes which continued to invest “globally”, allowing a cautious return to some in Japan despite relative currency weakness, generally did as well and came into the 2020s without suffering the gilts “crash”.
My own investment beliefs preferred prudent investing in (and/or avoiding) certain securities, not trusting to country indices which tend to be overconcentrated in fewer and fewer securities as time marches on.
22 out of 40, or maybe 27 rather than 22, would probably do me, though.
I just wonder if the relative UK underperformance in this century is at least partly due to higher dividend yields of UK companies, i.e., UK listed companies have been distributing more of their profits rather than reinvesting them for future growth.
While UK-listed companies have maintained slightly higher dividend payouts than are found in other regional markets, in recent years they have increasingly prioritised share buybacks over dividends, as well as reducing capital reinvestment in some cases.
The dividend payout ratio on average has fallen.
Of more concern to investors interested in overweighting UK listed companies is the extent to which liquidity in UK markets has diminished significantly due to a structural shift away from domestic equities by pension funds and insurers to hold gilts and other bonds instead.
This decline is exacerbated by increased, sustained capital outflows out of UK equity funds, a reduction in IPO activity, and higher rates of corporate delistings and foreign takeovers.
The number of larger UK listed companies in the FTSE All Share, which was just over 600 when I first became a trustee in 1987, has not grown at all, while liquidity has shrunk.
By 1996 there were around 2,700 listed companies in total, including AIM, but today there are less than 1,700.