Dan Mikulskis at People’s Partnership

If you’re travelling to Edinburgh for the Pensions UK conference should read this . First published in IPE, it’s conclusion is simple and one that we can all sign up to

Capital doesn’t respond to slogans – it responds to incentives

Should pension funds invest more in the UK? It’s a question that resurfaces regularly, often surrounded by fuzzy reasoning and calls for quasi-patriotism in capital allocation. And managers also have incentives to sell product.

However, beneath all that sits a more grounded reality when viewed from a neutral asset owner perspective looking out for members’ interests: capital doesn’t respond to slogans – it responds to incentives. And so, if we’re going to answer the home‑country‑bias question properly, we must unpack those incentives and understand where they genuinely support a higher UK allocation, and where they simply don’t.

For decades, investment theory has offered a clear starting point. Market efficiency holds that listed asset prices reflect available information: expectations for future revenues and earnings are priced in. The Capital Asset Pricing Model (CAPM) extends this, arguing that the optimal portfolio for a risk-seeking, long-term investor holds assets in proportion to their share of the global market. Global market cap weights have therefore become the baseline for strategic asset allocation.

The greater US weighting implied by this has broadly worked well over the last 20 years for asset owners. But theory abstracts away from features of the real world that do matter deeply to asset owners; there’s more to the answer than theory alone.

Setting aside shorter-term valuation views, what are the strategic reasons an asset owner might structurally allocate more to their domestic market than global weights suggest?

Broadly, five incentives push toward a home bias, while two forces push firmly against it. Understanding these seven factors helps explain why the right level of UK exposure varies across asset classes.

The incentives

1. Lower resource and access costs
Domestic investing is easier. It typically requires fewer specialist teams, intermediaries, and operational layers. Legal frameworks are familiar; oversight is simpler; fees are often lower. Global diversification, by contrast, demands larger teams, greater governance bandwidth, and more complex operations – all of which add cost over time.

2. Currency considerations
Most asset owners don’t want full foreign exchange exposure, nor fully hedged positions. Instead, they aim for a middle ground. But managing currency adds costs: overlay fees, forward point rolldown, and cash requirements to support FX hedging programs. These frictions are not enormous, but they matter. Domestic assets eliminate them – an advantage that grows as geopolitical uncertainty rises.

3. Inflation and liability alignment
Investors usually set return objectives relative to domestic inflation or local interest rates, not global equivalents. While the link between domestic assets and domestic inflation can be indirect, it is meaningful in areas like infrastructure, property, and some fixed income markets. This alignment doesn’t guarantee outperformance, but it strengthens the intuitive connection between assets and long-term objectives.

4. Tax treatment
In some jurisdictions (though not currently the UK), domestic investment enjoys favourable tax treatment. When present, this can strongly tilt capital toward the home market. Where absent, such as the UK, where stamp duty actually adds friction, the argument disappears.

5. Governance advantages
Proximity can matter. Domestic investing may offer real or perceived advantages in control, regulatory insight, and access to policymakers or local partners. Over long horizons, these soft advantages can support better risk management or even stronger returns.

The disincentives

1. Diversification limits
   This is the most powerful counterweight. Many domestic markets are simply too concentrated to anchor a diversified portfolio. The UK equity market is a textbook example: heavy in energy and healthcare, light in technology and growth sectors. A large overweight to such a narrow market increases uncompensated risk.

2. Liquidity constraints
   For large asset owners, domestic markets – outside the US – can become restrictive. Trading capacity, issuance volumes, and market depth matter when deploying tens of billions.

In equities and credit especially the UK market is not big enough to absorb very high allocations without compromising portfolio flexibility. Our own experience as a £40bn+ asset owner confirms that liquidity issues arise routinely outside the US, even in normal rebalancing.

How this plays out across asset classes

Listed equities
The case for home bias has weakened. Currency hedging is cheap; global vehicles are accessible; and the UK market’s narrow sector mix limits alignment with domestic inflation.

Large UK firms earn most revenues abroad, further diluting the link. With limited upside and notable concentration and liquidity risks, global benchmarks remain the sound foundation.

Fixed income
Sterling yields helpfully embed domestic inflation expectations and monetary policy (but also amplify exposure to local fiscal instability). The sterling credit market is concentrated in financials, and liquidity can thin quickly at scale. A modest home bias can be justified, but not an overwhelmingly domestic stance.

Private markets
Domestic private assets can be cheaper to access, foreign hedging is costly, and UK inflation can be more directly reflected in returns, particularly in infrastructure, property, and real assets. Yet capacity constraints and sector concentration emerge quickly. The UK opportunity set is material but finite, making a balanced blend of domestic and global exposures the prudent choice.

Stepping back
A clear pattern emerges: Real assets and fixed income often support some level of UK anchoring. Listed equities are better allocated globally.

None of this relies on patriotic appeals or political narratives. It reflects a simple truth: capital responds to incentives, structures, and constraints – not slogans.

How could these incentives be shifted if more investment into the UK was an aim?

Tax benefits such as stamp duty and Australian-style tax credits could clearly be looked at. Other incentives are harder to move quickly, but things like liquidity, access costs and diversification can be addressed through the considered actions of other pools of capital (e.g. National Wealth Fund).

Structural developments that facilitate better pooling of capital could improve market depth and scale helps fee terms and access over time. Genuine domestic investor influence on regulation and policy in real assets could tip the balance.

Taken together, this leaves a simple conclusion: the right level of UK exposure is the one the incentives themselves justify. In some areas, those incentives point toward a domestic anchor; in others, global diversification remains essential.

The task, then, is less about urging investors homeward and more about shaping the conditions that make home a sensible place for capital to reside. If the UK wants greater participation from long‑term asset owners, improving those structural conditions will achieve far more than just rhetoric.

Align the incentives and the results will follow.

Dan Mikulskis is chief investment officer of People’s Partnership, provider of People’s Pension