Home Bias in Asset Allocation: A Rational Case for (Some) UK Overexposure?
One of the most persistent patterns in investor behaviour is home bias—the tendency to favour domestic assets over their global counterparts. For UK investors, this typically means an overexposure to UK equities, gilts, commercial property, and sterling-denominated assets relative to their global market weights. Whilst some of this preference can be attributed to familiarity or inertia, there are also concrete and economically rational reasons to maintain a modest tilt towards UK assets.
This post explores the extent of home bias among UK retail investors, evaluates the optimal asset mix from a tax-efficiency and diversification perspective, and outlines five legitimate reasons why an investor might allocate more to domestic assets than a pure market-cap-weighted approach would suggest.
The Decline—but Persistence—of Home Bias in the UK
Historically, UK investors have exhibited a significant home bias. In 2000, UK equities comprised more than 70 percent of a typical balanced portfolio’s stock allocation (Investment Association 2024). Over the past two decades, however, the share of domestic equities in UK retail portfolios has declined substantially. According to the Investment Association (2024), UK-focused equity funds accounted for just 11.5 percent of assets in UK retail portfolios by the end of 2023, down from 29.6 percent in 2008. By contrast, global equities rose from 28.1 percent to 42.0 percent over the same period.
Despite this shift, home bias has not disappeared. UK equities still occupy roughly 20 to 30 percent of the equity allocation in many diversified portfolios, even though they represent only around 3.5 to 4 percent of global stock market capitalisation (Elston Consulting 2024). The fixed income side exhibits similar tendencies, with a strong preference for gilts and sterling-denominated credit. A similar story emerges in property, where many investors remain overexposed to UK commercial real estate despite liquidity issues in domestic funds.
The central question is whether this residual home tilt is optimal.
Diversification and Tax Efficiency: Why Global Matters
There are two primary reasons to diversify globally: return enhancement and risk reduction. Over the long run, globally diversified portfolios have significantly outperformed those with heavy UK exposure. Between 2003 and 2023, a globally balanced equity portfolio turned £10,000 into approximately £43,000, whereas a UK-tilted portfolio grew to only £38,000 (Trustnet 2025). This difference is not just a matter of returns but of opportunity cost.
From a risk perspective, the UK stock market is highly concentrated. The top ten stocks account for roughly 40 percent of the FTSE All-Share Index, with a heavy emphasis on financials, energy, and basic materials. Sectors such as technology and healthcare, which have driven much of the global market’s performance in recent years, are underrepresented.
Global diversification also mitigates domestic economic and political risks. During the Brexit referendum, UK property funds suspended redemptions, and UK equities underperformed sharply. In contrast, international assets provided a cushion against local volatility (Investment Association 2024).
On the tax side, the argument for home bias is nuanced. Whilst UK equities are not subject to withholding tax on dividends, many overseas equities are. For instance, US dividends typically face a 15 percent withholding tax for UK investors, and this cannot be reclaimed within an ISA (International Investment 2024). However, when assets are held in a SIPP, treaty benefits often eliminate this drag. For example, US dividends can be received gross within a properly structured UK pension. Furthermore, most tax wrappers (ISAs and pensions) shield investors from capital gains tax and UK dividend tax, levelling the playing field between domestic and international holdings (justETF 2024).
In other words, tax wrappers are more important than geographic allocation.
Five Rational Reasons for UK Overexposure
Although home bias is often criticised as behavioural, there are several rational arguments for maintaining a deliberate, limited overweight to UK assets.
1. Currency Matching for Domestic Spending
UK investors live, work, and spend in sterling. Holding GBP-denominated assets helps hedge currency-related risks, especially in retirement. A portfolio with no exposure to sterling could fall in real terms if the pound appreciates. Conversely, when the pound weakens, foreign assets appreciate in GBP terms, providing a useful hedge. This dynamic creates a valid rationale for holding some UK equities and gilts, particularly for those with sterling liabilities (Campbell and Viceira 2002).
2. Tax Treatment and Withholding Tax
UK dividends are not subject to withholding tax, making them slightly more efficient in ISAs than foreign equities. By contrast, dividends from US stocks incur a 15 percent withholding tax, which cannot be reclaimed within an ISA (International Investment 2024). UK REITs also benefit from favourable tax treatment within pensions, where the 20 percent withholding on property income distributions is waived.
Whilst these differences are relatively small when using wrappers, they can add up over time, especially for income-focused investors. Strategic asset location—placing UK dividend-paying stocks in ISAs and high-yield US stocks in SIPPs—can optimise after-tax returns.
3. Relative Valuations
UK equities have traded at a persistent discount to global peers for much of the last decade. They exhibit lower cyclically adjusted price-to-earnings (CAPE) ratios and higher dividend yields than many US or European stocks. This valuation gap reflects both sector composition and political discounting, particularly post-Brexit (Trustnet 2025).
For investors who believe in mean reversion or value-based tilts, the UK presents an attractive opportunity. A modest overweight may offer better risk-adjusted returns in a diversified portfolio.
4. Sector and Factor Exposure
The UK market is relatively heavy in traditional value sectors such as financials, energy, and materials. In contrast, global benchmarks—particularly those in the US—are dominated by growth stocks like technology companies.
This imbalance means that UK equities can serve as a counterweight to a tech-heavy global portfolio. They offer exposure to different economic drivers and factor tilts, such as value and income, which may outperform in inflationary or reflationary environments.
5. Familiarity and Implementation Simplicity
Domestic assets are easier to understand, analyse, and access. UK investors often feel more comfortable with local companies, regulatory frameworks, and economic news. Domestic products also tend to come with fewer reporting complexities, lower FX conversion costs, and better liquidity. Although not strictly financial, these practical considerations can influence investor behaviour and confidence—especially for self-directed investors.
Conclusion
Whilst home bias is often portrayed as a behavioural failing, a modest UK overweight may be entirely rational. Sterling liabilities, tax quirks, valuation opportunities, sector diversification, and implementation simplicity all support maintaining a proportion of assets in the UK. For many investors, this might reasonably equate to allocating 15 to 25 percent of the equity portion to UK stocks—well above the UK’s ~4 percent share of global equity markets, but far below historic norms of nearer 70%. The key is not to default to domestic holdings, but to choose them intentionally.
In a globally integrated economy, diversification remains critical. But that does not mean abandoning the UK altogether. By understanding the trade-offs and making informed choices about tax wrappers, asset location, and risk exposure, UK investors can build portfolios that are both globally diversified and domestically grounded.
References
Campbell, John Y., and Luis M. Viceira. 2002. Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. Oxford: Oxford University Press.
Elston Consulting. 2024. ‘Sizing the UK “Home Bias” in Your Equity Allocation.’
https://www.elstonsolutions.co.uk/insights/sizing-the-uk-home-bias-in-your-equity-allocation
International Investment. 2024. ‘Withholding Tax: What UK Investors Need to Know.’
https://www.internationalinvestment.net/news/4052294/withholding-tax-uk-investors-need-know
Investment Association. 2024. Investment Management in the UK 2023–2024.
https://www.theia.org/sites/default/files/2024-10/Investment%20Management%20in%20the%20UK%202023-2024.pdf
justETF. 2024. ‘How ETFs Are Taxed in the UK.’
https://www.justetf.com/en/academy/tax-efficiency.html
Trustnet. 2025. ‘Home Bias: Why You Should Have up to a Third of Your Portfolio in UK Companies.’
https://www.trustnet.com/News/13451093/home-bias-why-you-should-have-up-to-a-third-of-your-portfolio-in-uk-companies/