Don’t overlook the UK when it comes to your investments

Yet UK equities have provided juicy returns. Before the turbulence of recent days, the FTSE 100 index was on target to deliver its best annual performance since the global financial crisis more than 15 years ago. It may yet achieve that – and returns from UK equities remain well ahead of what US and European markets have generated.

Foreign investors have recognised the allure of London, piling in enough money to more than counter the impact of UK investors’ desertion. Attractions have included relatively cheap valuations, the strength of UK banking stocks, and the opportunity to use London to diversify out of over-hyped technology companies; the UK market offers plenty of mining and defence businesses, for example, to provide some ballast amid those growing fears of an artificial intelligence bubble.

It's good to diversify. Investors are often tempted to stick close to home, leaving them with too much exposure to domestic equities when some additional international holdings might help them to manage risk more effectively. However, it seems rather odd for UK investors to be discovering that principle en masse at just the moment when the UK market is outperforming.

Rather, it’s more likely that what’s going on here is an expression of concern from domestic investors about the prospects for the UK. All that talk of lacklustre growth and budget uncertainty appears to be spooking people. But while that’s understandable – the debate about the strength of the UK economy is valid.

That said, it’s worth remembering that UK equities aren’t necessarily a play on the UK itself. At the large-cap end of the market in particular, FTSE 100 stocks provide exposure to the global economy because the majority of these companies earn most of their revenues overseas.

The government, naturally, is keen to encourage more investment in UK companies – hence the debate over whether it might require pension funds and ISA investors to raise their domestic exposure in order to continue qualifying for tax reliefs. But it would be preferable if investors decided for themselves that the UK stock market was an attractive proposition.

Investment trusts, of course, offer multiple opportunities to explore different parts of the UK stock market. And data published earlier this year by FE Analytics suggested that investment trusts in both the UK All Companies and UK Equity Income sectors had consistently outperformed equivalent open-ended funds.

The latter sector, by the way, is home to a number of the Association of Investment Companies’ dividend heroes – investment trusts that have increased their dividends each and every year for at least the past 20 years. At the top of the list, UK Equity Income fund City of London Investment Trust is into its 59th year of consecutive dividend rises.

All of which is to say that domestic investors might want to give UK equities another look. Those of us who have holidayed at home in recent years have discovered that British tourism has more to offer than is often realised. The same could be said of the UK stock market.