Monthly Archives

March 2023

Anchors Aweigh

By and large, behavioral science suggests that human beings make lousy investors. Whilst we are excellent problem solvers, we suffer from a whole host of well documented biases that, on average, erode the investment returns on offer from markets[1]. Being aware of our biases is a useful exercise if we are to limit the impact that they have on our decision making. In this short note, we look at both anchoring – the tendency to be influenced by a particular reference point or ‘anchor’ – and recency bias – the tendency to overemphasize the importance of more recent experiences relative to less recent ones.

Today’s capital markets are extremely well integrated, costs are low and anyone with internet access can use the power of Google (or even perhaps ChatGPT) to conduct their own research. However, historically investors have favored companies listed in their home country as opposed to those abroad. Partially this was down to the additional cost, complexity, and unfamiliarity of investing overseas, although these hurdles are relatively negligible nowadays. Even so, recent data suggest that the ‘home bias’ – the extent to which the home country is weighted in a portfolio over and above its market weight – persists.

Table 1: Investor home bias by region

Country Market weight Investor weight Home bias
UK 6% 36% 6x
Australia 2% 52% 26x
Canada 3% 21% 7x
Japan 34% 8% 4.3x
US 53% 62% 1.2x

Source: FTSE (2019) Appraising home bias exposure.…

Perhaps anchoring to the performance of one’s domestic market is to be expected given the above. For UK investors, the FTSE 100 measures the performance of the largest 100 firms listed in the UK and is frequently quoted in the papers and media outlets[2]. For some time, the UK has performed dismally when compared to international (ex-UK) developed markets. For example, the decade of the 2010’s saw the FTSE 100 companies return ≈75% to investors whilst international equity markets delivered a staggering ≈255% in GBP terms[3]! Since the start of 2021, the roles have reversed with the FTSE 100 delivering 31% versus 16% from international markets3.

Enter recency bias. The charts below investigate the shorter and longer period returns of the FTSE 100 and global developed equities further[4]. In the top chart, rolling annual returns show that the UK has generally lagged, although it has enjoyed a handful of 12-month periods of outperformance.

Figure 1: Rolling 12-month returns of the FTSE 100 and global equity markets

…but these periods are lost to history
Biases creep in here…

Data source: Morningstar Direct © All rights reserved. Funds: HSBC FTSE 100 Index Fund, Vanguard Global Stock Index Fund.

Zooming out to rolling 10-year periods paints a different picture. This is due to the many small periods of underperformance above compounding up to provide poorer outcomes over longer horizons, as demonstrated below.

Figure 2: Rolling 10-year returns of the FTSE 100 and global equity markets

Data source: Morningstar Direct © All rights reserved. Funds: HSBC FTSE 100 Index Fund, Vanguard Global Stock Index Fund.

The point is not to suggest that the UK is some sort of anomaly, or that this level of relative underperformance is to be expected moving forwards. There are plenty of examples throughout history demonstrating exactly the opposite. The point is that getting swayed by recent performance, and perhaps anchoring to one’s domestic market, is best avoided.

Removing our performance hats and replacing them with our risk ones, there are some very sensible reasons why having too many eggs in the 100 largest companies in the UK makes little sense from an investment portfolio perspective:

  • The FTSE 100 is highly concentrated with over 33% of the assets held in just the top 10 companies – the likes of Shell, HSBC and AstraZeneca being the top holdings at present.
  • The FTSE 100 is materially overweight to certain sectors such as energy (12% vs 5% globally) and underweight to the point of almost not having any in terms of technology (1% vs 21% globally).
    • This explains much of the recent performance differential above – where technology has struggled, energy stocks have flourished in the high-inflation environment exacerbated by the Russian invasion of Ukraine.
    • Over longer periods technology stocks have dominated (Apple, Microsoft, Tesla etc.).
  • The global opportunity set consists of over 10,000 companies across over 50 countries. Diversifying across them all as a starting point makes good sense and should lead to a smoother investment journey.

Be aware of that anchor and make sure that you do not get overly influenced by what has just performed well.  You have no chance guessing which market will do well next.  Just own the world.


[1] Nobel laureate, Daniel Kahneman, has a fantastic book called ‘Thinking, Fast and Slow’ that unpacks why we make the decision we make. It is a very accessible read for those looking for a new book!

[2] It rarely appears in headlines when things are going well, but you can be sure it will when we experience the next poor investing day/month/year. Another one – negativity bias!

[3] Funds: HSBC FTSE 100 Index Fund, Vanguard FTSE Developed World ex-UK Index Fund.

[4] Global developed equities (including UK) due to much longer track record.

Planning Analyst / Senior Planning Analyst (Dependent on Experience)

As one of Northern Ireland’s leading Financial Advisory Firms, Pacem is a boutique practice which offers a unique Financial Planning & Accountancy Business Advisory service. As a company we are people focused and we have a very close relationship with our clients. Our culture is that we want all team members to realise their potential and we provide this through mentoring and coaching. We promote employee well-being and a supportive team working ethos in line with company values and objectives.

If you are looking for a role:

  • With a fantastic benefits package & competitive salary.
  • That is part of a growing team that is supportive, energetic and innovative.
  • Which has the opportunity for rapid progression through a clear career path.
  • With financial support for Level 4 qualification and excellent study leave.
  • Access to hybrid working.

Get in touch with our People & Talent Manager Frances Neely on for a chat about the role, to receive a copy of our role information booklet or to apply!

Lessons from Silicon Valley Bank’s demise

The spectacular work ‘Another Place’ by the British sculptor Antony Gormley[1], of one hundred naked men scattered along 1.5 miles of Crosby Beach in Liverpool, provides a useful twice-daily reminder about hidden risks in the financial world.  As Warren Buffet once said about easy money and favourable markets hiding risks:

‘You only find out who is swimming naked when the tide goes out.’

The demise of Silicon Valley Bank (SVB) is one such case of being exposed by a falling tide.  The bank focused on providing banking services, including the placing of deposits, to many early stage and start-up tech firms, alongside venture capital firms, both in the US, and via SVB UK, to UK firms.  At the end of last week, depositors began to worry about whether the bank was going to be able to meet its obligations and began withdrawing their cash.  The root cause of their concern lay in the exposed reality of the risks the bank had taken by accepting deposits and then investing the money in longer-dated US Treasuries.

That worked just fine when short-term interest rates were near zero and longer-dated bonds paid higher yields.  Unfortunately, SVB’s skinny dip into the bond market was exposed by the rapid increase in bond yields in the second half of 2022, which saw yields on 10 Year Treasuries rise from 2% a year ago to almost 4% at the end of last week.  That put a huge dent in SVB’s balance sheet, due to the losses incurred on the bonds as a consequence of these yield rises (bond prices move in the opposite direction to bond yields).  This in turn lead to a rapid loss of confidence that the bank could meet its liabilities.

SVB UK was purchased by HSBC for £1 and its depositors’ money was secured, allowing its young tech firm clients to avoid a severe, even terminal, liquidity crunch.  In the US, the Federal Reserve, the US Treasury and the FDIC, which secures deposits up to US$250,000, came up with a plan to protect all depositors, including those uninsured by the FDIC.  The Fed also set up a borrowing facility for other banks to provide liquidity against US Treasuries (and some other assets) based on the bonds’ par (i.e. redemption) value at maturity.  Although other small banks are under pressure, this has likely stopped any systemic risk to the banking sector.  Equity and bond holders of SVB rightly face the risk of losing their capital.

We may see some volatility in bank stocks until the full picture becomes clearer (i.e. is everyone else wearing swimming trunks and will the Fed’s towel cover the embarrassment of any who are not?).

What lessons can we learn?

Perhaps the most important aspect of this debacle is to identify what lessons we can learn.  Here they are:

  1. A deposit is an unsecured loan to a financial institution. Your money moves onto their balance sheet and you only get your money back if the bank remains solvent.
  2. Government backed insurance schemes, have limits on how much they will protect you. For example, the UK’s FSCS guarantee on deposits is only up to £85,000 per eligible person banking group[2].
  3. Diversification is critical to managing risk. For those with cash, diversifying it between banks or via a money market fund should be an important consideration and advice should be sought where necessary.  CFO’s of these tech start-ups, and those of the venture capital firms, should have known better.
  4. The other aspect of diversification is at the security level. SVB has a global market capitalisation of around 0.03%, which is an insignificant amount in a diversified, systematic portfolio.
  5. Never assume that all financial institutions are smart. The age old mistake of borrowing short and lending long has brought down many institutions over the ages, not least Northern Rock in the UK during the Credit Crisis of 2007-9.  Many institutions regrettably pumped client money into Bernie Madoff’s multi-billion dollar Ponzi-scheme fraud through insufficient due diligence.  More recently, many high profile firms backed Sam Bankman-Fried’s now-collapsed FTX exchange in crypto-world (another area where a lack of swimming trunks is rapidly being revealed).

A systematic investment process can protect you from many risks, not least through broad diversification.  Whilst it is not Canute-like and the market’s tide will ebb and flow, at least you know that you are swimming with your trunks on!

Risk warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]      It is a most spectacular installation, not to be missed if you happen to find yourself in Liverpool.

[2]      More information here:

Employee Spotlight – Tyrene Kerr

Each fortnight we will be spotlighting a member of the team so that you can get to know the people behind the Pacem brand. This week we feature our Business Support team member, Tyrene Kerr. Tyrene joined the firm in September 2021 bringing a wealth of experience from a wide range of business administration roles. She supports the financial advisory team in meeting our client’s needs.

Tyrene tells us a bit more about herself below.

Employee name
Tyrene Kerr

Your role at Pacem
Business Support

How long have you been with Pacem?
September 2021

What does your day-to-day role entail?
I enjoy the variety of the role which can range from providing excellent client service, maintaining our back-office system, preparing and closing month end, admin support, arranging travel and assisting with induction & training plans for new team members.

How would you describe yourself in three words?
Reliable, diligent and friendly

Tell us something that might surprise us about you.
I’m a twin, not identical but growing up we had fun confusing people!

What do you like most about your job?
The people – the Pacem team are fantastic to work with and of course, I enjoy engaging with and getting to know our clients.

If you won the lottery, what is the first thing you would do?
Sounds cliched but I’d book an extravagant holiday for family and friends and share my winnings.   As much as I would miss Pacem, I’d give up work and volunteer with local charities.

Favourite food
Cheesecake or my sister’s pavlova.  I’ve such a sweet tooth, I look at the dessert menu first when I’m at a restaurant!

 Where is the best place you’ve travelled to and why?
We had an amazing family trip to San Francisco, LA and Vegas in 2019.  I enjoyed the history of Alcatraz, the eclectic architecture, tram rides, Pier 39, the Holywood Hills, Santa Monica beach, flying over the Grand Canyon and Hoover Dam, the neon lights of Vegas and that’s just a glimpse of what we packed in!