UK home-biased equity portfolios have lost almost 3 per cent due to the BP oil crisis, in contrast to diversified global equity portfolios which have lost only 0.33 per cent, according to a MSCI research paper.
Since the BP oil crisis began on April 20, the company’s share price has halved, and the impact on domestic-biased institutional portfolios shows the merits of allocating assets globally, according to MSCI’s research bulletin ‘The BP Oil crisis spills over to UK domestic portfolios’, June 2010.
BP stock represented about 6 per cent of a UK home-biased equity portfolio (70 per cent UK/30 per cent All Country World Index), and such a large position would have led to a loss of about 2.9 per cent in such portfolios, in contrast to a more globally diversified position’s loss of 0.33 per cent.
In addition to the sharp dive in the BP share price, the mounting pressure on BP to suspend dividends will lower the MSCI UK Index from 3.61 per cent to 3.10 per cent, the paper said.
Before the spill, the total risks of the five top oil stocks were broadly in line, and their specific risks were “very low” at 2 per cent, the paper said. But, from June 14, the total risk of BP had more than doubled to 48.75 per cent with a “dramatic increase in its specific risk from 1 per cent about 18 per cent”.
Commenting on this, MSCI advisory director Roger Urwin said the oil crisis would spill into two areas: equity portfolio construction and the concepts of ESG investing (environmental, social and governance) and universal ownership.
Urwin, who is also global head of investment content at Towers Watson, said the UK investor “has been badly served by an outdated idea of investing domestically first and overseas second” (The BP Oil Spill and ESG, June 2010 MSCI).
Institutional investors would now need to “think less about the weights suggested by current market valuations and more about weights reflecting future economic prospects”.
This “successful incorporation of ESG in an investment process” would be a “differentiator in the future”, he said in his paper.
