Wish you where here

Geographical diversification will offer another dimension to your portfolio, says Jo Tura, and it’s not difficult to broaden your investment horizons

Investing in companies listed on other countries’ stock exchanges is just as easy as investing in UK stocks. Many brokers offer special accounts and provide overseas company re-search, and it is possible to invest in some very specialist stocks and places.

Overseas investment can be used to good effect for portfolio diversification as markets abroad may be up when the UK is down. It can also give you access to very successful companies. “If you’re only exposed to the UK you don’t have access to large, successful companies like Ebay and Microsoft, for example,” says Lee Gardhouse, manager of the Hargreaves Lansdowne Multi Manager Special Situations fund, which invests in other global funds.

International stocks can also offer diversification on a sector level. Some sectors are difficult to gain exposure to through UK stocks, while others just do not exist in this country. “The All Share index is made up of 20 per cent oil and mineral stocks and 30 per cent financials,” says Robert Merriweather, research strategist for stockbroker Morgan Stanley Quilter. “It has only 0.4 per cent IT and hardly any manufacturing, so the industries you want to get to might be very difficult to access in the UK.” To invest in these sectors, your only choice may be to look abroad.

“There are distinct opportunities for people to look overseas and cherry pick,” says Merriweather. “Different types of investment are cyclical so you can theoretically move from market to market catching things at their best.”

However you don’t necessarily need to buy a foreign stock to gain exposure to overseas markets. Just as a large proportion of Microsoft’s revenues come from countries outside the US, so do those of UK companies like HSBC, for example. You may be able to diversify your investments by buying into a large, multinational UK-listed business.

Finding the right market

Australia had an excellent year in 2004, with its All Ordinaries index reaching a record high in December. As for what will be hot this year, a recent survey of financial advisers by the Association of Investment Trust Companies (AITC) found the majority expected emerging markets to be the top performing geographical area, followed by the Far East excluding Japan. Just 14 per cent of IFAs thought the UK would be 2005’s best performer.

Lee Gardhouse says: “If you believe in the longer-term that markets such as Asia and Eastern Europe will form a bigger part of world markets you will want to look at buying some of the companies in those regions.”

Meanwhile, fund manager Charlemagne Capital has just launched a fund investing in Turkish companies, based on a belief that the country’s potential EU accession will spur growth. “There is no reason to believe Turkey will not enjoy the same results that other convergence countries have had,” says Stefan Böttcher, head of portfolio management at Charlemagne Capital. “For example, on 31 March 1994 accession talks began between the EU and Hungary. Between that date and EU entry on 1 May 2004 the Budapest index rose by 501 per cent.” Keeping an eye on the political landscape can give you ideas of the countries to watch.

Selecting stocks

Finding the right countries and companies to invest in need not be complicated. Investors with access to the internet should find it easy to research countries and companies, and many sites that deal with UK equities offer some overseas coverage.

Morgan Stanley Quilter’s Merriweather points out that advisory stockbrokers can help with choosing stocks, but investors with execution-only stockbrokers have to rely on their own research. “A lot of that is just common sense; if you read the newspapers you start to pick up what names are interesting. If you looked at the IT sector in Europe you could easily pick up, say, the top half-a-dozen companies.”

Trading internationally, says Richard Forsyth, head of product development at stockbroker TD Waterhouse, need not cost more than UK trading. On TD Waterhouse’s website fees are £12.50 per trade for an infrequent user (less than seven trades in three months) and £11.95 for frequent traders. Trading by phone, which has to be done for more unusual stocks or markets, costs a little more.

However, there may be extra costs attached to holding some foreign stocks, says Alistair Hodgson, investment manager at Pilling & Co stockbrokers. In the UK you can have a share certificate sent to you when you buy a share but that is not always the case abroad. You may need to have the certifi-cates held in some sort of deposit facility. “It’s more likely if it’s a less liquid and less well-known stock and you have to pay for a local deposit,” Hodgson explains. This can cost from £25 per annum upwards. A plus point to bear in mind on the costs side, says Forsyth, is that outside of the UK and Ireland there is no stamp duty on share purchases.

Beware the exchange rate

One thing to bear in mind before taking the plunge is currency risk. Investing in stocks in another country often means dealing in that country’s currency, which of course ?uctuates against the pound. Currency risk is the risk that the currency you are invested in will fall against sterling, effectively making your stocks worth less money.

These kinds of ?uctuations are an added layer of complication in investing internationally. “You may well say the US is a strong economy but the dollar may not be a strong currency. You have to be very aware of the economic and currency situation in the territory you’re looking at,” says Alistair Hodgson.

Yet currency ?uctuations can have advantages, according to Robert Merriweather. He explains: “There are two ways of looking at currency risk: one, that it’s a risk, and two, it’s something that diversifies you away from what you’re in at the moment. Last year I might have made money on my European investments but lost on my US investments – net, it’s not too bad.” Currencies can move in your favour and sometimes the underlying equity goes up as well as the sterling exchange rate for the currency it is in. “In that case you would get a double benefit,” says Hodgson, “but you have to get both of these things right in order to reap the rewards.”

Richard Forsyth points out that investors can get round potential problems by trading in a foreign currency account and keeping the currency in there until the ex-change rate improves – this is an option on TD Waterhouse’s site. Of course this isn’t helpful if you need the cash from the sale of shares in a hurry.

Backing the markets

There are other ways of gaining exposure to other countries without investing in single company shares, which, even when several are bought, still concentrate risk. One is to invest in the indices of other countries. This would mean exposure to a much wider range of companies, for example all those listed on the Tokyo Stock Exchange. Index tracking funds are available for overseas indices just as they are for UK markets.

Another way to invest in an index is to buy an exchange traded fund (ETF). This is a single share that replicates an index, moving up and down in value in line with the chosen index. Barclays Global Investors offers a series of ETFs (branded iShares) that allow you to invest in both market and sector indices all over the world. A recent introduction is the FTSE/Xinhua China 25 Index fund, which is traded on the London Stock Exchange and holds 25 of the largest Chinese companies including China Mobile and Petrochina.

Spreading your bets

Yet another route to investing internationally is through a collective investment, either a global or regional fund. Global funds invest in many markets, changing the proportions according to which countries they think are performing better or worse. They will include, for example, a chunk of UK shares, another fairly large chunk of US shares, then some in Asia, Europe, Australia and emerging markets such as Latin America.

Regional or single country funds need not be as focused as the Charlemagne Turkey fund. North America funds can invest in US companies, which make money all over the world, and regional funds, such as a European fund, can invest in successful stocks from all over the continent.

Hargreaves Lansdowne’s Lee Gardhouse says it is vital to get the right specialist if you are looking at a regional or single country fund. “No investment company is good everywhere,” he explains. “You have to make sure you have good people in each region.”

A great advantage of investing

in collectives is that the currency risk will be looked after for you. Most fund managers will hedge against currency risk by buying a derivative that allows them to make money on the currency they are investing in if it goes against them. Alistair Hodgson explains: “Currently the dollar would rob your investment returns if you hadn’t hedged against it. The fund manager would be losing money on the portfolio because of the dollar going against them, but if they’ve hedged against that currency going down they are protected.”

Charterhouse Communications

www.whatinvestment.co.uk

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