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When it comes to investing your hard-earned cash, you don’t have to seek returns just within the UK. There is a great deal of diversity that can be found within the investment trust sector because different trusts invest in various areas or countries around the world with different objectives and goals. ‘The UK has performed well in line with all global markets – it’s a defensive market.

But a lot of investors want to add more international exposure and not have all their eggs in one basket,’ says Gavin Haynes, managing director of Whitechurch Securities.

There are many benefits of investing outside your home country. Economies move in cycles so that while some markets may be depressed others will be thriving. Also, by investing in more than one country, you can ensure that your portfolio is exposed to stronger markets and produces more consistent returns.

The benefits of diversification

Having a diversified geographical portfolio also means that you are not exposing your investments to just one type of company. ‘Investing internationally means that you get exposure to a broad selection of different businesses. Domestic markets are narrow in composition. In the UK, for example, you would mostly be investing in telecommunications, pharmaceuticals and banks,’ points out Bruce Stout, senior investment manager of the Murray International Investment Trust.

But how do you go about choosing which countries or sectors you want to invest in? It is important to do your research first, and a good first port of call is the Association of Investment Companies’ (AIC’s) website, www.theaic.co.uk, which lists investment trusts by sector. Of course, you have the option of investing in global funds, but if you want a more specific focus then outside the UK there are funds investing in Europe, North America, Asia Pacific and emerging markets (which are split into European, Latin American and global emerging markets). Finally, there is also the option of investing in global funds.

Swayed by sentiment

Choosing the right country to invest in can be difficult, and it is easy to be swept away by media sentiment. Emerging markets, such as China and India, have received a lot of coverage in recent years, but for good reason. ‘The Chinese economy grew by 10.7 per cent in 2006, the fastest pace in more than a decade,’ says Peter Dalgliesh, manager of the Pacific Assets Trust.

Some advisers still see China and India as good bets, but the days of making a quick buck in the region are receding. To get decent returns, investors will have to stick it out for the medium to long term. ‘The more speculative investor may want to look at emerging markets such as China and India because they have better long-term growth potential than some of the more mature markets. You may want to look at firms such as JPMorgan which run a Chinese and Indian investment trust,’ says Haynes.

Other advisors feel that investors must not be blinkered by the “Chindia factor” and should consider other emerging markets within Asia for better returns. ‘If you are going to be a long-term investor, it’s hard to ignore the East,’ admits Mark Dampier, head of research at Hargreaves Lansdown. ‘Basically they are in a position of industrialisation and are growing at a rapid rate. India and China are now a growth opportunity area. But it’s important not to get carried away in Asia as it’s already had a good run. Don’t only look at India and China as there are other countries, such as Vietnam, which still has a 15 to 20 year growth story ahead of it.’

The Japanese question
When it comes to Asia, there is also the difficult decision of whether or not to invest in Japan. The country has had a rocky history. ‘Japan is emerging from 15 years of deflation. Property prices are rising and inflation has become positive again. We have around 13 per cent of assets in Japan,’ says Bruce Stout.

Gavin Haynes agrees that ‘It is hard to ignore Japan. It is, after all, the second-largest economy in the world and has a lot of potential. However, Asia excluding Japan trusts and those funds including Japan are investing in very different areas. There are a number of Japanese trusts out there that are run by highly respected fund managers. Japan is currently looking very well positioned and is a good recovery situation going forward as the economy is looking a lot healthier. Japanese companies are more conservative with profit forecasts and so it would be a good time to have a look at the market now.’

Wider horizons

But Asia is not the only area where emerging markets have performed well. In fact, Latin America has done far better, even though the region has not received as much attention as Asia. ‘Latin America is a very interesting case in point,’ says Stout. ‘Over the last six years, it has been the best-performing region in our view. We have 13 per cent of assets in Latin America, and we particularly like the Mexican airport operator ASUR, tobacco company Souza Cruz, and builder of low-income housing Consorcio ARA. All of these companies have very good growth prospects ahead of them.’

North America may not be an emerging market, but it is an area with potential too. Haynes feels that investing in the US could prove profitable if investors are prepared to wait for the right conditions. ‘The US is an attractive area. It is very much overlooked for more exciting markets such as Asia, but it has got the highest-quality companies globally. Certainly, some of the larger companies are due for good recovery, and if the dollar were to strengthen it would be attractive for UK investors. Here I would recommend looking at JPMorgan American Investment Trust or the Edinburgh US tracker funds to gain exposure to the US,’ advises Haynes.

Closer to home, European investment trusts can provide decent returns, but financial advisors and managers advise that investors should tread carefully here and do their research. Stout warns that ‘Europe is such a large region with various economies all going at different rates. For example, while Spain is overheating, the German economy is gaining momentum. Of course, Europe does yield less than Latin America and Asia, but there are still lots of interesting growth opportunities in Europe.’

Building your portfolio

Once you have chosen where to invest, there are different ways in which you can construct your portfolio. Some companies will allow you to invest directly with them and you can choose from a range of their funds and switch between them. JPMorgan allows investors to choose between their three European investment trusts or trusts that invest in the US, India, Russia and Greater China. ‘It is down to the individual to seek advice if they want to, but for direct investors we offer a share plan with which you can invest in all our investment trusts online or by paper. If you want to switch from one fund to another, you can send an instruction online or in writing and we’ll carry it out on your behalf,’ says James Saunders Watson, head of investment trust sales and marketing at JP Morgan Asset Management.

However, going it alone doesn’t mean that you will be without help. JPMorgan, for example, sends out statements every six months and literature containing advice and commentary on the various markets.

But choosing to go directly through one provider can be restrictive as investors are unable to invest with or switch easily to competitors. For a list of which investment trusts provide switching facilities, otherwise known as share exchange schemes, visit the AIC’s website. ‘Many groups have switching facilities, but it all depends on their terms and conditions. Choosing funds through a self-select individual savings account may therefore be easier,’ says AIC spokesperson Jemma Jackson.

Looking outside the UK for a return on investments could prove very fruitful, but it is not easy to predict which area will experience the next boom and conducting your own research can be very time consuming, so monitoring your holdings is essential. But for those investors who want to manage a global portfolio, the investment trust sector provides a range of options for active asset allocation on a global basis.

And while going for a global fund could prove less expensive and be the easier option, advisers warn that investors should not forgo specialist funds based on the cost argument. As Mark Dampier points out, ‘Cost shouldn’t be the only factor in choosing an investment trust, as a good fund manager could well make up for it.’

This article is from the July 2007 issue of What Investment.