Broadening the Investment Horizon

One of the lessons that investors should have learned over the last few years has been the importance of diversification. Long gone is the belief that money would appreciate no matter where it was invested. We stress 'should have learned' because the stampede into TMT stocks and under exposure to fixed income of five-six years ago has been replaced with low confidence in equities and a devotion to fixed income and property funds. Undoubtedly many portfolios are more balanced as a result, but moderation is the name of the game. Misconceptions persist that diversifying into overseas equities is an undesirable strategy that increases risk.

Shackled by the UK Market
A further argument for globally invested funds is the broad canvas that they offer the fund manager. Arguably, when managing a total return portfolio, managers do not wish to operate in a constrained, 'one hand tied behind the back' environment. For a research driven, stockpicking house, the attractions are obvious: the number of opportunities is greatly increased by offering a global mandate.
A limitation of UK only investing is that some sections of the market simply do not exist here. The lack of automobile manufacturers is an obvious example but there are others. For example, there are few small and mid sized banks in the UK. The UK economy is heavily service based and its market is often regarded as 'defensive'. The dominance of just four sub-sectors - oils, telecomms, pharmaceuticals, and banks, accounting for over 57% of market capitalisation is the evidence. A typical UK fund may be obliged to own a large proportion of such stocks as they dominate benchmarks and peer groups. A 'defensive' sector bias can limit exposure to exciting growth opportunities to be found in areas like information technology - which is miniscule in the UK compared to the big four sectors.
The bottom line, however, is performance and in many cases the best UK stocks are outpeformed by their overseas peers.

Overseas Risks
Currency risk is often cited in arguments against investing overseas but I would argue that currency is more a factor for fund managers than it is investors - and it may be as much of an issue for UK funds as overseas funds. For example, exchange rates often have a major impact on exporting companies in affecting the price of their goods to the market. Conversely, manufacturers who import their raw materials obviously see their costs rise if exchange rates move against them. And it's not always this simple: many German exporters, being used to strong home currency, have taken action to minimise the currency effect on their overall operations.
Much academic thought has been devoted to how currencies work and their correlation with economies. In the longer term however, currency fluctuations tend to even out and a company's true value will be reflected in its share price.
Geo-political concerns are also cited as a reason not to invest abroad. The question 'is now a good time to be investing overseas?' is usually associated with grim newspaper headlines. Other regions are indeed subject to risks are matched, if not outnumbered, by opportunities. As always in investing, the presence of risk should not be an excuse to procrastinate. There are a number of strong opportunities overseas in view right now. Emerging markets, for example, are rightly treated with caution but it may prove costly to ignore them. the emergence of the BRIC economies - Brazil, Russia, India and China - is a development that could transform the global economy. Although their combined output is currently less that 15% of the G8 economies, their growth models, demographics and grasp of western technologies make them strong candidates to become the 21st Century's powerhouse economies.

A Core Overseas Holding
If you were to chose a research driven, stockpicking house to manage just one fund it should arguably be a global or managed fund where global research resources can be exploited to best advantage. This should serve as an excellent base fund, providing broad exposure to the main international markets, with smaller investments in the exciting emerging markets.