Global money leaves the UK

Global fund managers are investing more in the fast-growing Pacific region and less in the sluggish UK. Should you make the same move?

Managers of global investment funds are switching away from the UK market. In April 2011, global funds were investing 32% of their assets in the UK market, down from 42% five years earlier, according to the Association of Investment Companies.*

Here’s how the make-up of funds have changed:

Percentage allocation of assets in global growth funds

The most striking changes are for the UK and the Pacific (excluding Japan.) There’s been a big reduction in assets invested in the UK market and a big rise in the Pacific region. I’m not surprised by the rise in Pacific investment. Young economies in the Far East are growing much faster than any developed country and their stock markets may rise more quickly too.

The rise in North American investment is perhaps more surprising given that the US economy is in pretty poor shape. The most likely explanation is that fund managers think at least some US companies are attractively priced and offer good growth prospects for the future. The poor performance of the US economy hasn’t halted the growth of exciting young companies such as Google and Apple.

Going global

So if you want to follow the global fund managers’ example, how can you switch some of your investments away from the UK?

I think the best way is to invest in tracker funds that follow overseas indices. So if you want to boost your exposure to the fast-growing pacific economies – including China – you could put some money into the HSBC Pacific Index fund. The charges are low because you won’t be paying an expensive fund manager to pick stocks for you; instead the fund simply tracks an index called the FTSE World Asia Pacific excluding Japan index. If the index rises, the value of your fund will rise too. And if it falls.... you can probably guess what happens.

If you want to invest in the US, there are plenty of US trackers to choose from. Or you could go for an exchange traded fund (ETF). For more information on trackers and ETFs, read Two simple ways to invest better in shares.

An even simpler approach is to go for an index tracker fund that tracks all major stock markets in the world except the UK market. Vanguard’s FTSE Developed World ex-UK fund fits the bill nicely. (The easiest way to buy Vanguard funds is via the Alliance Trust Savings platform.)

You don’t have to track

I’m a big fan of tracker funds but I am prepared occasionally to invest in a fund where the shares are picked by a manager – with two conditions. The manager must have a strong track record and the charges can’t be too high.

One example is the Templeton Emerging Markets investment trust where I’ve made a small investment. The trust invests in fast-growing countries such as Brazil, China and India and is managed by a real emerging markets expert, Mark Mobius. As with many investment trusts, the charges are quite reasonable.  It’s well worth looking at.

The FTSE is more global than you think

To be clear, I’m not suggesting that you should invest all your money in overseas markets. Foreign stock markets are normally riskier – partly because currencies can move against you – and markets in emerging markets are normally seen as especially risky.

And anyway, the London stock market is a more global investment than you might realise. Companies such as Tesco and HSBC are global companies that have substantial businesses outside the UK. In fact, when you look at the FTSE 100 index, more than two thirds of the profits made by those companies are earned outside the UK.

So, to use the jargon, the Footsie offers geographical diversification. The problem with the Footsie is that it’s dominated by a small number of corporate sectors – banking, resources and pharmaceuticals. So investing in overseas stock markets can be more about getting sector diversification rather than geographical diversification.

But whatever the reason, investing outside the UK is a sensible way to reduce risk and try and improve your returns. This is one occasion where it makes sense to follow the fund managers.

*These figures are for investment companies in the Association of Investment Companies Global Growth sector. Many of these companies are investment trusts. The sector does not include unit trusts or OEICs.