Should you still be investing in the UK?
The UK stockmarket entered bear territory summer 2008 and the outlook for the economy and housing market for the year remains far from rosy. With house prices falls of 10% predicted in 2008 alone, and no end in sight, economists are united in the belief that we'll be hard-pressed to escape a recession before the year is out.
Emerging from beneath all this doom and gloom, however, are the voices of global fund mangers who believe that the current round of ever-more depressing news, should provide a wake-up call to UK investors. They reckon it's time to review where we're investing and re-adjust our portfolios in favour of more profitable markets - in particular the emerging markets.
James Budden, managing director of Witan Investment Services, explains: "If you look at where growth is, then it's clear that the emerging markets have quite a lot more in the way of growth potential than the mature markets of the West, which are struggling under a weight of debt. These economies are in a fairly ropy state at the moment."
Peter Bickley, chief economist at Tilney Investment Management, agrees. "The returns to be gained from looking around and finding the emerging multinationals just knock those possible from the domestic stockmarket into the shade. A good example is the emergence of at least a dozen Indian multinationals over the last decade," he adds.
Peter Hicks, executive director at fund manager Fidelity International, also thinks the time is ripe for a rethink. He points out that the majority of UK investors have just 2.3% of their portfolio in emerging markets, yet a quick glance at the sums reveals that these economies now account for 30% of global gross domestic product. By contrast, Hicks claims the UK accounts for less than 5% of global GDP.
Hicks argues that seven of the world's largest 20 economies are emerging markets - China, Russia, Brazil, India, Mexico, Turkey and Indonesia.
Separate research from investment bank Merrill Lynch and consulting group Cap Gemini also confirms the outperformance (relative to the UK) of the stockmarkets of the first four of these countries in 2007. It records that China's Shanghai exchange clocked up a 96.1% return; India's Bombay Sensex, 47.1%; Brazil's Sao Paulo Bovespa, 43.6%; and Russia's RTS Index was up 19.2%.
Meanwhile, the UK's FTSE 100 (UKX) rose just 3.8% in 2007. Admittedly, these stellar rises should be taken with a hefty dose of caution; it's unlikely that they'll be repeated indefinitely. Indeed, after the first six months of 2008, of the BRIC economies (Brazil, Russia, India, China), only the Brazilian exchange is in positive territory so far - up 12.6%.
However, while these economies may be providing investors with something of a roller-coaster ride, the consensus is that Brazil and Russia are rich in natural resources, while China and India both have a burgeoning middle class eager to spend their newly acquired wealth. As a result, the long-term prospects for these emerging markets mean that their GDP will continue to expand, and with it their respective stock exchanges.
Many managers running UK funds contend that their funds do give investors access to global growth via UK-listed multinationals such as BP (BP-) and Shell (RDSB). However, by rethinking the percentage of UK companies in your portfolio, you could free up room for multinationals domiciled elsewhere as well.
Figures from the Association of Investment Trust Companies underscore the out-performance of emerging market investment trusts over the last decade, compared with UK trusts. The AIC's research reveals that global emerging market trusts were up an average of up 262% over five years and 330% over 10. By contrast, the average gain for UK growth trusts over the same time frames was 88% and 78% respectively.
Mike Jennings, manager of the Premier Global DSR fund, which launched in May 2008, is one of those who believes that investors should rethink their exposure to the UK. Jennings told Moneywise that his fund takes a truly global approach to equity selection and will not be skewed towards the UK. He believes there are greater opportunities to be had by thinking globally.
Jennings takes a very controlled approach to investing. This means that even if he likes a company he will not buy it unless he feels the price is right.
During summer 2008, not one of the top 10 holdings in the fund was British, although it includes the likes of Nasdaq-listed Microsoft (MSFT), New York-listed Syngenta (SYT), the Swiss crop group, and Brazilian oil giant ADR Petroleo Braisleiro.
Explaining the presence of Syngenta in the fund, Jennings says: "We know the prices of corn and rice have risen manyfold over the last year. Unfortunately, this is a multi-year problem for the world - the global population is rising and as it does the demand for food rises. Added to this, 20% of corn produced in the US last year went to the manufacture of ethanol for fuel.
"It's classic economics, demand is rising, supply is tight and the price is very high. One classic beneficiary of this is Syngenta. This company is one of the world's leading producers of seeds, and provides products like drought-resistant strains."
One big market
Witan Investment Trust (WTAN), which went multi-manager four years ago, is another fund that has recently upped its exposure to emerging markets.
Witan's marketing manager James Budden explains: "If you went back to just before we went multi-manager in 2004 we were 60% UK and 40% rest of the world. At that time we went 50/50, and as a result of our review last year we went 60% rest of the world and 40% UK, so that is now our benchmark and illustrates our strategic direction. The world is becoming one big market and the UK's part of that is shrinking."
Meanwhile, figures from the AIC show that over the last 10 years the top emerging market investment trusts have produced stellar returns. Templeton Emerging Markets (TEM) is up 341%; Advance Developing Markets (ADD) is up 321%; Genesis Emerging Markets (KGEM), 320%; while JPMorgan Emerging Markets (JMG) has risen by 307%.
Of course, hunting out the companies set to profit from tomorrow's growth is one way to tap into the developing economies, but there are others.
Infrastructure and energy resources funds focus on specific aspects of the expected growth in emerging markets - namely, helping newly wealthy countries to build roads, railways and power stations, and extract minerals or oil. For example, Mark Dampier, head of research at IFA Hargreaves Lansdown, points out that the First State Global Infrastructure fund, launched last autumn, is well positioned to capitalise on the urbanisation of emerging economies.
Just because a global-oriented fund may offer much greater potential than UK funds in the current climate, you shouldn't necessarily abandon the UK altogether. It's just a question of striking the right balance.
One reason why investment managers, even those with global remits, have traditionally held UK stocks is for income. UK companies pay some of the highest dividends around, which can be crucial if you're relying on dividend payments to top up your pension or other sources of income.
Indeed, the Investment Management Association reports that in May 2008, 11.8% of all the money looked after by its members was in UK income funds, suggesting that income is an important factor in investment decisions for a lot of investors.
Budden acknowledges the juggling act that you have to perform to provide income today while seeking returns for tomorrow. Witan is committed to increasing its dividend and recently announced a 4.9% increase (to 4.3 pence) to be paid in December 2008.
He says: "One of the reasons we've been pretty conservative with our weighting in the UK is that we have a progressive dividend policy and are committed to paying a growing dividend. In that respect, the UK is still a high-yielding economy as far as the stockmarket goes."
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.