DESPITE trade war spats and economic uncertainty, there are compelling reasons to look outside the home market for investments, such as enhanced diversification, and the potential for better returns.
While many investors will have taken advantage of the multi-year rally in UK shares since the global financial crisis, some may have overlooked attractive opportunities overseas. Despite trade war spats and economic uncertainty, there are compelling reasons to look outside the home market for investments, such as enhanced diversification, and the potential for better returns.
However, due to misconceptions about overseas investments, many investors remain underexposed. Here, the Barclays Smart Investor team look to separate some of the facts from the fiction.
Myth one: International investing is too risky.
Adding international exposure to a portfolio of UK shares can actually lower risk in a fund by increasing diversification. Spreading your money across countries where the economic cycles do not move in perfect tandem, should help reduce the variability of your returns because you are less dependent on the market performance of one particular country or geographical region.
Myth two: Investing overseas is difficult.
It’s actually very simple to invest overseas, particularly if you invest in a global fund. These types of funds provide you with diversification benefits by investing across multiple companies, sectors, and geographic regions. With a potential universe of thousands of companies to choose from, it makes sense to buy a fund and let the investment manager conduct the research and identify the best investment opportunities available.
Myth three: The US is the best performing market.
Global share markets tend to perform in cycles with one country typically outperforming the other for a period of time before the business cycle turns. For investors, timing the cycle can be challenging and being underexposed at the wrong time could mean losing out when the market changes. Even when the business cycle favours the US market, overseas markets can still offer higher returns. Emerging markets were the top performing asset class in 2018 although past performance is not a guide to future performance.
Myth four: Currency risk is detrimental to performance
Investing internationally involves some element of currency risk as the overseas currency – for example, US dollars – will be constantly fluctuating relative to sterling. If the value of the dollar increases against the pound, it could boost your overall return when you sell your investment, but if it falls and sterling strengthens you could lose out when your money is converted back to pounds.
This is an additional risk that you need to be aware of when considering investing overseas. However, it is something fund managers take into consideration in the running of their funds, so if you pick a good fund that offers strong long-term growth potential, hopefully currency risks won’t overshadow the benefits international exposure can give to your investment portfolio.
International exposure is an essential part of a diversified fund, and can provide enhanced diversification and increase the potential for better returns over the long term. It's crucial for investors not to let misconceptions get in the way of a sensible investment strategy. Investing overseas is not without risk. However, it is these risks which can create mispricing opportunities. Active managers have the skill and resources to exploit these price mismatches and use them to deliver returns in excess of their benchmarks and passive tracker funds.
:: Claire McCombe is a private banker at Barclays Wealth and Investments NI
