The case for foreign shares

It's all very well shadowing industry mega trends, perhaps using GKN for automotive, retailer Game Group for computer games or ARM for microprocessors. But these companies bring with them their own issues of management, scale, competition and costs, all of which muddy the water of the big investment idea that underlies them.

What's the solution? Certainly, there are thousands of funds that offer overseas exposure however you want it – usually by country or region, but increasingly by theme, too. For many investors, managed funds or exchange-traded funds (ETFs), will provide the required exposure. Of course, some of the best of these, particularly ETFs, are foreign-listed, too.

But sometimes only a particular stock will do. Some of these investment ideas have the virtue of tremendous simplicity. "The classic Wall Street recovery play always was to buy Porsche," said Gary Duckworth, operations manager at broker iDealing. It is based on the idea that big bonuses tend to get splurged on glitzy cars. It's a simple play but it has elegance, too. Buying Porsche geared the investor to whoever in Wall Street or London was getting the bonuses without having to guess winners or losers among the investment banks, or to work out whether, for example, fixed income or currencies were this year's big money maker. Unfortunately, Porsche is now merged with Volkswagen, so the play has lost its clarity, but you get the idea.

There are some unique companies that have no counterpart here in the UK. If you want to get pure exposure to the world's leading microprocessor firm, you have to look to Intel; for the king of online auctioning there is eBay; and for the leader in online search there is Google. Nothing in the UK comes close.

Interest picking up

"We've seen a lot more interest in foreign shares. It started with technology shares and has now broadened. People are so concerned about the UK economy that they are looking at emerging markets, gold and commodity plays," said Peter Day, a partner at Killik & Co.

Mr Day estimates that 11-12 per cent of Killik's business is now in individual overseas shares, compared to 2-3 per cent five years ago. "It could rise to 20 per cent in the next couple of years," he said.

One of the great advantages of owning a foreign share is that you can bundle it up with a currency exposure that might otherwise be hard to find. Investors who are bullish about both global TV sales and the Korean won can get two exposures for the price of one through buying Samsung or LG Industries (both of which are available as US-listed Global Depositary Receipts).


Of course, putting investment ideas into practice can be tough. Globalisation has been horribly slow and uneven in the world of traded securities, even if the companies which those securities represent are already global powerhouses. There are sometimes enormous difficulties in getting access to the unique foreign shares that give investors the exposure they are looking for.

Australia, for example, is the 'lucky country' in more ways than one – it has been the best-performing stock market in the world over the past 110 years, according to a study by Credit Suisse. It recorded a real return of 7.5 per cent a year, compared with 6.2 per cent for the US and 5 per cent for the UK. Yet, buying the individual Australian resource stocks that have powered this outperformance is still extremely difficult.

Things are beginning to get better. India, hitherto one of the most restricted markets for foreign investors, is looking to open up to individuals. At the moment, only pension funds and other investment institutions can buy individual shares, but now the government wants to attract less footloose investors. This is likely to be a slow process, given India's usual bureaucracy, but even a statement of intent shows progress. By the end of next year, UK investors could be buying shares in Reliance, Tata Group and any of the other 47 or so Indian firms among the world's top 2,000 companies.

Let's be clear. Owning individual foreign stocks is not for everybody. Even once the stock is purchased and settled into an account, difficulties may crop up. Newsflow is always more difficult, because there is no convenient RNS system that serves up company announcements. The larger international companies may have English language investment relations areas on their websites, but not always. There may be nobody to talk to by phone in your time zone to sort out any queries you may have. The most important thing is to be clear about why you want to have a particular overseas holding, and what you expect it to do for your portfolio.

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