Time to go global

Mr Stout says that while globalisation might be the buzzword of the 21st century, too many UK investors still find the idea of 'going global' altogether alien. "For the last 30 to 40 years the overriding mentality in the UK has been that one has to invest in your own domestic market because you live here and it is safe," he says.

Mr Stout uses the example of a slide he regularly included in client presentations between 2004 and 2006, a significant time prior to the banking blow-up. The slide compared two generically named banks. Bank A offers borrowers a mortgage five times their salary, loans 125 per cent of the property's value and does not require you to document your salary. Bank B requires a 25 per cent deposit, provides a mortgage twice the borrower's salary and demands all the required documentation. Which one would investors trust with their money?

A unanimous vote for Bank B, the question being a bit of a no-brainer, really. But, once Mr Stout revealed Bank A was a Scottish bank, and Bank B was an Indian bank, investors quickly changed their minds. "I am not going to invest in an Indian bank, it is far too risky," was the standard, albeit prejudiced, response.

But then there is nothing as cataclysmic as a banking crisis to make people realise that home grown is not always a sure bet. No one wants another painful rerun of what happened to the once mighty Royal Bank of Scotland but, as Mr Stout points out: "While it may be an absolute disgrace that 300 years of banking history can be destroyed by a few reckless individuals, the upside is that it does make people think globally."

Good things come from bad situations, and Mr Stout believes the best thing that can happen is for UK investors to realise that if you diversify internationally you substantially lower the risk of your portfolio.

"Why would you have 60 per cent of the assets in your typical pension fund invested in the UK, if the world is your choice? The thinking is totally flawed. Firstly, you are taking an enormous amount of risk putting 60 per cent of your eggs in one basket. Also, by definition, you are saying that 60 per cent of the best opportunities available just happen to be in the UK and have been here consistently for the last 25 years, despite the way markets have moved."

Mr Stout says he finds this premise very hard to believe given that the UK is a mature economy with an index of companies that consists mainly of banks, oil companies and pharmaceuticals. "These sectors now represent over 50 per cent of the market cap and yet people still hold a huge weighting in the UK," he says.

Mr Stout is, however, quick to admit that this does not imply that there are no attractive companies within the UK. He highlights Rio Tinto and Standard Chartered as attractive examples, having recently increased his funds' exposure to both companies. But Mr Stout makes the point that, while these companies may be UK-based, they primarily generate their earnings in overseas markets.

Stocks, not benchmarks

This thinking underpins the investment strategies of the Murray International Trust, and Aberdeen's global equity funds, which Mr Stout says are not confined by benchmarks or hung up on prejudices towards one market or against another. "Investments are made based on a stock-by-stock focus with as much business diversified within the portfolio. We ask ourselves if a given business will be stronger or weaker because of the downturn, because in a situation like the present the corporate fallout from bankruptcies for all industries is immense."

This fallout gives way to new opportunities and Mr Stout use the insurance industry as a case in point. "The difficulties AIG find themselves in means that as a global competitor the insurance giant is significantly weakened. The companies which used to come up against AIG will now be the beneficiaries of its weakened position. Hence we continue to invest in QBE in Australia and Zurich Financial in Switzerland, given that these companies are now in a position to make acquisitions on very attractive prices and recruit skilful staff. Ultimately, the more capacity comes out of the insurance industry the more operationally leveraged the surviving companies will be when recovery comes."

While no one knows when the much anticipated recovery will be, Mr Stout says it does not really matter because when we do hit rock bottom, nobody is going to be ringing a bell. "The recovery will only be known in retrospect so, for the moment, our focus is on increasing our exposure to good-quality businesses at lower prices."

Decoupling debate

Mr Stout is also one of the few people who still believe that the emerging world remains decoupled from the developed economies of the west. "The keys for superior economic growth, as well as profit and dividend growth in the world's emerging economies relative to that of the Anglo-Saxon world remains intact. While markets were almost 100 per cent correlated throughout the world in their declines, there was no attention paid to these fundamentals."

He expects the decoupling of the emerging markets world, like the eventual economic recovery, to "come upon us" without much notice. "You are not going to wake up one morning to find the S&P down 200 points and Hong Kong up 4 per cent. This will take some kind of a 'eureka moment' where perceptions change in an instant. It is not going to happen. But what can happen over time is that superior earnings and dividend growth in companies that happen to be domiciled in these markets will eventually be recognised in stock prices and will therefore have differentially good performance relative to their peer group."

At the end of the day, says Mr Stout, the companies that stand to benefit most coming out of the financial crisis are the ones that have global diversification in the goods and services that they produce. For this simple reason, if no other, he believes there has never been a better time to go global.