SHOULD DOMESTIC investors put money overseas? At one end of the spectrum, the modern balanced portfolio theorist will say that the UK represents just 10 per cent of world stock markets by capitalisation, rather less in terms of contribution to world economic output and a mere fraction of the global population. Go global, they say.

But it's never so simple. The counter argument says foreign markets can be tricky and difficult to access and, if you live in Tring and shop at Tesco's you will wish to earn your dividends in sterling. Rands or rupiahs count for little at the corner shop.

No one will deny that the world is shrinking rapidly. If you want to invest in Jaguar cars, you have to buy shares in Ford. And Britain's investment banking industry is now largely in the hands of continental financial companies. Asda, firmly established as number three in the UK supermarket league, is now owned by Wal-Mart of the US.

It works the other way, too. SmithKline Beecham may be registered in Britain but only around 6 per cent of its business is transacted at home. HSBC, owner of Midland Bank, is another FTSE constituent which has just listed its shares in the US and derives the majority of its earnings from abroad. Indeed, there is an argument that says you do not have to invest directly abroad to obtain an international spread. Just buy selected UK companies.

But overseas markets are different. It may seem hard to believe, but UK shares are among the highest yielding in the world. Only Australia, among the developed markets, offers a higher return. Investing overseas also brings an added dimension to performance - the currency risk. It is not unknown for an investor to find gains made in a foreign market are then eroded because they are made in a weak currency.

Perhaps the biggest drawback for the private investor is that buying overseas shares is costly. Despite increasing globalisation and the many electronic trading platforms, the cost of buying, and holding, an overseas security is usually significant. Only large institutional investors, able to establish appropriate custody arrangements and negotiate favourable commission terms with brokers in the local market, can trade cheaply. I read recently of a UK investor holding a foreign share where the handling charges for dividends were greater than the income. This is a real problem for those who wish to diversify their portfolio overseas.

The Association of Private Client Investment Managers and Stockbrokers says most private client managers in the UK invest abroad. They maintain indices which show how member firms allocate clients' assets. The Growth Index, which has the highest overseas representation, indicates that around 25 per cent of private client portfolios are invested abroad. To be fair, the bulk of this will be through unit trusts which is wholly sensible. These are just the sort of institutions that can negotiate favourable dealing terms and ensure they are not penalised for holding foreign shares in the way the small saver would be.

Brian Tora is Chairman of the Greig Middleton Investment Strategy Committee

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