Investors told to travel the world in the search for higher returns

Assets have risen in value across the board and volatility isn't going away. Rob Griffin asks where we should put our cash
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The Independent Online

Where should you be investing for the best chance of decent longer-term returns? Is now the time to plough every spare penny into the emerging markets, or is it wiser to commit your money to funds focusing on the UK markets?

How important will it be to get the split right between the various asset classes over the coming years, and how much emphasis should be placed on the outlook for both geographic regions and sectors?

It's certainly not an easy time to make such decisions because investors face the prospect of high levels of volatility and capital losses wherever they choose, according to Patrick Connolly, a certified financial planner with Chase de Vere.

"All of the major asset classes have risen significantly in value in recent years and there are strong arguments that shares, fixed-interest, commercial property and residential property are all looking quite expensive, while cash accounts are still paying very little," he says.

So what can you do?

According to Julian Chillingworth, chief investment officer of Rathbones, the secret to success over the next decade will be having exposure, through investment funds, to a wide variety of regions that currently find themselves out of favour.

"It would be sensible to have some balance and diversification within your portfolio," he says. "As well as some linked securities to give you a hedge against inflation, for most people the rest of their holdings would be in equities."

Depending on the individual, he then suggests having up to 35 per cent in the UK, up to 20 per cent in the US, 10 per cent in Europe, and a similar amount in Japan, which he believes is currently undergoing something of a renaissance.

"This is partly due to the realisation that demographics are against Japan, so it knows it must boost consumption in the country by pushing up wages and encouraging more women into the workplace," he explains.

 

Japanese corporations are also waking up to the fact they have got shareholders, so are investing in better corporate governance. "Investing in Japan also gives you exposure, via exports, to parts of Asia that will benefit from a growth in Chinese demand."

Nick Samouilhan, multi-asset fund manager at Aviva Investors, agrees that equities are likely to produce the best longer-term ret- urns – particularly given the low expectations for fixed income at the moment – and he believes Europe could be a lucrative option.

"If you believe the European project will continue and move to a more sensible environment where sovereignty and fiscal issues are pooled and it behaves more like a single entity, then you've got a huge market that's cheaper than the UK or the US," he says.

If you're happy to take a 10-year view then there is also a strong argument for selecting out-of-favour assets such as emerging market shares which have a greater chance of surprising on the upside, argues Mr Connolly.

"Sentiment toward the emerging markets is still very negative and the region isn't for the faint-hearted," he says. "However, when sentiment does eventually start to improve, emerging market shares should be positioned to perform really strongly."

You just need to be aware of the potential pitfalls. "There are likely to be additional dangers including political risks, sub-standard infrastructure and poorer levels of corporate governance, so you can't always believe what is written in company accounts," he says.

Another option is to buy individual stocks. Although not something for the inexperienced investor, tapping into growing companies could provide fantastic returns – and who wouldn't want a future Microsoft in their portfolio?

However, Graham Spooner, investment research analyst at The Share Centre, believes it's best to focus on companies producing "must have" items, which can be expected to enjoy strong demand for many years.

"You need to consider what is wanted and invest in companies that provide some of these essentials," he says. "As everyone is living longer, we're going to need pills and potions – so pharmaceuticals is obviously an area to be in, as is agriculture."

He suggests Compass Group, one of the world's largest contract caterers, as an example of a fairly low- risk, defensive stock that is well positioned. "It has benefited from the trend in companies outsourcing their catering facilities," Mr Spooner explains. "I look for absolute essentials – rather than techy companies that I don't have a clue whether they'll be around in the future – and people will always need to eat."

If you prefer something a bit racier, however, he recommends Clarkson, a leading ship broking company.

"Over the next decade you're still going to need ships to send things around the world," he says.

"This company is the leader in the sector, has been very resilient in a tricky period, has exposure in 18 countries and has made big acquisitions. Over the longer term there's likely to be a need for its specialist expertise."

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