Professional Investor: Buying British doesn't always make sense

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The Independent Online

British investors like to keep their money at home: nearly 60 per cent of assets under management in mutual funds are invested in the UK. But when was the last time you had a proper look at the London stock market and saw exactly where your money is going?

The first thing to say about the UK stock market is that it is dominated by a handful of industrial sectors that are global in nature. Oils, banks, pharmaceuticals and materials account for more than half of the total market's worth. Nearly £2 of every £10 that you invest goes into energy companies and a similar amount into banks.

Investors might also be surprised by the international credentials of many of the UK's larger listed groups. A few, such as Kazakhmys, the copper mining company, barely qualify as British because they source none of their revenues from the UK, nor do they have any significant operations here. Yet, for investment purposes, it is deemed a UK company.

Nor should savers be under any illusion that they are protected from currency risk by investing their money on the London stock market. Our analysis reveals that the companies in the FTSE All-Share Index, excluding financials, derive less than 40 per cent of their sales revenues from their domestic market.

By staying at home, UK savers are arguably not investing their money efficiently. Many UK investments have exposure to the currency risks and international trends that a global portfolio brings, but lack the benefit of genuine sector or industrial diversification. And that's not to mention the span of opportunities they miss by restricting their investments. It's worth remembering that the UK stock market accounts for just 11 per cent of the total value of world equities.

Certain investment plays are simply not open to those who stick to British stocks. Take oil. BP's decision this week to shut down part of its Alaskan oil field on finding leaks in the corroding pipeline sparked renewed concern about disruption to supplies and helped to push up the price of crude to nearly $77 per barrel.

Sure, you can tap into the high oil price by buying the majors such as BP or Shell. But I also favour a more focused theme: oil refineries. Putting money into BP or Shell is not the optimum way to pursue this theme: less than 20 per cent of their profits are generated from their refinery operations. If you look outside the UK, however, you can find companies whose core business is refining crude oil; companies such as Valero Energy, which is listed on the New York Stock Exchange.

There are countless other opportunities that are difficult for investors to exploit fully unless they are willing to take a global view. Look at the recent growth in flat-screen TVs and monitors. By 2009, only half of new TVs sold are expected to still have cathode-ray tubes.

Investors who want exposure to this growth story through the UK stock market have a very limited range of options. Buying stock in Dixons, the electrical retailer, is hardly the most effective play. Far better to invest in those companies that are producing some of the component parts for the screens. An early investment for us was Merck, the German drugs company. Although its history lies in pharmaceuticals, Merck is today the leading provider of the chemicals in liquid crystal displays.

Another way to back this story is through an investment in the providers of the glass for the screens. While the number of units shipped is forecast to grow at a good pace over coming years, the demand for the screen glass is expected to grow faster still. This is because the sets are getting bigger in size - and so require more glass. And the world's leading glass producers areCorning in the US or Nippon Electric Glass in Japan.

Most of the goods we buy, even much of the food we consume, are now sourced overseas. But when it comes to investment, British savers still put most of their money into UK shares. Now, where's the sense in that?

Jorma Korhonen is manager designate of the Fidelity Global Special Situations Fund

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