The Orient express

With the Footsie faltering, now is a good time to take a look abroad
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The Independent Online

Prudent savers who have been putting their money into the stock market hoping to build up funds are likely to have focused on British and European shares in the past.

Prudent savers who have been putting their money into the stock market hoping to build up funds are likely to have focused on British and European shares in the past.

This is partly because of natural caution and partly because the rules of personal equity plans - the tax-efficient investment wrappers replaced by individual savings accounts (ISAs) last year - restricted foreign investments.

One of the most positive aspects of the ISA is that it gives people a wider investment universe. Those who have a solid core of UK investments should use this as an opportunity to diversify, taking advantage of the potential returns offered by emerging markets, specialist funds and small cap stocks.

While foreign markets and sector-specific funds are perceived as higher risk than FT-SE 100 shares, the fall on the UK stock market so far this year is evidence of the benefits of diversification.

Any investment in equity should be seen as at least a medium-term commitment. If you are not prepared to tie your money up for at least five years then investing in the stock market is probably not for you.

Investors seeking to diversify should turn east. After a decade in the economic doldrums, Japan is tipped as the hot growth story. Save & Prosper's Japan Growth fund is the best performer in all sectors over the past 12 months, rising by more than 300 per cent.

The Nikkei, the Tokyo stock market index, has made a significant recovery, climbing more than 37 per cent over the past 12 months, but fund managers say it still has some way to go. Fleming Asset Management believes the Nikkei could hit 22,000 this year. It is currently at 19,817.88

A revitalised Japanese economy is good news for the rest of South-east Asia, too. While some countries in the region are still perceived as risky - Indonesia is off most fund managers' investment maps - Far Eastern funds excluding Japan are a good bet for those looking to take a gamble.

South Korea is an investment favourite, particularly after its spectacular performance last year. Fund managers say the South Korean market has further to go, with plenty of shareholder value yet to come from corporate restructuring. Financial advisers tip funds from Lloyd George Fund Managers, Save & Prosper and Fidelity.

European funds have been star performers over the past decade, with the best fund, Invesco GT European Growth, rising 584 per cent. The European story is not over, however. Increased merger and acquisition activity is likely to push prices higher. Chasing the next European mega-merger is becoming a popular sport.

Another way of diversifying a core portfolio of shares is to try your luck with specialist funds. Fears about a bubble in technology stocks, particularly dot coms and other e-businesses, may well be valid. However, the established technology funds, whose assets are dedicated mostly to giants such as Cisco Systems and cutting- edge telecoms companies, are undeniably exciting growth prospects. Over the past decade, they have outperformed all other asset classes.

If you have confidence in the internet revolution, you could target an internet-only investment vehicle such as Framlington's NetNet fund.

But even the most bullish technophiles warn that valuations of net companies are the stuff of fantasy. Make no mistake, there is a healthy element of risk involved - widows and orphans need not apply.

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