YOUR MONEY: MANAGED FUNDS: How to go global
Choosing a unit trust with international expertise protects your long-term investment against risk, writes Tony Lyons
Wednesday 19 March 1997
Investment in equities is generally about long-time savings, trying to maximise gains over five, 10 or more years. And despite what the salesmen say, the truth is that changes of government in the UK have historically had little long-term effect on stock market performance. The real issue for investors is not the end of the tax year, or the election, but to develop a strategy for long-term growth.
Few of us have the time, money or ability to assemble a portfolio of shares and other investments to provide good long-term growth prospects with a low risk. But this can readily be accomplished by investing in managed funds such as unit trusts. Many heavily advertised products concentrate on UK investments, particularly the tracker funds that follow the performance of the London stock market. But many City fund managers who look after big pension funds will tell you that the ideal portfolio is internationally diverse, to benefit from overseas gains. Various countries are at different stages of the economic cycle; not all stock markets go up at the same time.
Picking a relatively low-risk fund with long-term growth prospects can be difficult, with a choice of more than 150 unit trusts. Just as in the UK, the 75 per cent rule seems to operate: over a given period, three-quarters of fund managers fail to beat the overall performance of the stock-market index. There are, however, one or two international growth unit trusts that now offer a significant amount of international index tracking - and since they offer portfolios with more than half their holdings in the European Union, investors can use them in their general PEPs, the most tax-efficient means of investment.
Kleinwort Benson Global Equity Trust is one such unit trust. Launched just over two years ago, it has more than 800 investments spread around the world. It aims to have half its holdings in the UK and the rest overseas, taking the average life fund as its benchmark. Minimum investment is pounds 1,000, or pounds 50 a month. The managers make an initial 5.5 per cent charge, reduced to 3.5 per cent for PEPs, and a 1 per cent annual charge. The fund currently has 49 per cent of its portfolio in the UK, with overseas investments split between 15 per cent in mainland Europe, 10 per cent in the US, 12.5 per cent in Japan, and 10 per cent in the Far East and Australia. Half the remainder is invested in emerging markets via UK investment trusts; the rest is in cash.
Paul Kelly, the fund manager, takes a top-down approach, looking at world-wide economies to decide asset allocation. "We do not look at individual stocks," says Mr Kelly. "We track indices. Our target is to match the central index of the areas we invest in. This includes the FTSE 350 in the UK, the S&P 500 in the US, Eurotrack 100 for Europe, the Nikkei 300 in Japan, and so on." He adds: "Because the fund is investing in core holdings in each country and does not have a high turnover of stocks, it keeps dealing costs relatively low."
With such a wide spread of investments, Kleinwort believes it offers investors a low-cost means of buying into a highly diversified portfolio.
The fund also employs tactical asset allocation, used to invest for only a month or two when the manager sees interesting short-term opportunities. Using the futures market, it enables the fund to switch quickly and cheaply between different economies, normally the UK, US and Japan. Costs are only pounds 2 a contract worth pounds 100,000, compared with much higher charges for buying and selling shares. So if the manager thinks, for example, that the US market looks cheap, he can sell futures in the British index to buy them in the S&P 500.
These investment techniques were originally developed by Kleinwort Benson for use in its successful institutional investment management business, looking after pension funds for large companies and local authorities.
Funds such as KBUs Global Equity Trust are firmly in the long-term growth category and are not for investors looking for a high income. Since launch the fund has grown by 37.5 per cent, including income being reinvested, and 7.8 per cent over the last year, which is satisfactory rather than spectacular. Its aim is to outperform its competitors over five and 10 years. With a highly diversified portfolio and advanced fund management methods, Kleinwort believes that investors will see less volatility, as well as benefiting from long term growthn
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