Money: Take an ISA, see the world

Tax-free savers now have free rein to invest outside the EU, writes Faith Glasgow

One of the most attractive aspects of the new individual savings accounts, which have replaced PEPs as the tax shelter with a common touch, is that there is much less restriction on what type of investment can be held in them. Indeed, you can pick the pearliest trusts investing in any recognised stock exchange worldwide to hold in an ISA.

PEPs, by contrast, were largely limited to European Union-listed investments. As a consequence, most PEP holders - who are likely to maintain their tax-free investment habit using stocks-and-shares ISAs - are holding portfolios heavily skewed towards those areas.

That has not been a huge disadvantage recently. Over the last three years, according to Moneyfacts, the average unit trust in the continental sector rose in value by 54 per cent, and the average UK growth unit trust by 50 per cent.

However, PEP rules have left most investors with little exposure to North America, which accounts for half the world's stock market value - including around 60 of the biggest 100 multinationals.

The world's mightiest corporations are global empires. McDonald's, for example, sells hamburgers in 103 countries, including many emerging markets. So the fortunes of companies like McDonald's, IBM and AT&T depend not only on the buying power of Americans but that of people in markets from Egypt to Ecuador. And their influence there is considerable. Jonathan Fry, of Premier Asset Management, claims that two of the three most widely recognised words in the world are "Coke" and "Coca-Cola".

When it comes to investment performance, in other words, the nationality of a giant becomes less important than what's going on in all the countries where it is earning income. But that global penetration is not reflected in the classification of a company listed on the UK or US stock exchange and so officially "British" or "American".

Accountancy firm Bacon & Woodrow is working with FT-SE International to produce a new index composed exclusively of the world's largest multinationals.

This would be used as a benchmark for actively managed pension and retail funds. It could also provide the basis for tracker funds that expose investors to global markets via familiar blue-chip names.

Sally Bridgeland at Bacon & Woodrow explains that a multinational benchmark would enable investors to see clearly what kind of geographical spread they were buying into. By comparing like with like, it would also get round the problem of a domestic index (the FT-SE 100, for example) dominated by a handful of giants.

What are the attractions of investing in very large companies? Apart from the global spread, multinationals usually have diverse interests across a range of economic sectors. And, as Mr Fry says, they are disproportionately profitable: in a 1997 Compustat analysis of 5,000 US companies by size, the 3,800 groups worth up to $1bn generated 10 per cent of total profits, while the 100 "super-caps" worth over $2bn generated 44 per cent.

Bacon & Woodrow's multinational index is not yet functioning. However, Premier has adopted a "quasi-index fund" strategy for its Global 100 fund, which tracks the performance of the world's 100 largest companies by market capitalisation. The contrast between the geographical location of the fund's portfolio and the source of its global earnings is illuminating. More than two thirds of the portfolio, including eight of the top 10 companies, is listed in the US, with 20 per cent in Europe and a further 8 per cent in the UK. But less than 40 per cent of the global earnings is generated in the US: 32 per cent comes from Europe and 11 per cent each from Japan and the rest of the world.

Recent performance is reassuring. The Global 100 fund is dominating the Moneyfacts international equity income sector tables and have put on 32 per cent in value over the six months to 6 April, according to Standard & Poor's Micropal.

But Jason Hollands at BESt Investments warns: "The Global 100 concept is interesting, but there is a widely held opinion that valuations of the largest-cap stocks both here and in the US may be stretched."

Another potential drawback with the passive multinational "tracker" is that there is a sectoral bias towards industries such as telecoms and oil; the impact of any correction in those industries would be painful for a fund focusing on the global giants.

There are two actively managed routes into a broader international blue- chip portfolio. It is possible to hold several funds in one ISA, so you could choose one of the management houses with a solid reputation across a wide geographical spread, such as Gartmore or Fidelity (though no manager will perform equally strongly across the board).

Alternatively, you could consider international growth or equity income funds.

"Managers do have more freedom to diversify in the international sector, but there is a tendency for these funds to be used as something of a training ground for less experienced managers when it comes to individual stock selection," warns Mr Hollands, "so they have not generally performed very spectacularly."

Look, too, at the international general sector of investment trusts, which can also be held in an ISA and are markedly cheaper than unit trusts.

There is usually no initial charge for an investment trust, compared with an upfront fee of up to 5 per cent for unit trusts. Thereafter, management fees for investment trusts are around 0.5 per cent to 0.75 per cent annually, whereas unit trusts cost up to 1.5 per cent. The Premier Global 100 fund costs 5 per cent initially and 1.5 per cent annually thereafter, which is dear in comparison with investment trusts.

A number of international general investment trusts have performed strongly, including Alliance Trust (which offers a CAT-marked ISA), Tribune and Witan. Foreign & Colonial focuses on blue-chip stocks and has a geographically diverse portfolio, including 24 per cent in North America. F&C has been through difficult times but there has been a recent improvement, with growth of 23 per cent over the six months to the end of March, according to Moneyfacts.

However you achieve it, a truly international spread helps to lower risk while giving exposure to fast-moving markets and companies.

"We have always been advocates of diversification by investing internationally," says Mr Hollands, "and America is where investors are now underweight. We'd suggest holding no more than 50 per cent of a portfolio in UK funds, with up to 15 per cent in the US and the same in the Far East."

Start your day with The Independent, sign up for daily news emails
Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appeal
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
Arts and Entertainment
Strictly finalists Simon Webbe, Caroline Flack, Mark Wright and Frankie Bridge
tvLive: Simon Webbe, Caroline Flack, Mark Wright and Frankie Bridge face-off in the final
Sport
Ched Evans in action for Sheffield United in 2012
footballRonnie Moore says 'he's served his time and the boy wants to play football'
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture