Unit and Investment Trusts: Where to go after the party

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The Independent Online
The UK stock market has routinely set record highs recently, and there seems to be no reason why the party should not continue for at least another year.

But many fund managers believe the UK market's performance over the next five years is unlikely to match its current levels. So should UK investorsconsider putting their money elsewhere in the world?

There are two investment principles at stake. The first is diversification, the idea that it is wise to spread your risk across different markets. John Shelly, a director of Abtrust, says: "There is no doubt that, in any long-term portfolio, you need a balanced portfolio and long-term exposure to growing markets."

The second is matching the currency in which your investments are held to the currency you hope to spend. Nick Train, a director of GT investment, says: "If you have future sterling liabilities like pension or healthcare costs, it is grossly imprudent not to match those liabilities in the same currency."

The most practical way for a small investor to gain access to world markets is through an international unit trust. The consensus among fund managers seems to be that you should consider holding about 25 per cent of your money overseas. Mr Train says: "The average UK institutional pension fund invests up to 30 per cent overseas. More often, it is 20 per cent to 23 per cent. I cannot justify it scientifically, but intuitively having a quarter of your assets overseas strikes me as a nice prudent mix."

Diversification between different world markets is equally important. In the 10 years to the end of April 1996, the US market grew by 273.6 per cent, while the UK market grew by 276.2 per cent. Japan showed growth of 139.8 per cent over the same period, while Hong Kong grew by an astonishing 760.4 per cent.

The Personal Equity Plan rules allow you to put up to pounds 1,500 of your annual pounds 6,000 allowance into unit trusts or investment trusts with more than half their assets outside the EU.

One starting point in allocating funds around the world is looking at the size of each country's stock market. The US, for example, accounts for about 44 per cent of world trading, while Japan represents about 23 per cent and the UK about 10 per cent. The offshore fund managed by Tim Thomas, head of equities at Guinness Flight, is free to invest all over the world, and its asset split is US 34 per cent, Japan 27 per cent, Europe 17 per cent, Far East 11 per cent, UK 7 per cent, emerging markets 3 per cent and cash 1 per cent.

Overseas investors sometimes fret about the possible effect of currency movements but Mr Train believes this is unnecessary. He says: "It is unlikely on a five-year view that, if you invest in two or three major currencies, you will be a big loser."

It is worth stressing that prospects in the UK for the next year or two are still felt to be very strong, with hopes of continued takeover activity and strong corporate earnings.

Mr Train says: "We think it is unlikely that the rate of return that the UK has achieved over the past 10 or 15 years will be sustained, but that isn't the same as saying we think the market is about to collapse."

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