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Investment view

Judging where to put your money abroad means taking acc-ount of often conflic-ting information, says Brian Tora.

Most individual investors are parochial in their outlook. After all, if you live in Truro and shop at Tesco, who can blame you for wanting your dividends to be paid in pounds? Of course, there is the fact that dealing abroad tends to be expensive. There is the currency translation costs – which can be considerable, particularly for small dividends – and there are also higher settlement and custody charges. Little wonder that many choose to achieve offshore exposure through collective investments.

As it happens, the UK has one of the more international markets in terms of the reach of our FTSE 100 firms. Our pharmaceutical giants are truly global businesses and our integrated oil companies compete on the world stage. Vodafone, the leading mobile phone operator in so many countries, is a UK FTSE 100 constituent. You could argue that you need look no further than our domestic market if it is international coverage you are seeking.

Unfortunately, this has not always stood investors in good stead. When world stockmarkets turned, our headline index was left behind by other major markets, a reflection of the fact that we have a bias towards the US in terms of earning power. Translating those profits into sterling from a weakening dollar did Britain’s biggest companies no favours at all.

It all goes to show that judging where to put your money involves taking a wide range of often conflicting information into account. Take Europe as an example. It is now our biggest trading partner and the expectation that European enlargement will bring a whole new period of prosperity has been widespread. Yet recently, the IFO index of business confidence in Germany disclosed an unexpected fall. It seems that not everyone is optimistic about the future.

Turning to the Far East, the information flowing from China is truly remarkable. Chancellor Gordon Brown was out there recently, banging the drum for what was left of the British-owned car industry but the company expected to be the saviour of MG Rover is state-owned. The free market may be gaining hold in China but it remains politically constrained and has its own share of problems that, at the very least, seem likely to deliver periods of less reliable growth.

Perhaps it is because the investment scene is so complex that some of the best-performing funds have been based upon stockpicking techniques. Nowhere has this been more successful than in the smaller company end of the market. Here, there are fewer factors to take into account and it is easier to get to grips with the management of a relatively simple business than to understand how a multi-faceted organisation might be faring in a wide variety of markets.

One investor I knew said that the best share portfolio comprised a single company. You got to know it very well, understood what drove the business and how the management behaved. Then you confined yourself to owning the shares for periods of time, using your judgement on when to sell and leave your cash on deposit. So successful was this strategy that he became a tax exile but this is not a strategy I could ever recommend to anyone who was not an investment professional.

This year promises to be particularly taxing for the domestic investor. Aside from such troublesome events as a general election, there is the fact that valuations, while not stretched, will nevertheless need support if further progress is to be made. True, the outlook appears favourable. There remains plenty of opportunity and the threats that lurk on the periphery are little changed. But it is hard to argue against keeping a broadly diversified approach to portfolio construction for the present.

Of course, broadly diversified is what a lot of our multi-national businesses are. It is often this broad diversification that makes them difficult to value. In the end, it is management that makes the difference.

Just as my single stock investor got to understand his company, so it is crucial to know who is at the top of any business, driving it forward. Remember, though, that if a hith-erto highly respected manager is found wanting, it was probably not easy to spot in advance and the consequences in big organisations can be damaging.

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