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A growing proportion of unit trust investors are investing overseas, according to figures released by Autif. It seems the increased flexibility offered by Isas is one of the key factors encouraging investors to look beyond UK equities.

To suggest there has been a sea-change would be wrong but a steady flow of funds has been invested in Japan, Asia-Pacific, North America and emerging market sectors this year.

This is in addition to strong inflows into global and managed sectors which offer overseas exposure within mixed portfolios. Europe has also seen a steady inflow of funds but this was a market already available to Pep investors.

Should these investors be concerned about the clouds that have recently gathered over global equity markets?

As was the case in August, economic indicators released in September suggested that global economic activity was decelerating. But this time, markets have started to worry that we might be heading for the wrong type of slowdown – the FTSE World Index fell by 6 per cent in sterling terms, almost exactly cancelling out August&#39s rise.

The price of oil has been one of the key contributors to the change in sentiment and market downturn. Although the price has fallen back to $30 a barrel from peaks of $37 last month, the strength of the oil price has been greater and more persistent than most commentators had forecast. The threat now perceived is of an intensification of the cyclical downturn in global growth and a squeeze on corporate profit margins.

But even without the oil price effect, corporate profits&#39 forecasts have been under scrutiny. Indeed, the spread of profits&#39 warnings issued in advance of the quarterly reporting season in the US was greater than in recent times – in particular, the technology sector did not prove immune.

Looking ahead, it would be wrong to dismiss these concerns, which at the very least may continue to depress sentiment in the short term.

But, as far as oil prices go, there is a good chance that the worst is over as production is now running ahead of demand, allowing inventories to be rebuilt.

Slower earnings&#39 growth could act as a constraint on markets but this does not rule out progress as long as the economic background remains supportive.

In this respect, recent economic data continues to support the view that a US and global soft landing is achievable. A steeper than hoped for descent cannot be ruled out but the ability of central banks to react by cutting interest rates lessens the risk. The continued good behaviour of core inflation remains key to maintaining a positive view.

If economic conditions do remain supportive, the current market weakness should provide a good opportunity for investors to increase equity exposure. Diversifying through overseas investment is a trend that should certainly be encouraged.

The average UK investor still has a very high exposure to the UK market, perhaps because many feel safer sticking to home territory. But doing so does not limit the risk in the way that many investors imagine it might.

For those making their first foray into overseas markets, a fund with a mixed portfolio investing across a range of overseas markets is likely to be an attractive option for a number of reasons.

Take the example of funds in Autif&#39smanaged and global growth sectors which generally enable investors to piggyback on the asset allocation expertise of the large fund managers while limiting exposure to the negative impact of market volatility.

Such funds are also useful when an individual&#39s portfolio is small as they enable overseas diversification without incurring too many additional costs. However, the funds listed within each of these sectors vary considerably. Looking at the global growth sector, some of the funds have a US bias, investing over 50 per cent of assets in the US. Some aim to outperform mainly through asset allocation, moving overweight in the overseas markets that they think will perform best and underweight in those that have a poorer outlook.

Other funds place more of an emphasis on developing global sector themes andpicking quality stocks withoutconcentrating on a particular market or region.

This is an important point. Companies are finding the ability to operate on a global stage is becoming more and more important and cross-border merger activity has never been higher. In 1999, $3.4trillion worth of merger and acquisition activity took place around the globe. It is hardly surprising, then, that the sector correlation across equity markets is increasing.

This was perhaps most clearly demonstrated by the global technology run we saw at the end of last year and during the first quarter of 2000 when TMT stocks around the globe were in favour and dramatically outperformed.

A fund that is versatile enough to change tack and take advantage of different global themes as and when they arise is particularly attractive in the current environment.

World markets are moving closer to globalisation and the time is ripe for taking advantage of funds that offer investors the opportunity to gain from geographic, sector and stock strategy views across the global spectrum.

As substantial Isa funds build up, diversification will become more and more important to investors. The opportunity that Isas now offer for overseas investment should not be overlooked.

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