Four reasons to consider going global

What you’ll learn:

• How global funds can help with diversification.
• How you can gain exposure to sectors which may be under-represented in the UK.
• Why it’s important to understand exactly what you’re buying into.

Investors willing to look beyond the UK will find plenty of opportunities in global stock markets, with an array of funds that invest on an international scale. The Investment Association reported global was the best-selling sector in April 2020, attracting fund purchases worth £1.2billion, compared to £874million for UK All Companies funds.

Here, we look at four reasons why investors might want to consider global funds, and some of the risks involved in investing in this sector. We don’t offer advice, so if you’re unsure where to invest, please seek professional financial advice.

Going global can help with diversification

It might feel safer as an investor to stick just to your home market – after all, you’re more likely to be familiar with companies based on British soil rather than those based overseas. But bear in mind that many of the companies listed on the FTSE 100 index are large, multinational businesses, which often generate most of their sales abroad. Although this means they aren’t entirely reliant on the UK economy, it still makes sense to spread your investments globally to help protect yourself against any potential setbacks which may occur if, for example, we see a disorderly Brexit or the recovery post the coronavirus pandemic in Britain is slower to take off than elsewhere.

Global funds invest in a wide range of companies across world markets, with this broad focus potentially helping to minimise the impact of stock market shocks on a portfolio. For example, if one region or sector suffers a knock, hopefully gains elsewhere will help offset these losses. 

You can gain exposure to sectors which may be under-represented in the UK

There are certain economic sectors that tend to be under-represented in the UK. For example, most of the biggest technology companies, such as Facebook, Amazon and Netflix, have their headquarters in the US, whilst Japan is home to many companies at the forefront of high-tech manufacturing, such as Hitachi, Toshiba, Sony, Nissan and Honda.

In contrast, the UK’s FTSE 100 index of Britain’s biggest companies is heavily weighted towards oil and gas and financials¹. The impact of being heavily exposed to oil, for example, was felt in April 2020, when shares in the sector tumbled sharply in response to a collapse in demand for the black stuff due to the coronavirus lockdown. 

Investing globally rather than adopting a purely domestic focus can therefore help provide a better balance of sectors, further helping with diversification.

You can invest in companies across a range of different markets

Global funds can invest in companies in any country across giving you exposure to regions such as Asia, America and Latin America as well as markets closer to home in Europe.

Not only does this enable you to invest in companies based outside of the UK, it also helps provide greater diversification which can help cushion the impact of share price volatility. When it comes to investing, one of the things you have to accept is that stock markets go up and down, but some regions tend to be more volatile than others. There are a number of factors that can influence this including things such as political stability, rate of economic growth and development and whether certain sectors are dominant in a particular economy. But if your money is spread between different regions around the world, it lessens the impact the performance of one country’s stock market or a single sector has on the value of your overall investment. It doesn’t eradicate risk entirely though, so you need to be prepared that there could be periods when the value of your investment falls. If you stay invested for the long term, you’ll hopefully be able to recover any losses.

There are plenty of opportunities for income-seeking investors

Many investors seek a reliable and consistent income stream so they don’t have to sell any investments or cash in savings in order to generate an income. And there are plenty of companies around the world which pay some of their profits back to shareholders in the form of dividends, rather than investing it all back into the company for growth.

When you invest in funds you can usually choose either income units which will pay out income to you as cash, or accumulation units where any dividend income is re-invested instead – if you don’t need the income, the latter can be a good way to potentially boost your returns over the longer term. 

Funds in the global sector that focus on income and invest across a wide range of countries include the Janus Henderson Global Equity Income fund and the Jupiter Ecology fund. Please note that our mentioning these funds is not a personal recommendation, and if you’re unsure where to invest, you should seek professional financial advice. 

Remember the risks

If you’re considering investing globally, make sure you’re comfortable with the risks involved.

Markets outside the UK may have lower levels of corporate governance, with fewer safeguards for investors, and they may also be more volatile.

There’s also currency risk to consider. If you invest in shares that are priced in currencies other than sterling, any gains you make could be offset by a fall in value of the particular currency against the pound. If, on the other hand, the foreign currency strengthens, this will have a positive impact on returns. It’s a good idea to invest across a range of different countries and currencies, so that if one currency does fall against sterling, hopefully rises in other currencies may help limit your losses.

The funds we’ve mentioned here are included in our Funds list. You can find out more detail about why we like these funds by taking a look at our fund commentaries. It is important that any investment is part of a balanced portfolio. Our Funds list includes other products that we like in these, and other, sectors which are key to building a balanced portfolio.

Bear in mind too that all investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.