The best ways to invest abroad

Are you keen to take advantage of the investment opportunities abroad but just don't know how? You're not alone. Here, Cris Sholto Heaton explains the best ways to get in on the action overseas.

Many investors rightly want to have some of their assets outside of Britain, but are unsure how to go about it. As MoneyWeek's Asia specialist, the question I get asked most often is: "how do I invest in overseas stocks?" So let's take a look at what the options are for investing abroad, from the simplest to the most complicated.

Getting started with funds

Most people begin investing abroad by buying a UK-based fund that invests in foreign shares. This gives you a diversified portfolio and means you don't have to think about choosing specific stocks. If the fund you want is an investment trust (also known as a closed-end fund) or an exchange-traded fund (ETF), it will be listed on the stockmarket, so you trade it through a stockbroker. Meanwhile, open-ended funds known as unit trusts or open-end investment companies (OEICs) can be bought through the fund management firm that runs the fund, through a financial advisor, or through a specialist funds broker.

If you do buy an open-end fund, don't go direct to the fund management company. It's far better to use a fund supermarket (or discount broker), such asHargreaves Lansdown. Because they buy in bulk, these supermarkets can usually secure you large discounts on a fund's entry fees (which can be as high as 5%) and often on the annual management charge as well.

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Hargreaves LansdownFund supermarket with discounted fees on more than 2,000 UK and international funds
TD Waterhouse13 major markets online including Australia, Hong Kong and Singapore for £12.50/trade
Saxobank19 markets online including most small European ones at €20/trade or less
Interactive Brokers16 markets online including Japan and Mexico at 0.05%-0.2%/trade
Killik & Co27 markets by telephone including Malaysia, Thailand, South Africa and the UAE from £60/trade
Boom(Hong Kong)11 Asian markets including Indonesia, Korea and Taiwan at $10-$40/trade

Foreign exposure from Britain

What if you want to pick your own stocks? One option is to buy UK-listed companies that get a substantial amount of their revenue from abroad. There are three main types of company you'll be dealing with if you do this.

First, there are UK firms that have significant international businesses. An extreme example is Standard Chartered, a British bank that gets almost all its revenue from emerging markets. Second, there are several foreign firms that have chosen to list their shares in the UK, usually because they believed it would be easier to raise money in London. These range from very large firms to small caps on Aim. You can buy these through your stockbroker, just like any other stock.

Lastly, some foreign firms that are listed abroad also trade in London using Global Depository Receipts (GDRs). These are listed on the London Stock Exchange and give the owner rights over shares listed on a foreign exchange. One example is Russian energy giant Gazprom, whose London-listed GDRs give the buyer rights over an equivalent number of Moscow-listed shares. Having a GDR is not the same as having a full London listing: these firms do not have to meet the same accounting standards and disclosure rules. Although GDRs are bought through a stockbroker like other London shares, not all brokers will offer them because they can be more risky due to this difference.

Going abroad

At this point, you've exhausted the options for investing within Britain. However, many investors don't realise how easy it is to trade many major global markets through British brokers. For example, TD Waterhouse offers 13 markets in North America, Europe and Asia for £12.50 a trade. And full service brokers, such as Killik & Co, offer more markets at higher cost. (You need to be aware that buying foreign shares exposes you to foreign currency risk and you may be trading on exchanges with lower governance standards than in Britain.)

Lack of demand means that many smaller markets aren't available through UK-based brokers, so if you want to access one of those, you will need to open an account with a foreign broker. Sometimes this is surprisingly easy: one firm that stands out is Hong Kong's, which offers almost every Asian market on a low-cost online platform and has plenty of experience with foreign clients.

Other regions, including most of South America, are an immense hassle, so few retail investors bother. Always remember that trades you make through a foreign broker will be covered by investor protection rules in its country (if any exist) and not by the British Financial Services Authority.

Buying overseas-listed funds

What about buying funds that are based abroad? If your stockbroker will trade stocks on a foreign market, they should also be able to trade closed-end funds and ETFs listed there. Open-end funds are more of a headache and few investors will find it worthwhile. If an open-end fund isn't registered for sale in Britain, you'll have to go direct to the foreign fund management company, and whether they can sell to you depends on local laws. In particular, as far as I know it is virtually impossible for non-Americans to buy US mutual funds (US closed-end funds and ETFs are no problem though).

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.