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How British are UK funds? By Rob Griffin
You could be forgiven for thinking that when you invest in a UK tracker fund, you're investing in the UK economy. But an investment in a company listed on the London Stock Exchange today is no guarantee of that. In fact, your These foreign predators splashed out a staggering £93.3 billion ($184 billion) buying up hundreds of UK assets during 2006 - the highest amount spent since the dotcom boom in 2000, according to figures compiled by Dealogic (to the end of November). Telefonica's £17.7 billion purchase of O2, the mobile phone company and German conglomerate Linde's acquisition of the BOC Group for £8.2 billion were among the most prominent deals. This enthusiasm made the UK the second most popular location for deals to take place after the US, which was the target of over 800 acquisitions worth a total of $191.7 billion during the same 11-month period. So which countries have been buying into the UK? Of the 595 deals finalised during the first 11 months of 2006, 219 of them - 35% of the overall total - were carried out by companies based in the US, according to Dealogic. Those in Germany and Australia were next with 37 deals each, followed by French companies with 31, then 21 by companies based in India and 11 by Japanese ones. The rest were split between countries including Spain and South Africa. As far as deal values were concerned, Spain emerged as the clear victor. The 10 deals clinched by Spanish companies were worth an incredible $50.4 billion, well ahead of the $34.4 billion splashed out by US firms and the $22.5 billion spent by the Germans. A prime example was the £10.1 billion purchase during the summer months of BAA (the company that runs seven UK airports) by Spanish consortium Ferrovial's bid vehicle, Airport Development and Investment. Others have concentrated on building up stakes in UK firms. For example, Baugur, the Icelandic investment firm, has money tied up in a string of companies, including Hamleys, the toy chain; House of Fraser, the department store group; Whittard of Chelsea, the tea and coffee retailer; and Wyevale Garden Centres. So what is attracting these foreign buyers? Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management, believes that the key factor is that it's far easier to cut through the red tape to buy companies in the UK than it is in countries such as France and Germany. This is a view echoed by Halldór Kristjánsson, chief executive officer of Landsbanki, one of Iceland's largest banks and a keen investor in the UK. He points out that the combination of relatively low interest rates and strong economic growth has created a good environment for takeover activity, and this has been helped by the supportive nature of London's financial markets. At the end of last year, a consortium led by Eggert Magnusson, the president of the Icelandic Football Association, agreed an £85 million takeover of West Ham United, the Premiership football club. Kristjánsson believes such deals are good for everybody. "The international activities of Icelandic companies have not only created a lot of jobs in the countries in which they invest, but also in Iceland, where people are needed to help support their expansion," he explains. Richard Batty, global investment strategist at Standard Life, agrees the high levels of merger-and-acquisition activity can be good news for the general well-being of the UK economy. But what does all this mean for UK investors? Does it really matter who owns a company and where it generates most of its profits? What difference does this make to an average person's portfolio and do they need to reassess their investments? As Mark Dampier at broker and financial adviser Hargreaves Lansdown points out, UK equities may be a core part of many investors' portfolios, but that doesn't mean to say they are actually investing their money in the UK. According to Richard Buxton, head of UK equities at Schroders and manager of the UK Alpha Plus fund, there is nothing new in UK companies having exposure to international markets. He points out that overseas sales generated by companies in the FTSE 100 now account for around 60% of their total revenues. A good example, he says, is the mining sector. Even though it's not a significant part of UK GDP, the pre-eminence of the London markets means that many mining companies choose to list here - even though their profits are generated abroad. Richard Philbin, director of fund of funds at F&C Investments, doesn't believe that this globalisation is much of an issue. The way people manage money has been changing over the past decade, he says, and there's no sign of this trend coming to an end. Getting a truly diversified portfolio these days, Philbin adds, often means looking at alternative asset classes, because there's so little to choose between many of the leading funds, regardless of where they are in the world. Fidelity Global Special Situations In fact, concentrating on just one country is often riskier than spreading your investment net wider, according to Jorma Korhonen, who has taken up the reins of Fidelity's Global Special Situations fund. Choosing to invest in only the UK market means people are effectively taking large bets on just a handful of areas, he says, and this could have a very detrimental effect on the value of their investments should these areas perform badly. That's not to say that a heavy weighting towards the UK is necessarily a bad move. Peter Reid, chief investment officer for UK equities at Resolution Asset Management, points out that it can be very useful at certain times in the market cycle. "We occasionally want to be more domestically positioned, such as at the times when we think the UK will outperform other economies," he explains. Investors who want a high exposure to the domestic economy, therefore, need to either invest directly in the shares of companies that derive most of their profits from within these shores or choose funds that can do so on their behalf. So, before investing your money with a particular fund, you'll need to research the types of companies the manager invests in and, in turn, how reliant those firms are on the UK economy. Unfortunately, this is easier said than done, because the simple fact is that even tiny companies will probably trade - even to a limited extent - in overseas markets, and it will be difficult to get a detailed breakdown of where their clients are based. And even if you do manage to find funds investing in totally UK-focused stocks, warns Reid, this doesn't automatically mean you'll be shielded from what's happening in the rest of the world. "Every stockmarket is affected by global trends," he says. "The US is still the world's biggest economy, and if it sneezes, the rest of the world catches a cold."
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