Most investors make one fundamental investment mistake when building their portfolios, they forget to diversify overseas.
Investing overseas, outside of your home market, is essential if you want to achieve the best returns as it allows you to benefit from growth in faster-growing economies such as China, India or regions such as South America.
However, it can be daunting and complicated, so it’s best left to the experts. Luckily, there are plenty of highly experienced overseas investment managers out there who have a record of outperformance.
Asian exposure
The Scottish Oriental Smaller Co‘s (LSE: SST) investment trust, is a perfect example of the benefits of investing overseas. The investment objective of the company is to achieve capital growth by investing mainly in smaller Asian quoted companies. The investment firm invests in China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. So, if you’re looking for a bet on Asia’s economic growth, Scottish Oriental ticks most of the boxes.
During the past 10 years, the fund has produced a return of 230% for investors excluding dividends. Over the same period, the FTSE 100 and FTSE 250 have returned 13% and 76% respectively.
Asia’s economic growth is only just getting started, and the region is still relatively underdeveloped. As growth continues, small companies will profit, and Scottish Oriental should continue to produce returns for investors. Right now, shares in the firm are trading at 1,050p compared to a net asset value per share of 1,203p, a discount of 12.7%.
Diversified income
As Scottish Oriental tries to profit from smaller companies, City of London Investment Trust (LSE: CITY) is focused on generating income here in the UK but also has some global exposure.
City of London is primarily a UK income trust. It has matched its benchmark, the UK Equity Income index, over the past five years, and currently yields 3.95%.
Most importantly, this trust is cheap for investors to own. Total annual operating charges are 0.42%. For some comparison, Neil Woodford’s flagship equity income fund charges 0.75% and yields only 3.5%.
So, if you’re looking for a cheap, diversified income buy, then I don’t think you can go wrong with City of London. Shares in the trust trade at around net asset value, which was last reported at 422p per share.
Interestingly, while 90% of the fund’s assets are devoted to UK equities, notably FTSE 100 dividend champions, around 10% of the portfolio is invested overseas. As well as the UK the fund is invested in the US, Netherlands, Germany, and Hong Kong so there is some international diversification here.
The bottom line
Overall, both the Scottish Oriental and City of London funds look to me to be good investments for different reasons. Scottish Oriental offers exposure to a fast-growing region of the world with a proven management team. Meanwhile, City of London provides a diversified income stream at a low cost.
