To manage or not to manage…

By Mark Fryer

New Zealand may be as far as it is possible to get from the financial capitals of the world, but investing internationally need not be any more complicated than putting your money in the bank. For most of us, the obvious approach will be to use some form of managed investment.

International managed funds come in all the usual permutations - unit trusts, superannuation funds, insurance bonds and so on - each with its own advantages and disadvantages. The argument for using managed funds - rather than just going out yourself and buying some shares in, say, Microsoft - is even stronger for international investments than it is locally.

Putting together a diversified portfolio on the world stage is much easier with a managed fund than with direct investments; even if you only have a few thousand dollars you can buy a stake in several different economies and many different companies.

However, international funds vary widely, not only in their structure but also in the investment strategy they follow. Many managers offer funds which go by descriptions such as "balanced", or "multi-sector", which will put your money into a range of things, including overseas investments.

But be careful about relying on such a fund to give you a reasonable stake in the rest of the world. Managers have different ideas of what "balanced" means, and many such funds have a large proportion of their holdings in fixed-interest investments and correspondingly little in overseas shares - not a great idea if you're a long-term investor.

If you want something more closely targeted, the choice is huge. There are funds which cover the whole world, specific regions, individual countries, "emerging markets" and particular types of industries - "technology funds", for example.

But for most investors, the best strategy will be to go with a fund that has a wide focus; investing in an emerging markets fund, for example, may be exciting but it should be regarded as the icing on the cake rather than the core of your overseas portfolio. Having decided on the "where" question, it's also worth considering the "how" issue.

Some international funds are managed "actively", meaning they try to work out which markets have the best prospects and, within those markets, look for the most attractive shares to buy.

Others are "passive" or "index" funds, which just aim to follow the markets - up or down. Local examples are AMP's WiNZ fund, or Tower's TORTIS-International.

Rather than relying on a manager to make the buying and selling decisions, such funds follow a mechanical approach. So, if the value of all the shares listed on the US market accounts for 45 per cent of the world's sharemarkets, for example, then 45 per cent of the fund's investments will be in the US.

Passive funds enjoy a tax advantage over many other types of managed investment, as do British-based investment trusts, which offer another convenient way of investing in overseas markets.

Investors who prefer the direct approach, rather than relying on a fund manager, can get a degree of exposure to overseas markets by buying the shares of foreign companies which are listed on the local exchange - Guinness Peat Group, for example, or Telstra - although the selection is limited. Many brokers can also help you invest directly in overseas markets, so you can have your very own Coca-Cola share certificate if that's what you want.

However, the direct approach does make it difficult to get a reasonable spread of investments, unless you have a lot of money. Keeping track of your investments, and accounting for them at tax return time is also likely to be more complicated than using a managed fund.

One half-way approach, combining direct investment with the convenience of a managed fund, is a broker's custodial account, in which the overseas share certificates, or other documents, are held by a custodian, on behalf of the individual investor.

Broker Merrill Lynch, for example, offers such a service, aimed mainly at those with overseas investments of $US25,000-plus, which allows local investors to choose the shares they want to buy or be guided by the broker. The returns are wrapped up into one statement, making it straightforward to keep track of what your investments are doing.

If you invest in overseas-based funds, keep in mind that in some cases you could be complicating your relationship with the taxman. Depending on the type of fund, where it is based and the amount involved, you could find yourself having to pay tax on your (theoretical) capital gains. Generally, you're safe if the amount is under $20,000 and the fund is based in Australia, Canada, Germany, Japan, Norway, Britain or the US. If the tax issue isn't clear though, it would pay to check before investing.