Investing abroad

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7. Picking foreign trusts

Your easiest option is to pick a general international trust and let the fund manager decide on your behalf which countries to invest in. This is certainly advisable if you wish to invest in riskier emerging markets, but only have a limited amount of capital.

For the more affluent and ambitious investor, there are three obvious steps to selecting country-specific funds:

1. Identify the country or countries you wish to invest in
2. Identify the trust(s) that cover that country / those countries
3. (Optional - and hard!) Try to select the best-managed trusts in the group.

There are innumerable sources of research into particular countries. But a good starting point is The World in 2009 (or whatever the forthcoming year is). This is published annually by The Economist magazine and usually appears in bookshops every November. It provides comprehensive data tables that give you a wonderful snapshot of how each country's economy is developing.

According to whether you follow a growth or value strategy, you are looking for either

• Countries in the early to middle stages of sustainable above-average growth, or
• Countries where recession, war, civil disturbance, general strikes or other disasters have depressed share prices to bargain-basement levels.

Once you have drawn up a shortlist, you can conduct more detailed research by reading weekly issues of The Economist itself, or visiting websites like growthmarkets.com (see under 'Market Profiles') or ask.com for its individual country profiles (see under country name and 'Economy').

The Financial Times periodically publishes inserts on individual countries, as well as quarterly specials on Personal Finance that monitor the progress of world markets. To ask about back issues, email FT Back Issues on FT@remember-when.co.uk or search by subject on www.ft.com.

Once you have picked your target market, your next task is to find the trust or trusts that cover it. Your best starting point is the website www.trustnet.com. Here you can sort comprehensive lists of unit and investment trusts by region and by performance over 1, 3 and 5 years. For most trusts, you can also click onto a table listing

• their top ten holdings
• the name of the individual manager(s)
• contact details for the investment company that runs the trust.

After that, you may wish to order annual reports from the company to find out more about each trust's strategy and prospects. This is especially useful if you are faced with a choice of several funds covering one country.

For example, you would have made consistently good returns by investing in the US via a general fund since 1992. But had you done so via a US smaller-company fund, you would have done poorly until mid-1998. This shows how important it is to specify the market or sector you wish to be in.

A word of caution: Never, ever choose a trust on past performance alone. There is a wealth of evidence to show that there is no meaningful link between past and future returns. The Financial Services Authority is so concerned about investors ignoring this that they have considered restricting or even banning the use of performance statistics in advertisements for trusts.

Other data is thought to be more helpful in estimating future returns. For example, studies of the consistency of past returns seems to suggest this measure offers a better basis for predictions. But such data only points to probabilities rather than certainties. It is also too expensive for private investors to get hold of, except via independent financial advisors who subscribe to services like Standard and Poor's Fund Research.

These are some of the reasons why it is so hard to select above-average managers and - arguably - why it is not really worth trying to do so.

1. Why invest abroad? 2. Risk and reward in foreign investment 3. Custody risk 4. Currency risk 5. UK companies are foreigners too 6. Foreign unit and investment trusts 7. Picking foreign trusts 8. How to make the most of trusts 9. Tracker funds for foreign markets 10. Foreign companies on the London exchange 11. American Depository Receipts 12. Investing in American companies 13. Investing in European companies 14. Investing in Asian companies 15. Investing in other markets 16. Dividends and withholding taxes 17. Markets go global 18. Conclusion

• Mobius on Emerging Markets