Put savings to work across the world to beat UK inflation gap

Diversity is vital in money planning in terms of geography, sector and time scale. The latest figures on retail price inflation out this week show that savings need to achieve 4.7 per cent just to maintain their value. The consumer prices index also rose, recording 3.3 per cent.

Inflation is likely to exceed its official two per cent target for most of next year, boosted by rising oil prices and an increase to 20 per cent for most VAT products and services.

The Office for Budget Responsibility forecasts that inflation will outstrip average earnings growth in 2011, which means household spending power will be eroded unless savings can help.

In the annual survey by the Association of Investment Companies among fund managers, 92 per cent predict that markets will rise next year, compared to 74 per cent a year ago. Equities are tipped as the best performing assets by an impressive 80 per cent (up from 50 per cent in 2010). The best performing sector is forecast to be resources (including oil), followed by 'blue chips' (the major quoted companies).

For the first time in the survey's eight years, geographical instability and the threat of terrorism have been cited as the largest threat to equities (34 per cent), followed by global recession and high inflation (both 21 per cent).

Looking at the most successful growth funds, analysis by Lipper specially for the Yorkshire Post reveals the top ones are best over both three and five years:

Ruffer Investment 71.6 and 79.5 per cent;

Mid Wynd International Investment Trust 57.4 and 84.3 per cent;

Murray International Trust 44.8 and 97 per cent;

Lindsell Train Investment Trust 41.3 and 98.5 per cent

McInroy & Wood Smaller Companies 40.2 and 79.4 per cent;

JP Morgan Overseas Investment Trust 39.9 and 57.2 per cent.

These funds vary considerably in size from just 32m (McInroy & Wood) and 44m (Lindsell Train) to over 930m (Murray International, managed by Aberdeen Asset).

One key to growth is to avoid mature economies. On average, the UK and US economies are forecast to grow on average just 2.7 per cent but, by contrast, developing economies such as India, Brazil and China are expected to enjoy significantly higher average growth of 7.1 per cent, according to the IMF.

Spencer Bennett, manager of independent financial advisor Chartford with offices in Bradford and Keighley, warns, "The average UK investment portfolio holds less than seven per cent in dedicated emerging market equities, yet these markets represent 47 per cent of world GDP. In a changing world, it is clearly time for investors to look more closely at their portfolios."

For those with no such exposure, Bennett recommends a managed emerging markets fund which invests across the globe to include the 'BRIC' group (Brazil, Russia, India and China), Mexico, South Africa, Taiwan and Turkey.

There are clearly greater risks in terms of higher volatility, currency exchange and corporate governance but for those taking the longer view, savers cannot afford to ignore the opportunities.

Martin Payne, director at Leeds based stockbrokers Brewin Dolphin, tips Artemis UK Special Situations which he says "often takes a contrarian view on markets, seeking to invest in out-of-favour stocks that have turnaround potential."

Launched a decade ago, it has attracted 1.1bn.

Both Standard Life UK Smaller Companies and Finsbury Growth & Income are also favoured by Payne with the former returning 175 per cent over the past five years. The latter concentrates on 25-35 securities and has a low annual fee of just 0.45 per cent, although there is a performance charge as a carrot to the manager.

Often savers believe that UK-based investments should form the majority of a portfolio because of the perceived risk of investing internationally, but the FTSE 100 actually derives over 70 per cent of its earnings from overseas.

"Over 90 per cent of investment returns come from diversification," says Tony Fisher of Harrogate-based IFA Ellis Bates, who believes savers in global growth funds should view them with caution, take a minimum five-year view and consider the potential barriers. "Issues and technicalities aside, with the right advice forming a global portfolio can be a good way of maximising investments and ensuring a good return," he adds.

Mature markets are likely to show sluggish growth at best. Both the US Federal Reserve and Bank of Japan are printing money and the Bank of England and European Central Bank are considering it. One way forward is to invest in companies quoted here which have a strong presence in developing nations.

For those looking for best value in the UK stock market, including mining companies, the aptly named Matterley Undervalued Returns Fund is recommended by Jonathan Baker of Charles Stanley stockbrokers in Leeds. In the year to date, it has returned over 25 per cent with 38.9 per cent growth last year.

Baker also tips JO Hambro UK Opportunities trust, managed by John Wood, saying, "He has a tried and tested style that concentrates on cash generative companies that have sustainable and recurring top line revenue". It is a trust not driven by short-term trends with up to 10 per cent allowed to be invested in non-UK firms.

Not all global emerging market funds perform well. Bestinvest has highlighted the stars (Aberdeen Emerging Markets A, First State Global Emerging Markets Leaders A and JP Morgan Emerging Markets) which have turned 100 over three years into 157, 149 and 126 respectively.

Conversely, Bestinvest say four in this sector are 'dog funds' for consistent under-performance. Therefore, weed out Martin Currie Emerging Markets A, Gartmore Emerging Markets Opportunities, Scottish Widows Emerging Markets and SWIP Emerging Markets A. The first two actually lost money over three years.

Contacts: Bestinvest 020 7189 9999, Brewin Dolphin 0845 2131300, Charles Stanley 0113 200 5230, Chartford Financial Management 01274 876444, Ellis Bates 01423 520052, Skipton Financial Services 0800 7315345.

Overseas outlook pays off with many happy returns

Ian Campbell, a 72-year-old former business manager in synthetic fibres from Ilkley, has chosen Henderson Multi-Manager Growth "to achieve capital growth by investing in markets in both the UK and overseas."

Last year Ian invested his ISA in the fund which merged with New Star in June to be called Henderson Multi-Manager Active. It has returned almost 13 per cent this year and 48.2 per cent over two years. The major holdings are 29.8 per cent in UK equities and 19.3 per cent in Asia Pacific excluding Japan.

He invested on advice from Skipton Financial Services, where he has been a client since 2005.