Small investors sign up for the foreign legion as overseas investments beckon

Their frenzy to buy shares may have cooled a little from the heady heights of the first quarter, but Irish retail investors are now looking much further afield when it comes to investing their funds.

Small investors are instructing their stockbrokers to buy specific shares on the UK, US and European markets while some are using the Internet in their homes or workplaces to buy in overseas markets.

Why are retail investors looking to overseas markets, how do they decide what to buy and what are the pluses and minuses of investing in different markets? Diversifying your investments across sectors and markets makes a lot of sense. But retail investors should be wary of pouring funds into shares in companies they know nothing about on the basis of tips on the Internet or gossip in the pub. Until about the middle of 1999 Irish shares were generally performing reasonably well with the banks and other blue chips in particular favour. Then the market in traditional shares stalled as investors were lured into technology stocks which carried the promise of rapid increases in value and huge potential gains for investors.

But there were very few technology shares available on the Dublin stock exchange. So ordinary Irish investors, many of them investing in shares for the first time, started to pile into technology shares in markets such as the Nasdaq in the US, the Tech Mark in London and the Neuer Markt in Frankfurt. Television programmes such as the Channel 4 programme Show Me the Money and Internet bulletin boards and chat rooms tipped shares. One Dublin broker said "you could always tell the shares that had been tipped on TV without seeing the programme because they would shoot up straight away".

From mid-to-late 1999 most of the shares tipped were e-commerce and technology companies and many were at relatively low prices. Many investors who got in early saw their shares rise and those who had sold again by the early months of this year made good profits. News of their good fortune encouraged other investors to pile in. But many of the shareholders who only started their technology share buying spree late in the first quarter of this year were left nursing substantial paper losses as technology share prices fell sharply.

As one broker explained "after the profits warnings from the US on technology companies, some people were caught - they had paid high prices for their shares and could not afford to take the loss on selling. Some hung on for a period in the hope the shares would go up again but many had to sell and suffered big losses".

While technology stocks have rebounded off their lows, the recovery has not been uniform, and the experience has dented the confidence of many Irish investors. All stockbrokers report sharp falls in the volume of private client share dealing in the second quarter. Fexco, an execution-only brokerage dealing for private clients, said its level of business is down 20 per cent on its forecasts for the year, according to head of dealing Mr Ken Sloper.

At Davy Stockbrokers, Mr Donnacha Fox said business was considerably quieter and investors were much more cautious since the market correction in March.

At Dolmen Butler Briscoe, Mr Paul McGowan said business fell off in April and May but had picked up steadily since.

Even if the extent of share buying interest has cooled somewhat, brokers report that Irish shareholders are now much more interested in buying overseas shares than Irish shares. And the decision to buy overseas has so far been justified on the basis of the performance of foreign markets compared with that of the Irish market.

After a 12.6 per cent rise in the first quarter, the Irish market was the worst performer in Europe in the three months to end June. The overall Irish Stock Exchange Index was down 13.5 per cent compared with a barely changed average over the period. Only the Nasdaq, down 14 per cent, and Japan, down 14.4 per cent, produced worse performances. Unfortunately for investors holding Irish shares, the new retail interest in overseas shares coincided with portfolio rebalancing by Irish institutions who sold Irish shares to diversify their portfolios.

Irish pensions funds have reduced their holdings of Irish equities from 30 per cent of their portfolios at the beginning of 1999 to around 20 per cent at present. This sell-off accentuated the poor price performance of the Irish market over the period. Some 18 months ago, according to Fexco, 50 per cent of its deals for clients were in Irish shares, 35 per cent involved UK shares and the balance was made up of US and Canadian shares.

Now just 25 per cent of its deals involve Irish shares, while the US/Canadian proportion has fallen back to about 12 per cent and over 60 per cent of the deals involve UK shares. At Dolmen Butler Briscoe, some 80 per cent of its business is in non-Irish shares. About 30 per cent of its deals involve US shares, 30 per cent UK shares and 20 per cent involve European shares mainly in the German, French and Dutch markets.

Explaining the fall off in the interest in Irish shares, Mr Sloper said that it reflected the very limited number of e-commerce/technology shares quoted in Dublin and the poor liquidity in these shares here. "A lot of younger investors still want to get into these type of shares and they are going where there is liquidity and choice," he said.

"And many of our older regular investors already have their boots full of Irish shares where they haven't seen much improvement over the last year. They are holding on to their traditional shares, but for new investment they are looking to overseas markets," he said. Mr McGowan said that investing in the Irish market did not allow clients to take a sectoral approach - to build up a portfolio of investments in preferred sectors and to have liquidity in their portfolios.

For this reason Dolmen has offered clients the opportunity to invest in overseas markets since it was set up in 1995, he said. Mr Fox said increasing levels of sophistication among Irish investors and the prominence of technology companies in the Irish economy - though not on the Dublin stock market - together with the widening networks of contacts and connections of Irish investors, have increased interest in overseas markets. "People are buying on the recommendation of friends, on conversations in pubs and on Internet tips," he said.

Davy encourages clients to build "balanced diversified portfolios" - buying shares in different markets and different sectors. It advises against a portfolio consisting entirely of technology stocks whatever market the customer wants to buy in. "We suggest an investment strategy of investing in different markets, industries and asset classes," said Mr Fox.

"We identify the proportion of an investors assets that should be invested in the different areas so that their portfolio is balanced geographically and sectorally. Balanced diversified portfolios result in better long-term investment returns while reducing the volatility of the portfolio," he said. Davy advises investors to look at big companies with strong balance sheets and superior growth prospects which often would have leading market shares in their industries and an established track record of delivering consistent increases in profits.

"Our experience shows that above average returns are produced by investing in growth companies," said Mr Fox. "We don't buy recovery or turnaround situations. Our investment philosophy is one based on long-term investment rather than a short-term or trading strategy.

"Ultimately, our investment implementation process is based on us being comfortable that we are buying growth companies for you at reasonable prices and not succumbing to the latest fad in the market," Mr Fox said. While Fexco does not offer advice to clients, Mr Sloper said clients liked to have their thoughts reaffirmed. "They will often be acting on a tip from a friend or something they have read or heard and will ask us if we think its a good share or if there is anything bad about it."

What are the potential risks/ rewards of buying in overseas markets?

As with all share buying, whatever the market, in addition to the potential for gains there is always a risk that the shares will fall in value. That overall market risk is no different just because the market is overseas. But the extent of an Irish investor's knowledge of or access to up-to-date information about the company of sector could be much less, thereby increasing the risk involved.

Taking steps to reduce this risk will involve building up access to reliable market/sector and company information. There are many sources of information ranging from the Internet and newspapers to trade and business journals. But potential investors should try to satisfy themselves that the information on which they base their decisions is accurate and reliable.

Technology-heavy markets like the Nasdaq, the Neuer Markt and Techmark offer retail investors the potential for big gains but the risks are correspondingly greater because these markets have become much more volatile.

For example, the Nasdaq finished the second quarter 23 per cent off its peak. In the year to date that market has had 13 days on which it fluctuated more than 5 per cent compared to just one day in 1999, according to Davy.

Investing in the euro area carries no currency risk, but this risk must be considered when investors are looking at non-euro markets.

Currencies can fluctuate up and down and while the capital appreciation of the shares could more than compensate for any loss due to currency fluctuations, it is something that investors should be aware of in assessing potential returns.

Building a diversified portfolio including Irish and overseas shares is a sound approach to investing in equities. But investors should be wary of being sucked into market fads and should be prepared to spend some time doing their own research or buy good investment advice.