In her Warren Buffett biography, The Snowball, Alice Schroeder describes how in 2004 he ordered a book the size of several telephone directories that contained information on the major stocks listed on the South Korean stock exchange.

At first Buffett did not understand how to read the information and quickly realised he had to learn an entire new business language. So he did.

He got more books and taught himself the intricacies of Korean accounting. After having mastered how to interpret the company figures, he concluded that many Korean companies were substantially undervalued.

"I could end up with nothing but a bunch of Korean securities in my personal portfolio," he told Schroeder.

It is a remarkable passage in the book, because Buffett has made the vast majority of his money in United States domestic companies and has always maintained investors should stick to what they know.

But at the start of the 21st century the investment landscape had changed so dramatically from when he laid the foundations for his dazzling wealth in the 1970s - as derivatives made debt cheap and changed the way businesses operated - that he decided his approach needed to change as well.

Like Buffett, Australian investors have traditionally favoured domestic stocks and they have had good reason to.

Despite the global financial crisis (GFC), investors who put money into the ASX 200 Index five years ago have still seen their wealth increase by almost 20 per cent over the period. The MSCI World Index, on the other hand, increased by just over 10 per cent during the same period. For most investors this is enough reason to stick with what they know.

But increasingly there are voices that say the fundamentals that have led to the outperformance of the Australian market over international markets have changed.

"Australian shares have been a good market, but one experience is not a proof statement," Axa Asia Pacific chief investment officer for Australia and New Zealand Mark Dutton says.

Much depends on the period being looked at and when you take a longer-term view the picture is quite different, Dutton says.

"Looking back in time, global equities have outperformed Australian equities two-thirds of the time," he says.

It is just a matter of time before the markets return to their natural cycle again, he says.

Investment managers are increasingly positive on the outlook for global equities. Fidelity International director of asset allocation Trevor Greetham recently conducted a study on the time it takes for valuations to return to average levels after a downturn. Greetham concluded that after 10 years of sub-average returns for global stocks, the next 10-year period was likely to produce strong results.

"Returns in the 10 years after a lost decade average out at a healthy 11 per cent per annum in real terms," he says.

That is certainly better than the performance of the S&P Global 1200, which increased a meagre 0.81 per cent between 1999 and 2009.

Currency effects

In the past 18 months, the relatively slack performance of international shares compared to Australian shares has been amplified by a rise in the Australian dollar. Although international markets have recovered strongly after the GFC, in many cases more so than the Australian market has, the rise of the dollar from around US$0.65 to over US$0.90 has wiped out much of these gains.

Australian Unity-owned fund manager Wingate Asset Management chief investment officer Chad Padowitz gives a clear example of how this movement has impacted on his international equities portfolio.

"A lot of our oil shares doubled in the local currency, but the Australian dollar doubled as well, so we did not necessarily see it in the growth of our portfolio," Padowitz says.

Financial planners have received many questions from their clients about why their portfolio did not rebound.

"Clients ask us: 'why does my Australian fund perform better than my global fund when all markets have recovered?'" Australian Unity Investments group executive David Bryant says.

But this initial negative feedback turns on many occasions into interest in international equities when planners explain about the currency effect and the likely scenario going forward, Bryant says.

"The question that needs to be asked is: well, that is the year behind us, what about the period ahead?" he says.

Although the Australian dollar could rise further in the short term, the general expectation is that it has run most of its run, he says.

Being near its high, investors get more value for their money when buying international equities now, while a weakening of the dollar would amplify positive returns the same way it has dampened returns in the past 18 months.

"The reason that international equities have lagged Australian equities has in large part been driven by the currency, so in the next couple of years, unless the Australian dollar continues to go up in value, the reality is that that differential won't exist," Bryant says.

"There is a very good argument that international equities will be a very strong performer in the next couple of years, largely aided by currency."

Advisers should take this scenario into consideration when making asset allocation decisions, he says.

"Advisers in general have tended to skew their portfolios to what they know. That has not been an unwise approach, but as a result you tend to have a much more domestic portfolio, a portfolio that you built two years ago and you have to ask whether it is still the right portfolio today," he says.

Although the market has already recovered by over 50 per cent, Dutton says investors have not yet missed the boat.

"The opportunity is still there; there is still value in the market. We are about a third of the way through the rally," he says.

He says there are normally three stages in a recovery. The first stage is when panic subsides and company valuations recover from distressed levels to levels that are still cheap, but do not reflect fire-sale prices.

The second stage is when companies are starting to report positive surprises in their periodical financial statements.

"That's the stage we are in now. That's what we've seen in the last couple of months," Dutton says.

The last stage is when the actual economies themselves are starting to grow again, which will drive further growth in companies' profitability.

Dutton says he expects the global market to resume growth sometime this year, after global gross domestic product (GDP) declined 0.8 per cent in 2009.

Profiting from growth

The case for international equities is made stronger by the expectation that the largest growth in the coming years will be found in emerging markets, particularly in Asian markets.

But there are different schools of thought on how to benefit from this growth. Some investors prefer to invest directly into these markets, buying stocks on the Chinese, South Korean and Indian stock exchanges, while others prefer to invest in international companies listed on stock exchanges in the US or Europe, but which derive a large part of their revenues from emerging markets.

The logic behind this last approach is that rapid growth of a country's economy, as measured by its GDP, does not necessarily translate in a buoyant local stock market.

"Some of the traps that people fall into at the moment are around confusing economic growth with companies and where they are domiciled," Zurich Investments general manager Matthew Drennan says.

"So if you take the view that the US economy is going to struggle - it has got a high unemployment rate, it's got some debt that it is going to need to repay and they are going to be winding back their fiscal stimulus - then it is easy to draw the line and say 'therefore, I'm not going to invest in a whole range of US companies'.

"But that doesn't make a lot of sense to us.

"Where companies are actually domiciled and which exchange they trade on is really irrelevant. It is more about where their exposure is and where they are linked into the growth areas, like the energy demand from China.

"If you look at a company like Chevron, it couldn't give two bits about how fast or slow the US economy is growing. It is about the exposure it's got to Gorgon [gas field project]. That sort of gas field is going to deliver the growth and earnings from China."

Security Global Investors (SGI) runs a global equity fund for Bennelong Funds Management. SGI portfolio manager David Whittall does invest directly in emerging markets, but does so sparingly. The fund's weighting towards China is just 2 per cent of the portfolio.

"The Bennelong SGI Global Equities Fund invests primarily in companies from developed world stock markets," Whittall says.

"Many of these companies do manufacture in, or sell to, emerging markets and provide exposure to high-growth emerging market trends in areas like infrastructure, transport, energy, financial services, technology and consumer spending. Where appropriate, we will also invest directly in listed companies in emerging markets."

Investing in companies on developed stock exchanges gives the benefit of working with familiar legislation and strict compliance rules, thereby mitigating the risk often associated with investing in emerging markets.

But AMP Capital Investors senior portfolio manager Ragu Sivanesarajah, who runs the India allocation in AMP's Asia Equity Growth Fund, says this is not always possible.

"It is difficult to derive revenues directly from India," Sivanesarajah says.

He waves away the argument that the corporate governance and disclosure requirements are less stringent in India.

"To us it is like any other market; there are companies that give good disclosure and ones that don't," he says.

It is up to the fund manager to do their homework properly, he argues. Besides, there are a number of large Indian companies that have American depositary receipts listed in the US, and are therefore subject to the same disclosure rules as US companies.

To illustrate that it is not always possible to benefit from growth in India through foreign investments, Sivanesarajah points to the auto component sector.

"India will cross $3000 GDP per capita in the next year and this is likely to cause a spike in the auto demand," he says.

"Almost every other country in the world that has gone through this barrier has seen a spike in demand."

Although a number of foreign carmakers have tried to penetrate the Indian market, they have struggled to introduce a successful model.

"The India auto market is quite insular, but local players have done well," Sivanesarajah says.

Yet, this trend has not gone unnoticed and car manufacturers in India are relatively expensive stocks to buy.

But Sivanesarajah found a tyre company, Apollo Tyres, which was trading at relatively low valuations. The reason for the discount was because the tyre company bought a Dutch company, called Vredestein Banden.

"When an Indian company makes a western acquisition, investors think they are wasting their money because they don't focus on demand in the home market," Sivanesarajah says.

"But [the acquisition] was about access to technology."

Travelling regularly to India, he met up with the management of the company, who explained the logic behind the deal to him, and he decided the transaction made commercial sense.

"That's why you need to speak with management," he says.

He says he finds that financial planners are somewhat polarised in their approach to India, with some striking differences along geographical lines. The willingness of planners in Western Australia to invest in emerging markets is much higher than on the east coast, a development that can partly be explained by a large part of the WA workforce being involved in industries that export directly to Asian countries.

But the limited diversity of Indian-flavoured investment products also makes planners somewhat reticent to embrace the region more widely.

Asked if AMP Capital has considered establishing an India-only fund, Sivanesarajah smiles broadly. "I can see the opportunity," he says.

But he does not want to say whether such a fund is in the pipeline.

Mentioned in the same breath as India, and perhaps first, is China. The growth story of China has been on everybody's lips in recent years, but there have been growing concerns the country will not be able to sustain its rapid economic expansion over the long term. T Rowe Price portfolio manager Scott Berg says these concerns are misplaced, and China's main problem lies in preventing the economy from overheating by keeping GDP growth to around 8 per cent a year.

"People overly fear what the Chinese [government] is doing, but you want them to be doing that," Berg says.

"[China] did better during the crisis than what everyone thought they were doing."

On the other hand, investors who believe a bubble is building up in the Chinese markets also miss the point, he says.

"[Chinese] companies are no longer the sale of the century, but it doesn't look like a bubble right now," he says.

Yet, he does not skew his own investment style towards emerging markets. "The way I run the portfolio is to not have any tilt. We are only 60 basis points overweight on these economies," Berg says.

More choice in products

The number of international equities funds available in Australia has steadily increased in the past few years, but a rapid expansion of funds offered by foreign managers could take place if the planned repeal of the foreign investment fund (FIF) rules goes ahead.

The current legislation requires international fund managers to establish an Australian domiciled fund, rather than the more common approach in other markets of allowing the use of so-called feeder funds that invest directly into offshore-based pools.

"If you can't take something that is produced elsewhere and put a front on it, then it becomes very expensive," Pinnacle Investment Management managing director Ian Macoun says.

"Under the current rules you have to set up a separate trust, separate compliance and most foreign fund managers find it all too hard."

T Rowe Price director for Australia and New Zealand Murray Brewer says the firm has hired a number of lawyers and tax advisers to help form an interpretation of what a repeal might look like.

"We are working to get an opinion on what it all means," he says.

The fund manager recently launched a new fund in the Australian market, the Global Equity Core Growth Strategy, but Brewer says it will make it much easier if the rules are repealed.

"The best way is to give investors access through a pooled vehicle. Feeder funds provide liquidity and nimbleness," he says.

"If the FIF rules would be lifted, the efficiency of funds are going to be improved."

He says T Rowe Price is keen to expand the number of funds it offers in the Australian market and the firm is currently scoping the interest for an actively managed fixed income fund.

"We've got certain credit skills that we might bring to the fore," he says.

"It might be something that is complementary to existing fixed income funds and invests in sub-asset classes."

The repeal of the FIF-rules would certainly help with the introduction of such a fund, as the firm offers similar products in the US. "We are scoping interest at the moment, but we might not come up with a product," he says.

The current FIF rules also include a number of capital gains tax restrictions for foreign fund managers, requiring them to pay taxation over unrealised capital gains in portfolios. This has led to the practice of bed-and-breakfasting; selling stocks with significant capital gains one day and buying them back the next morning.

The idea behind it is that you can better pay tax over realised gains, rather than carry the gains forward to the next tax year and run the risk of these gains diminishing, or even turning into losses while tax has already been paid.

A repeal of the rules would also solve these inefficiencies and make the establishment of new funds by foreign managers more appealing.

Although the federal government announced in its 2009 budget that it would abolish these rules, Treasury remains tight-lipped on its agenda for the repeal.

A number of fund managers say they expect to see interim rules being introduced before the end of June, but unless these interim rules contain a clear repeal it is likely fund managers will maintain the status quo. An influx of new international equity products would then be unlikely.

Cheap exposure

The continuing increase in popularity of exchange-traded funds (ETF) forms a serious contender for the traditional international equity unitised trusts, as they offer cheap exposure and are relatively easy to understand.

But these passive investments also limit investors' ability to profit from opportunities in global markets.

"Well, you take out the risk of making the wrong choice, but you are also taking out the freedom of choice," Bryant says.

"Just because you are investing in global equities, it doesn't mean that you have to invest in overseas markets equally."

For example, the MSCI World Index covers roughly 1500 shares, while there are globally more than 10,000 listed companies to invest in. Asian shares are a relative small percentage of the index, while they are generally considered to be driving economic growth in the years to come.

"Everyone would say that we are definitely looking to Asia to provide the economic demand and growth and help the US and Europe lift itself from where it is today," Bryant says.

"But the US and Europe are a significantly larger proportion of the MSCI than Asia is and that to me is in reverse. The MSCI in reality is a backward-looking allocation and to me you need to have a forward-looking allocation. I think Asia is people's first port of call."

India, for example, is only 1 per cent of the MSCI World Index, while its share in global GDP growth is many multiples of that. Conservative predictions even assume India will nearly match US GDP by 2050, assuming it will continue to grow by 6.5 per cent a year, according to Goldman Sachs Asset Management data.

Padowitz brings the case for active management in international equities back to a simple principal. "There is much more opportunity to find investments when you look at a couple of thousand companies than a couple of hundred," he says.

"There is always something happening in the world."

This does not have to mean scouring the world for obscure investments, he says, there are good opportunities in large names such as Walmart and Coca-Cola. "These are companies that have good growth and they are companies with pricing power that sell products that people don't go quickly without in a crisis," he says.

The other clear advantage is that international equity managers have the ability to shop around for a better price.

"Woodside Petroleum trades at a relatively expensive price-to-earnings ratio, based on its ability to profit from the development of the Pluto Project on the North West Shelf," Zurich Investments senior investment specialist Patrick Nobel says.

"But Shell [listed in the UK] owns 33 per cent in Woodside and trades at far more attractive multiples than Woodside."

No rush to change allocations

Despite the unmistakeable case that can be made for increasing the allocation to international equities in investment portfolios, financial planners are cautious in making any abrupt changes.

"We are not into the market timing strategy, so we have always had a sizeable allocation to international equities and we are not looking to decrease or increase our allocation," HLB Mann Judd partner Jonathan Philpot says.

"Currency is just another risk with international shares and over the short term I think you have to be very game to say the currency will not rise higher, so we are not using that argument as a reason to invest internationally."

Research indicates that investors who receive advice have historically already a higher exposure to international equities than investors who do not receive advice, and most planners indicate that although clients do not seek to increase their international equities exposure, clients are happy to maintain their initial exposures.

Most planners also indicate that investment allocation decisions often form part of a much broader wealth strategy that aims to deliver the best solutions over many decades.

"Our investment decisions are based on our clients' need to take risks: what's going on in their lives, not what's going on out there," Australian Independent Financial Advisers director Matthew Ross says.

"We invest our clients' portfolios into the world economy every day of the year. We don't make our decisions based on gut instinct, watching charts or from what we read in the paper. We believe in capturing market returns for the lowest possible cost."