Country Specific Funds

DairyQueen

I am in the process of rebalancing our portfolio. The portfolio is self-managed using core passives and satellite actively-managed funds. I am not a slavish adherent to passive strategy and use the satellites as a way of weighing the portfolio in specific directions. In particular, the satellites tend to be country/region specific.

I am currently seeking funds that specifically invest in the following countries:
Singapore
Spain
Netherlands
Canada
Australia

Fidelity and HSBC appear as candidates on some of the above.

Recommendations? Thoughts? All welcome.

bowlhead99

DairyQueen wrote: »

I am currently seeking funds that specifically invest in the following countries:
Singapore
Spain
Netherlands
Canada
Australia

Fidelity and HSBC appear as candidates on some of the above.

iShares have an MSCI Canada ETF listed on London stock exchange (CCAU) and MSCI Australia (IAUS or SAUS).

Both those countries stock markets have more than a trillion dollars of market cap so there is some demand from some people for a tracker product. But cap- weighted trackers for both will be heavily tilted to financial businesses, materials and energy (60-70%, with 35-40% in financials being the biggest single component).

Spain and Netherlands combined market cap is probably measured in hundreds of billions of euros rather than trillions and I know iShares doesn't have a dedicated tracker - though their bigger companies would be in the Europe ones of course, and good smaller companies may feature in a Europe smallcap fund. Singapore's stock exchange market cap is only a couple of hundred billion and I guess you would struggle to find a highly liquid European product that invests in that country alone -there just isn't the demand here.

Recommendations? Thoughts? All welcome.

While some niche products do exist - and you would have a wider choice of Canada options if you include US-listed ETFs, though they may not have UK reporting status causing tax disadvantages if outside a tax wrapper - the above are not recommendations. I would recommend you don't try to get super country-sensitive with your satellites and themes and tilts.

Presumably you don't intend to have a massive amount extra in the Netherlands than you'd already get from more global or European funds that form the core of you're portfolio? If you love Shell, ASML, Unilever and Heineken there are plenty of mainstream funds that will hold them. Prosus has a large market cap but is just a 100m slice of Tencent. If you want particular exposure to it, just buy it as a separate holding rather than overweight the whole country just to get it.

You may be much better served by looking at active fund managers who share your preferences for what regions or industries are attractive. If you don't find any, ask yourself why they don't agree with you that those regions or industries are attractive.

Thrugelmir

Why countries and not themes?

MarkCarnage

I agree with the comment about 'why countries'? Most of the time anyway.....

Any particular reason(s) that you are able to share as to why you've chosen these countries?

DairyQueen

bowlhead99 wrote: »

iShares have an MSCI Canada ETF listed on London stock exchange (CCAU) and MSCI Australia (IAUS or SAUS).

Both those countries stock markets have more than a trillion dollars of market cap so there is some demand from some people for a tracker product. But cap- weighted trackers for both will be heavily tilted to financial businesses, materials and energy (60-70%, with 35-40% in financials being the biggest single component).

Spain and Netherlands combined market cap is probably measured in hundreds of billions of euros rather than trillions and I know iShares doesn't have a dedicated tracker - though their bigger companies would be in the Europe ones of course, and good smaller companies may feature in a Europe smallcap fund. Singapore's stock exchange market cap is only a couple of hundred billion and I guess you would struggle to find a highly liquid European product that invests in that country alone -there just isn't the demand here.

While some niche products do exist - and you would have a wider choice of Canada options if you include US-listed ETFs, though they may not have UK reporting status causing tax disadvantages if outside a tax wrapper - the above are not recommendations. I would recommend you don't try to get super country-sensitive with your satellites and themes and tilts.

Presumably you don't intend to have a massive amount extra in the Netherlands than you'd already get from more global or European funds that form the core of you're portfolio? If you love Shell, ASML, Unilever and Heineken there are plenty of mainstream funds that will hold them. Prosus has a large market cap but is just a 100m slice of Tencent. If you want particular exposure to it, just buy it as a separate holding rather than overweight the whole country just to get it.

You may be much better served by looking at active fund managers who share your preferences for what regions or industries are attractive. If you don't find any, ask yourself why they don't agree with you that those regions or industries are attractive.

Thanks for the reply. I take the point re: relative size of market cap of most countries on the list. I also didn't make clear that my core portfolio is passive but the satellites are actively managed. I prefer active managers for markets that are excluded from, or notionally represented in, the global trackers by virtue of size (small caps, small developed countries, emerging markets).

I am not sufficiently knowledgeable to pick individual stocks, nor take punts on sectors or themes, but niche-invest in specific national markets by reference to current valuations and their prospective future returns. Not exactly an exact science but one method by which to mitigate the risk posed by global passives when large markets become overvalued.

Yes, I do mean the USA. It's big but its GDP doesn't warrant its current market valuation. Other nations (not least the UK) are undervalued using the same market cap / GDP measure.

The countries on my shortlist are amongst the developed markets that appear to have better prospects of growth over the mid-term (5-8 years) and which are currently minimally-represented in my portfolio.

I am also increasing my allocation to specific emerging markets - China and India. High risk and volatile but they represent a very small part of my overall portfolio.

DairyQueen

Thrugelmir wrote: »

Why countries and not themes?

See post 5. Lack of knowledge.

DairyQueen

MarkCarnage wrote: »

I agree with the comment about 'why countries'? Most of the time anyway.....

Any particular reason(s) that you are able to share as to why you've chosen these countries?

I am looking at mid-term returns (5-10 years). These are some of the countries whose markets appear undervalued relative to current market cap/GDP. They are also missing/minimally represented in my passive portfolio. Note the position of the (over valued) USA. The dominance of the USA in global passives is of particular concern given that over-valuation.

Feel free to comment on my devotion to tilting using geographic diversification. It's a method I use given I lack the knowledge to stock/theme/sector pick.

bowlhead99

DairyQueen wrote: »

. I also didn't make clear that my core portfolio is passive but the satellites are actively managed. I prefer active managers for markets that are excluded from, or notionally represented in, the global trackers by virtue of size (small caps, small developed countries, emerging markets).

I am not sufficiently knowledgeable to pick individual stocks, nor take punts on sectors or themes, but niche-invest in specific national markets by reference to current valuations and their prospective future returns

There are various active fund managers offering funds for places like China or India because those places are huge, with a billion of population driving strong investor interest. Australia does have a trillion of market cap mostly in banks and mining but there are not many people pitching Australia-only funds to UK retail investors. Having a punt on (e.g.) Spain seems even more niche because even though it has the same sort of GDP and its own dynamics, it's surrounded by similar countries that could form part of a sensible diversified approach, while Australia is out there in a geographic continent on its own

Iberia-only or Singapore only is a real niche and you would expect most people to get exposure to them bundled into something regional. If you are trying to get an actively managed fund they would not have much competition so it would be difficult to judge them against peers because they don't have them - so you might buy a lame duck.

You mention looking at current market valuations and prospective future returns to decide what countries would be good to invest. If you are not knowledgeable enough to understand the sectors or themes, how do you know the future returns of the countries? Presumably you are just looking at some sort of average P/E ratio for a local index and making a guess?

If it is a historic average of the index's p/e that's leading you to conclude that e.g. Australia and Canadian companies have tempting valuations, and you don't know much about sectors but are really confident about your projections based on your view of the index, then it's the index constituents in their weighted average mix that appeals, right? So seeking out active management might seem an unnecessary step. Just use an index fund to buy more exposure to the index that you just proved was a suitably nicely valued index.

One could reflect that Australia only looks cheaper than US because its index has really high exposure to banks and energy/mining (which are industries without massive growth and PEs) while US has things like fast growing consumer tech, the world's reserve currency, international thought leaders like the Teslas and FAANGs etc which quite rationally have higher PE ratios because of higher expected future growth than a coal mine. So, if Australia 'looks cheap' compared to Australia's historic index PE (because the global financial crisis took the banks down a peg or two, and growth plateaus in China mean miners are no longer having a heyday); or looks cheap compared to the USA because of fundamentally not having so many growth stocks in its market cap mix - that doesn't mean it is definitely a better home for your investment.

Not exactly an exact science but one method by which to mitigate the risk posed by global passives when large markets become overvalued.

Yes, I do mean the USA. It's big but its GDP doesn't warrant its current market valuation. Other nations (not least the UK) are undervalued using the same market cap / GDP measure.

The countries on my shortlist are amongst the developed markets that appear to have better prospects of growth over the mid-term (5-8 years) and which are currently minimally-represented in my portfolio.

You mention not feeling 'sufficiently knowledgeable to pick individual stocks, nor take punts on sectors or themes'. So it's not clear how you do feel sufficiently knowledgeable to know which individual countries are the best place to be.

Markets like Spain and Australia are quite small in the grand scheme of things, though surely Australia would be well represented in many APAC ex-Japan funds whether active or passive. If you are not aiming for particular sectors and themes as you de-expose yourself to the US markets it seems you could just do that by holding regional funds for the core of your portfolio and put less in the North American regional one. Then you don't need to mess around adding individual bits of Spain or Netherlands or Bolivia or Romania to 'niche-invest in specific regional markets'.

It sounds like your portfolio is quite a bit more complex than it needs to be. If that's because you love tinkering, fine, but don't kid yourself that you're going to get a much better risk-adjusted result. The old adage "market can remain irrational longer than you can stay solvent" comes to mind.

I am also increasing my allocation to specific emerging markets - China and India. High risk and volatile but they represent a very small part of my overall portfolio.

The last part of the sentence seems pertinent. Yes single country investing is risky so you wouldn't want much of your portfolio in it.

The two countries you cited are current or future economic powerhouses, emerging as markets. There are other 'world powers' you might want to punt on, like Russia if you're watching your CAPE ratios. But all of them would only get a small slice. How much then for Singapore or Netherlands or Spain who will probably not end up king of the world? Not much.

If you keep adding niches and extra holdings on some pseudoscientific valuation basis you will end up with absolute loads of punts and tilts around the core of your portfolio, while each only represents 'a very small part of my overall portfolio' and if you're honest with yourself, could be skipped with no harm done.

bowlhead99

MarkCarnage wrote: »

'why countries'?

Thrugelmir wrote: »

Why countries and not themes?

DairyQueen wrote: »

See post 5. Lack of knowledge.

Choices would include
a) acquiring knowledge, or
b) accepting that you are not an expert and if the strategy you want is a good one, someone will have already built a fund with that ethos and you don't need to research umpteen super niche funds to construct a portfolio yourself from a position of 'low knowledge so I'll just accept the flaws of CAPE etc and press on regardless'.

AnotherJoe

DairyQueen wrote: »

See post 5. Lack of knowledge.

When I saw that i thought you meant didnt have the knowledge that it was pointless.

Example 1, Netherlands. Amongst the biggest companies, Royal Dutch Shell, Unilever, AIbus heineken. How much of their business do you think they do in the Netherlands?

Example 2. Canada. Of teh 6 bigegst companies, 5 are financial and one is an oil company. SO you are mamking a bet not on "canada" but the finance sector in Canada and elsewhere

Example 3. SIngapore. The biggest is a commodity trading company which for sure will do 99% of ist business outside SIngapore. The other two are well down the top 500 global companies.

Example 4, of the top ten, 4 are global banks and 2 are global busienss consulting companies. Doing nearly all their business outside Australia

TL;DR All you'll do is end up with randomly biased and skewed global fund, for exampel if you have a global one as well, you'll have a lot of overlaps with Shell, Unilever etc. More concentration not less.  Better to buy one global fund and perhaps regional or theme based and small companies funds.

DairyQueen

Thanks for the comments BH & AJ. I will take them on board.

Yes, I have been using CAPE to provide candidates for diversifying away from the US. Whilst I appreciate all that you say about the US market, a 60% exposure to a single country of which a disproportionate value is represented by a relatively few supra-global, tech companies makes me uneasy.

The Nasdaq 100 dropped almost 80% when the dot-com bubble burst 20 years ago. Yes, some companies' prices recovered reasonably quickly. Many others didn't. For example, Microsoft didn't recover its 2000 high for 15 years.

I remember the one-way bet that Microsoft et al represented at that time. I don't subscribe to 'it's different this time'. 

I am also more conversant with the political scene in America than any other nation outside of the UK. I have lived there. I have studied the political and economic system. I know its history and understand something of its culture. I could write a long and boring essay on the subject. 

Yes. I am probably over-tweaking by looking at  specific nations rather than regions and, yes, tinkering like this may be a mug's game. Even so, I would like to take a few punts on the prospects offered by apparently undervalued markets mid and long term rather than continue to disproportionately invest in one very large, overvalued market and its optimistically valued tech sector.

In the last decade or so China has moved from 6th to 2nd in the economic pecking order. Its population is over 4 x the size of the USA's and increasing at a faster rate. Its GDP has quadrupled since 2005 whilst the USA hasn't even close to doubled over the same period. It has massive potential for economic growth. It no longer relies on the 'West' for design, technology and management expertise. It isn't a question of if China will overtake the US as the world's largest economy but when. The balance of power is changing quickly and the next hegemonic power is not a Western democracy. 

Meanwhile Europe's growth is hampered by the political idealism, over-regulation,  and incoherent economic policies of the EU. I am not a fan.

Interesting times.

I think I have just made an adjustment to my view on preferred regions and nations. So, thank you BH for helping me to stand back and consider the bigger picture.