Geographic diversity of funds

AnotherJoe

lollynerd said:

I recently did a review of my ISA and pension funds (I am already retired) and I found that I am not as geographically diversified as I previously thought.
My current mix looks like this (These are all equities, not bonds):
USA 69%
UK 11%
China 7%
Taiwan, Japan, India 3% each
The rest is covered by Switzerland, Canada, Brazil, Korea, France.
Now, considering how expensive US equities are today, I am thinking that I am top heavy in this geography, and am worried that a reverse could hit me hard.
Do you have a view on a good geographical balance for the next few years?
Can you point me towards any good articles on this subject?
Thanks

IMO, if you want diversity, sector is better than geography.

Here's why.

No doubt Apple to pick one not at random, is a US company as far as your statistics above.

But much of its business is global they sell all over. And they manufacture all over. Foxconn, who make most iPhones, who were mostly in China are now branching (from memory) to Vietnam and India.

Or say, Tesla, again marked as US. Sold worldwide. Well they will shortly have manufacturing not just in USA and China but Europe and Indonesia and India.

Or say >>British<< Petroleum whose business is worldwide and very little proportionally in the UK.

Or Unilever who nearly arbitrarily moved from being a UK company to a Dutch one a couple years ago on account of their HQ being moved (but didnt happen). That will mess up your UK stats. But manufacturing and sales woudl have been unaffected.

Youve got Switzerland there, well some huge % of Switzerland is Nestle. How much of their product is sold in Switzerland? I have no idea but i do know that Swiss sales will be tiny, insignificant,  compared to sales globally.

So I say your neat numbers above , 3% India, 11% UK, etc, are a meaningless fiction.

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

JohnWinder

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Linton

JohnWinder said:

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Or you have a long term allocation strategy and keep to it whatever the market does. I see no reason to believe that the market allocations are optimal for an individual small private investor with objectives very different to that of chasing short term gains which drives the global markets.

How can a portfolio be considered optimally diversified when 60% is allocated to one country and 10% is allocated to just 3 companies. Neither figure has any real world justification in terms of GDP, profits, or turnover.

lollynerd

Linton said:

JohnWinder said:

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Or you have a long term allocation strategy and keep to it whatever the market does. I see no reason to believe that the market allocations are optimal for an individual small private investor with objectives very different to that of chasing short term gains which drives the global markets.

How can a portfolio be considered optimally diversified when 60% is allocated to one country and 10% is allocated to just 3 companies. Neither figure has any real world justification in terms of GDP, profits, or turnover.

Hi Linton, I'm not sure if you are referring to my portfolio there. My question was only about the equities I hold. I have propertiy and bonds, but those aren't not related to my question.
Also, I don't have 10% invested in 3 companies. Maybe you were referring to someone else?

Linton

lollynerd said:

Linton said:

JohnWinder said:

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Or you have a long term allocation strategy and keep to it whatever the market does. I see no reason to believe that the market allocations are optimal for an individual small private investor with objectives very different to that of chasing short term gains which drives the global markets.

How can a portfolio be considered optimally diversified when 60% is allocated to one country and 10% is allocated to just 3 companies. Neither figure has any real world justification in terms of GDP, profits, or turnover.

Hi Linton, I'm not sure if you are referring to my portfolio there. My question was only about the equities I hold. I have propertiy and bonds, but those aren't not related to my question.
Also, I don't have 10% invested in 3 companies. Maybe you were referring to someone else?

Sorry, my post was a response to John WInders implication that global index funds are optimally diversified.  The figures are typical for a global equity index.

Thrugelmir

lollynerd said:

Linton said:

JohnWinder said:

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Or you have a long term allocation strategy and keep to it whatever the market does. I see no reason to believe that the market allocations are optimal for an individual small private investor with objectives very different to that of chasing short term gains which drives the global markets.

How can a portfolio be considered optimally diversified when 60% is allocated to one country and 10% is allocated to just 3 companies. Neither figure has any real world justification in terms of GDP, profits, or turnover.

Also, I don't have 10% invested in 3 companies. Maybe you were referring to someone else?

That's the portfolio concentration in some funds due to the market capitalisation of certain companies. 

If you take the 15 largest companies based in Silicon Valley in terms of revenues i.e. GDP. They would rank 15th in the world if they were a country. Sitting between Spain and Mexico. 

dunroving

eskbanker said:

dunroving said:

Do global trackers typically reflect the global market share of each country (or region)? I suppose it makes sense, but I'd never thought about it that way.
Your link shows this tracker (vanguard-ftse-global-all-cap) is 59% weighted towards the US, which seems overweighted (just intuitively, which is why I asked my question). I just checked the Fidelity World index/tracker, and it's 65% US, and "my" global tracker (Vanguard FTSE Developed World ex-UK) is also 65% US.

It's not an exact science and there are multiple indices to track, so for the FTSE Global All-Cap one I mentioned, that includes 8,941 companies, including small ones.  There are other indices, such as that FTSE Developed World ex-UK, but of course that's not truly global, or FTSE All World, which omits small cap but is otherwise comparable to Global All-Cap - there is no right or wrong answer though, but it's just a case of identifying the index which most closely matches what you're trying to model and then picking a tracker.

In terms of the USA proportion, the Global All-Cap is 56% (the 59% is the whole of North America) and this is much the same in the All World one.  Both the FTSE Developed World ex-UK and MSCI World (tracked by the Fidelity product) relate to a subset of developed countries and so the USA proportion would be expected to be higher for those, hence your 65% figures.

Thanks for the detailed explanation.

Linton

Thrugelmir said:

lollynerd said:

Linton said:

JohnWinder said:

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Or you have a long term allocation strategy and keep to it whatever the market does. I see no reason to believe that the market allocations are optimal for an individual small private investor with objectives very different to that of chasing short term gains which drives the global markets.

How can a portfolio be considered optimally diversified when 60% is allocated to one country and 10% is allocated to just 3 companies. Neither figure has any real world justification in terms of GDP, profits, or turnover.

Also, I don't have 10% invested in 3 companies. Maybe you were referring to someone else?

That's the portfolio concentration in some funds due to the market capitalisation of certain companies. 

Yes,  true.  Which is why I think that focussing solely on market capitalisation is not an ideal way of choosing the underlying investments for a portfolio.

eskbanker

lollynerd said:
I don't have 10% invested in 3 companies.

Out of curiosity, how is your 69% US allocation held?  Market capitalisation is obviously a popular method, but as above there are alternatives....

lollynerd

Linton said:

lollynerd said:

Linton said:

JohnWinder said:

AnotherJoe said:

If you want diversity, spread across finance, energy, manufacturing blah blah whatever your chosen sectors are.

Or just forget about it and buy  global funds, perhaps top 1000 companies or whatever and then small companies. And maybe real estate if you want to diversify more.

One does diversify across sectors by owning cap weighted global index funds. One doesn't need to have 'chosen sectors' to be optimally diversified.

If one chooses to pick and choose which sectors or which regions to over- or under-weight then you've got a couple of questions to answer (to yourself): how will you decide to 'sell out of' or 'stay with' your strategy if it has underperformed a global index fund at your most recent review of your investment returns, or indeed if it has outperformed?; and secondly, what strategy will you use to decide whether, having 'sold out' (from a 'winning' or 'losing' position compared with the index fund), you will choose a different active strategy or go with indexing?

Or you have a long term allocation strategy and keep to it whatever the market does. I see no reason to believe that the market allocations are optimal for an individual small private investor with objectives very different to that of chasing short term gains which drives the global markets.

How can a portfolio be considered optimally diversified when 60% is allocated to one country and 10% is allocated to just 3 companies. Neither figure has any real world justification in terms of GDP, profits, or turnover.

Hi Linton, I'm not sure if you are referring to my portfolio there. My question was only about the equities I hold. I have propertiy and bonds, but those aren't not related to my question.
Also, I don't have 10% invested in 3 companies. Maybe you were referring to someone else?

Sorry, my post was a response to John WInders implication that global index funds are optimally diversified.  The figures are typical for a global equity index.

ah. OK. Thanks.