Selective international investing

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TheoLeo
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Selective international investing

Post by TheoLeo »

I came across a post from Elysium that didn´t get an answer but I thought was worth discussing. The idea was, that instead of buying the entire international basket as "ex-US", it might be worthwile to selectively diversify into different countries based on fixed rules (as opposed to market timing). So, for example, one could invest in countries with low corruption, innovation capability, business dynamism etc. One could start by looking at the top ten countries in the global competitiveness index of the WEF, then weed out the countries of decade long and consistent underperformance and invest into the remaining countries. This approach resonates with me, because if I imagine my investments to actually be the purchase of businesses that need to sustain me with their profits (think of Warren Buffett and his farm metaophor), I actually don´t want to buy "wild card" stock markets such as China, Italy, Spain, Russia, Mexico and maybe not even France, UK or Japan.

Such a selection of international markets could include US, Sweden, Denmark, Netherland, Switzerland, maybe New Zealand, maybe Germany, maybe UK.

Thoughts?
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Makaveli
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Re: Selective international investing

Post by Makaveli »

In theory I get it. In practice I won't get on board. Who decides when a country that is on the "out" gets included to the "in"? Seems like a headache to track and balance through time.
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TheoLeo
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Re: Selective international investing

Post by TheoLeo »

A little overview of countries I could imagine buying a farm in:

MSCI Switzerland: +PE 21,36 +39 companies +annualized return since inception 1994 9,52 %, since 2010 9,22 %
MSCI Sweden: +PE 15,8 +36 companies +annualized return since inception 1994 10,39 %, since 2010 6,29 %
MSCI Denmark: +PE 28,9 +18 companies +annualized return since inception 1987 13,19 %, since 2010 12,27 %
MSCI USA: +PE 28,4 +619 companies +annualized return since inception 1987 10,84 %, since 2010 13,9 %
MSCI Germany: +PE 22,16 +63 companies +annualized return since inception 2000 4,16 %, since 2010 5,29 %
MSCI New Zealand +PE 36,13 +7 companies +annualized return since inception 1987 7,36 %, since 2010 13,02 %
MSCI Netherlands +PE 22,09 +22 companies +annualized return since inception 1998 4,83 %, since 2010 10,4 %
MSCI UK +PE 15,79 +86 companies +annualized return since inception 1994 5,32 %, since 2010 2,07 %
MSCI Japan +PE 21,32 +320 companies +annualized return since inception 1994 1,48 %, since 2010 6,51 %
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midareff
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Re: Selective international investing

Post by midareff »

It seems to me that selectively buying countries is a very close cousin to selectively buying sectors, which is a close cousin to thinking you are smarter than the market as a whole. It's easy to pick the winners looking backwards, and then hoping the trend continues, but hope doesn't always make good choices.
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TheoLeo
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Re: Selective international investing

Post by TheoLeo »

Makaveli wrote: Sat Oct 17, 2020 6:53 am In theory I get it. In practice I won't get on board. Who decides when a country that is on the "out" gets included to the "in"? Seems like a headache to track and balance through time.
I´d say you don´t have to buy a farm everywhere where its possible when you already have a wide selection. So you now chose the places that you think are likely to harbor successfull businesses and that will allow you to participate in the profits of these businesses. If more places become viable options, good for these places. But you don´t have to be the one buying businesses there if you already have good businesses.
Elysium
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Re: Selective international investing

Post by Elysium »

TheoLeo wrote: Sat Oct 17, 2020 6:26 am I came across a post from Elysium that didn´t get an answer but I thought was worth discussing. The idea was, that instead of buying the entire international basket as "ex-US", it might be worthwile to selectively diversify into different countries based on fixed rules (as opposed to market timing). So, for example, one could invest in countries with low corruption, innovation capability, business dynamism etc. One could start by looking at the top ten countries in the global competitiveness index of the WEF, then weed out the countries of decade long and consistent underperformance and invest into the remaining countries. This approach resonates with me, because if I imagine my investments to actually be the purchase of businesses that need to sustain me with their profits (think of Warren Buffett and his farm metaophor), I actually don´t want to buy "wild card" stock markets such as China, Italy, Spain, Russia, Mexico and maybe not even France, UK or Japan.

Such a selection of international markets could include US, Sweden, Denmark, Netherland, Switzerland, maybe New Zealand, maybe Germany, maybe UK.

Thoughts?
I remember that conversation, it is a counter argument to owning a basket of countries all lumped together as ex-US, which makes no sense. In practice though selecting and owning individual countries in the absence of a proper framework is very difficult. You may as well pick just about any 4 DM countries outside of US and equally split your ex-US allocation into them, and the results aren't going to be very different. You may end up with a few basis points in improvement depending on the time period selected, but this may as well be opposite. The point is that allocating 40% or more to an ex-US index doesn't make sense, and if you are considering that sort of high Intl allocation then it is worth spending more effort to pick just 4-5 countries. If you are investing no more than 20%, then it doesn't matter at all. The difference will be trivial.
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TheoLeo
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Re: Selective international investing

Post by TheoLeo »

midareff wrote: Sat Oct 17, 2020 7:31 am It seems to me that selectively buying countries is a very close cousin to selectively buying sectors, which is a close cousin to thinking you are smarter than the market as a whole. It's easy to pick the winners looking backwards, and then hoping the trend continues, but hope doesn't always make good choices.
Yes i can see that. I try to not look at it like that, though. To me, it wouldn´t be thinking I am smarter than the market. How the market choses to allocate its capital might be influenced by goals that are very different from mine. Maybe the market has another investment horizon, maybe the market primarily tries to sell a story to draw in assets under management and make its money through fees, maybe the market doesn´t have the same opportunities I have when it comes to choice, maybe the market serves a political purpose sometimes and so on.
z3r0c00l
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Re: Selective international investing

Post by z3r0c00l »

TheoLeo wrote: Sat Oct 17, 2020 6:26 am I came across a post from Elysium based on fixed rules... (as opposed to market timing).
Not sure how you can say the above and then the below in the same post. If you want to exclude Japan and the UK I understand why, but that sounds like market timing. I even more appreciate why you don't want to invest in China and Russia due to massive corruption and government interference.
TheoLeo wrote: Sat Oct 17, 2020 6:26 am then weed out the countries of decade long and consistent underperformance and invest into the remaining countries.
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Makaveli
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Re: Selective international investing

Post by Makaveli »

TheoLeo wrote: Sat Oct 17, 2020 7:35 am
Makaveli wrote: Sat Oct 17, 2020 6:53 am In theory I get it. In practice I won't get on board. Who decides when a country that is on the "out" gets included to the "in"? Seems like a headache to track and balance through time.
I´d say you don´t have to buy a farm everywhere where its possible when you already have a wide selection. So you now chose the places that you think are likely to harbor successfull businesses and that will allow you to participate in the profits of these businesses. If more places become viable options, good for these places. But you don´t have to be the one buying businesses there if you already have good businesses.
Since it’s your interest do you mind providing a back test? How did this strategy perform for the past 10-15-20 years. Feel free to add any legit ex US countries you stated in OP.
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TheoLeo
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Re: Selective international investing

Post by TheoLeo »

z3r0c00l wrote: Sat Oct 17, 2020 8:28 am
TheoLeo wrote: Sat Oct 17, 2020 6:26 am I came across a post from Elysium based on fixed rules... (as opposed to market timing).
Not sure how you can say the above and then the below in the same post. If you want to exclude Japan and the UK I understand why, but that sounds like market timing. I even more appreciate why you don't want to invest in China and Russia due to massive corruption and government interference.
TheoLeo wrote: Sat Oct 17, 2020 6:26 am then weed out the countries of decade long and consistent underperformance and invest into the remaining countries.
I proposed weeding out long term underperformers because there might factors hindering the growth of a market that are not considered in the WEF competitveness index. Like the Nikkei recovering from a massive bubble. Or an index being poorly diversified across sectors (like the UK index was before BP and Shell crashed).
snailderby
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Re: Selective international investing

Post by snailderby »

Interesting idea.

1. Would you equal weight these countries?

2. Did you intentionally exclude countries like Canada, Australia, Taiwan, and Korea for one reason or another? These countries have bigger markets than Sweden, the Netherlands, Denmark, or New Zealand.
Last edited by snailderby on Sat Oct 17, 2020 10:59 am, edited 2 times in total.
Tingting1013
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Re: Selective international investing

Post by Tingting1013 »

If it’s underperformance you’re worried about just buy IMTM
snailderby
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Re: Selective international investing

Post by snailderby »

In theory, at least, I get why some people might want to exclude countries where there are certain political risks that they're not willing to take on, or where the presence of corruption or lack of transparency casts doubt on the ability of traders to accurately value companies in those countries. I'm less comfortable with the idea of selecting countries based on their past performance.
Last edited by snailderby on Sat Oct 17, 2020 11:01 am, edited 2 times in total.
Topic Author
TheoLeo
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Re: Selective international investing

Post by TheoLeo »

Makaveli wrote: Sat Oct 17, 2020 9:30 am
TheoLeo wrote: Sat Oct 17, 2020 7:35 am
Makaveli wrote: Sat Oct 17, 2020 6:53 am In theory I get it. In practice I won't get on board. Who decides when a country that is on the "out" gets included to the "in"? Seems like a headache to track and balance through time.
I´d say you don´t have to buy a farm everywhere where its possible when you already have a wide selection. So you now chose the places that you think are likely to harbor successfull businesses and that will allow you to participate in the profits of these businesses. If more places become viable options, good for these places. But you don´t have to be the one buying businesses there if you already have good businesses.
Since it’s your interest do you mind providing a back test? How did this strategy perform for the past 10-15-20 years. Feel free to add any legit ex US countries you stated in OP.
Sure. So according to portfoliovisualizer:
Portfolio of 50 % US, 12,5 % Sweden, 12,5 % Switzerland, 12,5 % Germany, 12,5 % Netherlands
10 years annualized return: 10,1 % (S&P 500 12,9 %)
15 years annualized return: 7,9 % (S&P 500 8,8 %)
20 years annulized return: 5,5 % (S&P 500 5,99 %)

The top 10 of the 2000 WEF competitiveness index ranking was:
1. Finland
2. US
3. Germany
4. Netherlands
5. Switzerland
6. Denmark
7. Sweden
8. UK
9. Singapore
10. Australia

Finland I think wasn´t investable with an index fund back in 2000. Didnt find a fund. But can be wrong.
Topic Author
TheoLeo
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Re: Selective international investing

Post by TheoLeo »

Tingting1013 wrote: Sat Oct 17, 2020 10:01 am If it’s underperformance you’re worried about just buy IMTM
What I am worried about is underperformance of a subset of my investments that I don´t really believe in and that might not even be necessary from a diversification standpoint. I think the risk of selling low at some point is just too high then.
Topic Author
TheoLeo
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Re: Selective international investing

Post by TheoLeo »

snailderby wrote: Sat Oct 17, 2020 9:52 am Interesting idea.

1. Would you equal weight these countries?

2. Did you intentionally exclude countries like Canada, Australia, Taiwan, and Korea for one reason or another? These countries have bigger markets than Sweden, the Netherlands, Denmark, or New Zealand.
1. For simplicities sake, I would equal weight them.

2. I didnt include these countries for three reasons. Fist, they don´t rank as high in the WEF competitiveness index. Second, I am not as familiar with these markets. The second point I think is important, because familiarity can help you stick with an investment and trust it, if things go wrong for a sustained perioid of time. This way, you are less likely to sell. And third, Australia, Taiwan and Korea are more expensive for me to invest in.
However, depending on where you live and what you familiar with, Taiwan, Korea, Australia and Canada are also fine choices I think. They still rank high in infrastructure, institutions, financial system etc, just not as high as some others. But they are top 20.
dml130
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Re: Selective international investing

Post by dml130 »

I wouldn't trust myself to do any such selection, but I think this is a place where active management just might have some value. Vanguard has a mutual fund (VTRIX) that you might look into.
carolinaman
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Re: Selective international investing

Post by carolinaman »

I use VEA (Vanguard Developed Markets) for my international investing. I gave up on emerging markets years ago as simply too volatile and China was always a major part of these funds. VEA does pretty well and has the countries you like. But the largest country holding is Japan at 23%.
tibbitts
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Re: Selective international investing

Post by tibbitts »

dml130 wrote: Sat Oct 17, 2020 10:35 am I wouldn't trust myself to do any such selection, but I think this is a place where active management just might have some value. Vanguard has a mutual fund (VTRIX) that you might look into.
I've owned VTRIX for decades but have almost finished disposed of my shares this past week Maybe I'll keep $3k for old times sake as I finish moving it from Traditional to Roth. You may recall that back on Diehards (I think) there was a post commenting that at the time, Vanguard's two managed international funds (International Growth and Value) had almost identical top-ten holdings. Of course now International Growth has gone it's own way, but in any case you have that nearly .4% expense ratio to overcome. In fairness over time VTRIX hasn't done a bad job of that, but if we see reduced returns (possible, even for international!) going forward, that might become harder to overcome. In any case I've become slightly overweighted in Emerging, and VTRIX has a small Emerging component, so I'm going with Developed Markets as a replacement. I think you'll find it pretty difficult to make a case one way or the other for performance, but that just shows that the old argument that management pays off for international they way it doesn't for better-researched domestic etc. etc. has really held up in my limited (but decades-long) experience with VTRIX. Intuitively those arguments make sense but they don't seem to play out in real life.
dml130
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Re: Selective international investing

Post by dml130 »

tibbitts wrote: Sat Oct 17, 2020 11:10 am I've owned VTRIX for decades but have almost finished disposed of my shares this past week Maybe I'll keep $3k for old times sake as I finish moving it from Traditional to Roth. You may recall that back on Diehards (I think) there was a post commenting that at the time, Vanguard's two managed international funds (International Growth and Value) had almost identical top-ten holdings. Of course now International Growth has gone it's own way, but in any case you have that nearly .4% expense ratio to overcome. In fairness over time VTRIX hasn't done a bad job of that, but if we see reduced returns (possible, even for international!) going forward, that might become harder to overcome. In any case I've become slightly overweighted in Emerging, and VTRIX has a small Emerging component, so I'm going with Developed Markets as a replacement. I think you'll find it pretty difficult to make a case one way or the other for performance, but that just shows that the old argument that management pays off for international they way it doesn't for better-researched domestic etc. etc. has really held up in my limited (but decades-long) experience with VTRIX. Intuitively those arguments make sense but they don't seem to play out in real life.
No disagreement here, for the most part. I'm just saying that, to the extent one believes in the theoretical potential for outperformance through active management and selection in the international setting, it makes the most sense (to me) to have the full time financial professionals attempt that, rather than trying to come up with one's own scheme as the OP is suggesting.
000
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Re: Selective international investing

Post by 000 »

The problem is the costs:
VEA has an ER of 0.05% and is liquid.
Most of the Franklin country ETFs have ERs around 0.19% and are not very liquid.
The iShares ETFs are even more expensive.

I'm not willing to pay probably 5x expenses to pick my favorite developed markets. If it were cheaper, maybe.
GJ48
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Re: Selective international investing

Post by GJ48 »

TheoLeo wrote: Sat Oct 17, 2020 6:26 am ....Thoughts?
Active management bias and Wellington fan here and sleeping well. I went into the International Core Stock fund they manage as soon as it was offered. About ~50% of my other stock holdings are in Wellington. Putting together those two gives me ~11% international stock exposure. I'm well into retirement with a 30% stock/70% bond asset allocation.

I track the monthly stats so FWIW here's an overview of the International Core:

Top five countries over time

On 10/31/2019

Japan 18.80%
France 11.50%
UK 11.10%
China 10.30%
Netherlands 6.50%

On 9/30/2020

Japan 14.20%
France 10.90%
China 9.90%
Switzerland 7.80%
UK 7.20%

Top ten investments over time

On 10/31/2019

Nestle SA
Novartis AG
Alibaba Group Holding Ltd.
Vinci SA
Samsung Electronics Co. Ltd.
Iberdrola SA
ASML Holding NV
Airbus SE
Hoya Corp.
TOTAL SA

19.10% of total net assets


On 9/30/2020

Alibaba Group Holding Ltd.
Nestle SA
Taiwan Semiconductor
Samsung Electronics Co. Ltd.
Roche Holding AG
Schneider Electric SE
AIA Group Ltd.
Hoya Corp.
ITOCHU Corp.
Novartis AG

22.70% of total net assets

Turnover rate 36.6% as of September
tibbitts
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Re: Selective international investing

Post by tibbitts »

GJ48 wrote: Sat Oct 17, 2020 5:26 pm
TheoLeo wrote: Sat Oct 17, 2020 6:26 am ....Thoughts?
Active management bias and Wellington fan here and sleeping well. I went into the International Core Stock fund they manage as soon as it was offered.
I also bought International Core shortly after it was introduced. The problem I have is that Covid-19 provided a breathtaking opportunity for its active management to outperform and we got... nothing. It more or less matched Total International on the way down and fell short on the way back up. Management made it clear that their objective was to outperform. Not provide less volatility, or more downside protection, or any of the things we sometimes assume active management is trying to do. They were managing entirely for performance and struck out, even with the headwind of the tiny asset base and virtually no legacy investments to deal with.
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