Successful strategies for global investors
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Building the world brain
Global investment opportunities abound and yet investors rarely leave their home market. Is it possible to conquer home bias and invest profitably in overseas companies?
Pooling our experiences can be a great time (and pain)-saver in terms of learning lessons. A lot can be gained from reading the conversations in the comments section of this recent home bias article, for example, where contributors discuss a variety of (equally valid) overseas investing strategies and pitfalls. There is useful information here for anybody interested in looking at different stock markets.
Stockopedia is an amazing platform for investors to share successful strategies. We should take advantage of this more.
We are now able to compare a broad array of portfolio strategies and stock screens instantly thanks to the internet. It’s quite a marvel if you stop to think about it. In the 1930’s, HG Wells wrote about the ‘World Brain’ - a sort of central repository for the sum of all human knowledge. Once, we might have called that fanciful. Today, we call it the internet.
What’s more, ‘linking up to the world brain’ does a better job of describing what we do when we go on Google or Wikipedia than ‘connecting to the internet’ ever could.
In this article, I’d like to riff a little on those previous conversations. If you have any insight or experience in this area please do share with others in the comments - help build this small corner of the world brain.
Exchanging currencies and dastardly broker fees
One recurring gripe investors have is the often excessive foreign exchange conversion costs levied by brokers on overseas trades in which they have to either convert domestic currency into foreign or vice versa.
These charges are currently at around 1-1.5% per overseas trade. What's more, many brokers convert the cash back into your home currency once you sell those shares, doubling the fee. Ouch. This makes short-term trades and rebalancing strategies tricky. For those seeking longer-term buy-and-hold investments, it might be less of a big deal.
Some brokers do allow you to hold foreign currencies. This is one thing to ask for if you intend to start dealing in different markets.
As one contributor pointed out, it can make more sense to convert money and transfer it overseas to a local broker. This does add another layer of research. Specialist currency brokers and P2P websites have taken market share off established banks in this area in recent years. They can bring the cost of conversion down to less than 1% in some cases, although this option comes with its own risks. You can read more in this post from the International Investor blog.
If you are going this route, do the research and make sure you opt for a reputable broker. There is less regulation here than you might expect. A less hands-on solution is to invest in attractive markets via low-cost tracker funds or investment trusts.
Another complicating factor is withholding tax on dividends. although some markets are more hospitable than others. UK investors can at least reduce this cost if they are holding US or Canada-listed stocks. In other cases, the withholding tax may eat up a significant proportion of your dividends.
Again, as contributors point out, the US also tends to have lower spreads on smaller companies, along with no stamp duty and decent stock coverage. Perhaps this could be the first port of call for a newly-global investor.
The above is only a cursory look at the nuances of overseas investing. Brokers’ services can vary by headline cost, currency charges, markets covered and shares included. Not only that, but the landscape changes in terms of services offered.
Don’t be disheartened though - it’s not a perfect system, but investing overseas is at least easier than it used to be. Retail investors can and do invest profitably in overseas markets - there is proof in those comments from the previous article. What’s interesting is there’s more than one route to success.
Investing overseas: the hunter and the farmer
Some investors have found their overseas niche in sectors where they have an informational edge and can consider themselves specialists. Others create systematic, rules-based strategies using Stockopedia’s screening tools. Put another way, you can be a hunter or a farmer about it.
The farmers' strategies include a variety of metrics for digging up opportunities. These include price/sales, operating cash flow, capital expenditure (usually the ‘plants, property and equipment line of ‘cash flows from investing’ in the cash flow statement), balance sheet ratios, StockRanks and Styles, earnings and sales momentum, and rolling PEGs. Stockopedia has its default guru screens that you can tweak, or you can create one from scratch easily enough.
If this piques your interest and you’d like to know more about our data plans for different markets click here. You can also read more about investing in the US specifically in this ebook.
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About Jack Brumby
I'm looking for compounding investments.
I started off in Leisure - a part of the market I still love, but an area where stocks can appear "cheap" for years without going anywhere. It made me realise that valuation is only one part of the puzzle.
Now I sift through a much broader universe of stocks in search of small, high quality operators with large addressable markets, strong and maintainable margins, and clear share price catalysts.
CFA charterholder.
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I moved my SIPP, my ISA and my wife's ISA from Barclays to AJ Bell YouInvest 5 years ago to take advantage of their wider Global Universe and cheaper rates.
I haven't looked back even if I end up paying 3% FX (for the round trip of buying and selling).
Good point, thanks. You mentioned possible moving funds to a broker account in Singapore last time - is that just something you might do or are you in the process of doing it?
And is it only due to UK-related risks or are you doing it to take advantage of better exposure to Asian stocks or anything like that? It's an interesting idea.
IG ISA FX conversion fee is 0.3% which is a lot better than some, they have quite a few overseas markets although not all by any stretch.
Saxo ISA now have FX conversion at 1% for new clients, which is quite high, but they do cover a lot of markets.
I'm still hoping this area will get more competitive (I think any FX conversion over say 0.1% is high), and perhaps Interactive Brokers or DeGiro will offer ISA accounts one day which would make it more competitive.
Anyone else aware of a good broker for overseas stocks, both in terms of markets offered and low FX fees?
I have about 5% of my funds with a Singapore bank & broker at present. The plan is to increase this.
The biggest challenge is to trawl through the companies and find the best opportunities. I'm pretty much having to do that from scratch, as there is no equivalent to a SCVR to provide a daily list of ideas. Well, nothing with the same credibility as Paul & Graham have.
Also, I cannot just park the money in a Singapore listed fund whilst looking at stocks, as I believe HMRC would tax all gains as income for any fund which does not have UK reporting or distributing status.
There are lots of Singapore stocks on very reasonable valuations. However, I'm currently excluding a lot of the ones which appear to be Chinese companies listed in Singapore. Then there are a large number of oil industry service companies which would be a bet on a cyclical industry.
Plus a few oddities, such as one which is running a chicken farm.
As stated, they charged me about 0.4% on a foreign currency trade. My expectation is best level forex charges should be no more than about 0.5% away from mid market, so this is OK. Unlike almost all the large UK brokers who charge a multiple of this.
I'm still at Barclays but it's on my list to move actually. Was it easy to switch or was there any foot-dragging involved?
I see it, here:
Hopefully that pic goes through. Quite material - the FX charge on a £5k investment is halved, on a £25k it's now a quarter of what it was.
Maybe HL sees the writing on the wall wrt FX charges and the party's over...
I'm also hopeful that the high FX charges are going to get competed away - if a broker wants to take market share it's an easy win, surely? I just went on the IG website and found this comparison table with FX charges on one of the rows. It's a bit limited mind you.
It wasn't instant but it was relatively straightforward.
By the way AJBell YouInvest have recently tweaked their FX charges as follows ...
Foreign exchange charge on international dealing and foreign currency funds
First £10,000 1.00%
Next £10,000 0.75%
Next £10,000 0.50%
Value over £30,000 0.25%
Slightly off topic, but because it's so hard to retrieve old topics on Stockopedia, it's worth reminding that an informed poster back in the summer indicated that Fx gains/losses on non-UK holdings needn't be included in one's overall capital gain/loss computation. At least I think that's what they said - happy to be corrected! And I'm not sure if needn't' implies 'shouldn't'. Whether this simplifies record-keeping or not may depend whether you keep a local currency investing account or just remit to/from a GBP account on each trade. (I thought the analogy was if you maintain a large amount simply in a bank account overseas you're not normally taxed on Fx changes, even when you remit the money home.)
It's details like this that must put many off making direct investments overseas.
Somewhere in the vast quantities of HMRC documents, I think there was something saying we don't have to pay tax on changes in the GBP value of foreign currency holdings due to exchange rate fluctuations.
However, I haven't seen anything which says we can ignore exchange rate movements for capital gains. That would be slightly counter intuitive.
I've just been doing the tax return. I get monthly interest on the overseas savings account and the cash account with the broker. HMRC only seem to publish monthly interest rates, so I suspect I'm supposed to use a different exchange rate each month. Same for dividends, although thankfully these are only paid about twice a year.
Then every time we get dividends from somewhere like Germany, they have already taken about 26% off in tax. I believe I'm allowed to offset 15% of that against UK tax, but HMRC's on line tool always calculates the allowance as zero, even after I pick 15% from the drop down tab. To get the remaining tax back, I'm supposed to go after the German authorities.
Then in Singapore, quite a few companies offer scrip dividends. I believe these are not subject to income tax, so of course I selected the Scrip dividend option. Then I find I have to make this selection every time there is a dividend. Also, they have "normal market sizes" which are somewhat more rigidly enforced there. So I purchased in multiples of 100, but now have a holding with a handful of shares lashed on top, so when I dispose of this, it will not be "normal market size".
Yes, skinner66, but many of us don't have sufficient headroom in an ISA but have substantial funds outside of tax-sheltered vehicles. And I doubt you'll find many non-UK brokerages prepared to jump through the ISA hoops - it's just not worthwhile for the small potential client base. I have a De Giro account and they weren't interested in ISAs.
jonesj - yes, that's indeed another complication; scrip dividends will impact on your base cost of that security for CGT purposes. I have friends who even with UK holdings are wary of funds' accumulation units due to the tedious record-keeping involved (which fund/platform managers may or may not help with).
Millen. Thanks for the reminder ! One of the reasons I switched off automatic dividend reinvestment with my UK brokers was to vastly simplify the capital gains planning & calculation.
However, for capital gains tax, can I not just obtain the average purchase cost by summing the total cost of all the buys I have made & then dividing by the quantity held at the time of the disposal ?
Disposing of them in one tranche would be sensible, but if I keep some of the holding, then I suppose I need to record the cost of the remaining holding, so it can be divided by the number of shares held at the time of sale.
Yes, I think that's the general principle. Your base cost per share of your current holding will be the average purchase cost, so as and when you reinvest dividends these will adjust your average price. Then if you sell part of your holding, the gain/loss on the sold shares is easily calculated. If you buy no more, but sell more later, those will have the same average purchase price. If you do buy more, or reinvest more dividends, this will then adjust your average purchase price. I suppose I shouldn't be put off by this complexity. I thought there may be some exceptions eg if you sell and buy back within 30 days.
I imagine in practice different people may use different ways of treating Fx changes when reporting to HMRC. (I even heard a guy last week say he treated "loans gone bad" as a capital loss, as he felt this is only fair! He was prepared to amend if HMRC ever investigated.)
Still, it would be nice if brokers could give clear guidance on this aspect. I suspect much of HMRC guidance on overseas stuff is geared to property owners, who presumably maintain current accounts overseas to deal with rent, management expenses etc if let out. I imagine most of them have accountants to deal with their tax disclosures and liabilities.
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Incidentally, I believe holding foreign currencies in an ISA is not permitted.
So, for example, ii allow you to hold foreign currency in a normal trading account but NOT in an ISA.
Since they charge 1.5% for conversion, if you want to switch from one US stock to another, that would be 3% lost in forex fees in an ISA. Due to the excessive fees, I have not actually tested this.
In the non-ISA account, you can just keep the money in USD.