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Informational edge or home bias?
Not so many investors diversify across different stock markets
Home bias can increase risk and cost money in terms of missed opportunities
Do you only invest in the UK-listed stocks? I do, even though UK indices make up just 6% of the world stock market. Adding the rest of Europe takes it to 25%. That still leaves an awful lot on the table.
I don’t really know what’s going on with a company half the world away. I can flip it around, of course, and say I have some kind of informational edge on UK stocks. The fact is, though, that my UK-centrism is not a choice - it is a function of what I don’t know (and not what I do know). It’s probably time to expand my investment universe. Not doing so has cost me money before.
About five years ago it occurred to me that I should put some money into the FAANG stocks. FAANG is an acronym for the S&P 500’s superhero squad of Silicon Valley tech titans. You know their names: Facebook Inc (NSQ:FB), Amazon (NSQ:AMZN), Apple Inc (NSQ:AAPL), Netflix (NSQ:NFLX), and Google (alright, Alphabet - NSQ:GOOGL). Together, they make up more than 10% of the S&P 500 index.
We can turn it into ‘FAANGS’ if we stick ‘Stockopedia’ on the end.
Anyway, I never got around to investing in them but have been revisiting their share price performances and am now distracting the rest of the office as I loudly kick myself under the table.
Here are their three-year stock charts:
I know, I know, I’m not the first bright spark to have had this (exact) idea, and everybody has stories about ‘the ones that got away’. What’s more, failing to act on a hunch helps me as much as it hinders me. I was considering taking a small stake in DP Eurasia recently until I cunningly forgot all about it. Next thing I know, Turkey is grappling with inflation, LON:DPEU’s share price has nearly halved, I’ve had a good miss, and getting distracted by something else is just another sign that I might be brilliant. I’ll add it to the list...
So the FAANGs were just another idea that I never acted on, big deal - but reading about home bias lent this half-forgotten memory a new significance.
We now have electronic markets and masses of company information
Studies show investors from developed markets are increasingly investing overseas...
… But the majority still only play locally, even though it has never been easier to go global
As markets become more interconnected, sophisticated investors will become increasingly global in outlook. This trend is already happening, according to US brokerage Charles Schwab, as you can see from the money flows shown in this graph:
Yet this graphic of the IMF’s Home Bias Index shows a significant bias remains across regions:
The trend towards a more global investment outlook is entrenched but still has a long way to play out. Research shows even institutional investors and professional money managers display home bias. If this is the case, then considering investment opportunities further afield might strengthen our hand.
According to Charles Schwab, home bias ‘is a universal phenomenon’ and ‘investors are actually weakening their portfolios and cutting themselves off from potentially superior returns’ because of it. Schwab recently conducted a study into home bias based on interviews with 200 UK retail investors, each with at least £25,000 in disposable assets. It found the following:
74% of respondents aim to invest 'the majority of their assets' in their home market.
Just 7% are looking to make significant investments in the US market despite significant outperformance in recent times
48% said they feel 'most informed' about companies in their own market and 39% feel that they 'understand the dynamics of their domestic economy better' than other parts of the world
I imagine that last bullet point resonates with a few people. It does with me. There are other concerns that come with investing overseas as well, including transaction costs, dealing with different languages, currency risk, tax complications, potential corporate governance issues and general management accountability. Currency conversion costs on overseas trades can also be a pain so it’s important to check just how a broker charges to buy or sell.
Investing across more stock markets is certainly not a panacea. It won’t guarantee better returns.
True, but having more choice (as long as we remain diligent in our research and prescient of the risk we take on) must be a good thing. A UK-based investor can get exposure to Australian mines by investing in UK-listed stocks, but there might be a better alternative actually listed on the Australian exchange. Many of the obstacles that prevented us from researching these companies are now gone.
Also, different markets have different characteristics, valuations, and constituents (see charts below). Being able to access these different markets can be an advantage.
Investing in unfamiliar companies listed on unfamiliar markets is risky
Investing is always risky and prudence is required when dealing in unfamiliar markets with strange companies - but isn’t exercising caution and demanding a margin of safety good practice in your home market, anyway? One way of partially addressing this concern is to rule out developing markets (or use ETFs) and focus instead on the big, global indexes.
(An aside: being familiar with a company’s presence does not necessarily mean it is less risky than a foreign peer - see familiarity bias)
Perhaps the best way to mitigate concerns around a lack of knowledge of overseas markets is to stick to systematic, factor-based investing methods. Investors who already gravitate to this style might find it easier to make the jump to different markets.
We can check quickly to see how Stockopedia’s model has fared in different regions:
The StockRanks appear to be working well in the UK and EU markets, according to the five years of data we have on each region. The US StockRanks (3.5 years of data) are affected by the low-value FAANG stocks that account for a good chunk of the S&P, while c2 years of data on Australasia might not be enough to spy a meaningful trend (although there is early evidence of the 90-100 SRs rising to the top and the 0-10s falling to the bottom).
If you’d like to explore these markets yourself and start screening for investment candidates, we’ve been working on our international data plans.
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Photo by Tom Grimbert on Unsplash
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.
Disclaimer - This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
Thanks for the insight, Peter, you laid that out clearly. The comment from jonesj also brings up some of these costs.
There's definitely scope to dig down into the nuts and bolts of investing in overseas markets. The currency conversion costs are clearly a pain! Particularly if you were to start a factor-based approach with some kind of periodic rebalancing. Food for thought...
I suppose ETFs etc. are still on the table. In the meantime I think I'm going to look more closely at overseas markets anyway, out of genuine curiosity and in the hope that it might improve my perspective on the UK market.
Extremely important points made here. The costs charged by the main share dealing platforms for non-UK shares and FX conversions make this a very difficult strategy to implement and make money. Your holding period would have to extend well beyond 5 years (not necessarily a bad thing) to make this cost effective and even then, from a fee perspective you'd be better off buying an ETF,
I use HL, and although the FX costs are there on both sides (buying and selling), I didn't find them prohibitive. You are right, Jack and Edepicier, the holding period needs to be much longer, How long of course depends on the performance of the stock and the particular market it operates in. Maybe 12-18 months plus (probably not suitable for trading in and out).
I'm really referring to the US. For Japan, China and emerging markets, I use ETFs and Unit Trusts for the beneffit of their expert local knowledge.
I'm certainly interested in trading directly in US stocks again when the markets have picked up.
Agree with you there. A 2% round trip FX and withholding tax on dividends makes foreign share buying on a direct basis fairly difficult. You can buy the S&P 500 tracker for a management fee of 0.07%. Unless you think you can spot the next big winner it is worth being cautious with regard to overseas investment. If I had to go for one market it would be the US. Withholding tax there can be reduced.
Hargreaves Lansdown recently reduced FX fees. But they are still fairly high across the board. Fees are the one thing you can choose to temper your exposure to.
My own experience of investing outside the UK has been extremely positive.
The screens I've set up in Stockopedia are limited with regards to the UK offerings (most of the same names keep cropping up and my own due diligence has filtered the ones I would or did invest in) so expanding the investment universe, whilst still being able to deal within an ISA, has been an ideal strategy over the last 2 years.
I mainly deal with HL and even though the fees for dealing in foreign markets is much higher than solely in the UK, the returns achieved have more than justified the added expense.
Some big wins over the last 2 years include (in no particular order):
Align (US)
Abiomed (US)
EUZ (Germany)
BESI (Holland)
SolarEdge (US)
Most of the above have given me significant returns (eg Align +113%, EUZ + 41%), so the trading fees, even with currency movements, has been almost irrelevant.
Full disclosure: the wins from foreign dealings have far outweighed the losses, of which there have been a few, though of much lower magnitude, eg Vestas -20%.
In any case, the fees have certainly not been a deterrent to investing abroad and I have seen foreign holdings as a nice hedge on the precarious UK economy.
The costs charged by the main share dealing platforms for non-UK shares and FX conversions make this a very difficult strategy to implement and make money. Your holding period would have to extend well beyond 5 years (not necessarily a bad thing) to make this cost effective and even then, from a fee perspective you'd be better off buying an ETF
I disagree!
See https://www.stockopedia.com/fa... which proportionately mirrors my personal investments over the last 5 years +
Best of luck
Phil
jonesj, your broker account in Singapore is an excellent idea, as I agree with your worries over a potential Corbyn/McDonnell government. Thank you for the thought.
I have had success so far in investing directly in the US and, a little, in Canada. Of course, it has been an easy time to invest in the US and I shouldn't pat myself on the back too much as market collapse may come tomorrow. For that reason, I have mainly focussed on conservative REITS and infrastructure companies, that have rewarded me with decent yields (>4%) plus capital gains. I have used https://seekingalpha.com/ as a source of ideas and analysis to back up Stockopedia: you can read a lot without charge - I think it's worth reading and thinking over several months in an endeavour to obtain a balanced view. I am sure that some of what is on Seeking Alpha is dross - but which?
I have had success in the US with a handful of investments in biotech (which I understand) but - so far - lost money on a couple of small investments in semiconductors (which I don't understand). There's a moral there.
Thank you to peterthegreat about the FX and tax information. I invest long term rather than trade, so I am not so concerned about FX affects - though on reflection it would be useful to hold foreign currency.
The other small issue I have is that HL (current broker) don’t have stop
loss functionality for US shares. Not a massive problem as I was investing quite long term, but I would like to use stops if I start trading more US stocks.
Congrats abtan, that's great to hear! How did you find those companies? I see you set up some screens - can you shed any light on what your strategy has been?
You've managed to pack a lot of criteria into those Growth and Value screens. Have they evolved and grown over time or have they stayed more or less the same over the years?
It would be great to know a bit more about how flexible you are with them, how much due diligence you do on top of the screens, which measures you view as core, etc.
These screens originated from The Naked Traderesque Guru Screens and then I've folded other criteria into them as I've integrated ideas, e.g.
Risk adjusted PEG from a Stockopedia article
Balance sheet checks from Paul Scott's SCVR
When the screens spit out selections I copy the data from a table view I built into a Google Spreadsheet and use conditional highlighting to find the best of the best.
I do zero, yes that's right zero company research!
I then look to buy on break outs/new highs.
Key things I'm looking for are HighFlyers/SuperStocks exhibiting increasing earnings estimates and a PEGR < 1. In essence cheap growth, broker sentiment and then price breakout.
Typically I sell when a stock
1) breaks below a notional trailing stop loss that I maintain in my spreadsheet that is selected using Ichimoku Charts
2) Bad news is issued from a company
As long as the price keeps appreciating I won't sell due to a loss of earnings momentum or loss of stock rank etc.
When the whole market sells off (as has happened of late) I tend to sit still for a while before doing anything too rash.
The zero research bit is challenging to some, but think on this ...
How much due diligence do the Stockopedia Guru Screens undertake?
I wonder if they out perform you?
I wonder if the draw down on the Naked Traderesque screen is lower than your drawdown?
About 5 years ago I held my hands up and said "I'm a crap stock picker and I can't tell if anyone else is any good either"
So why pretend?
Sure people look down their noses at you and think ...
1) You're stupid
2) You're lucky
Maybe I'm both, but with a system in place at least I'll be consistent and following principles of academic research rather than pretending I understand the spin of a CEO/CFO or board ramper.
I'm sure they'll be some watching over the years just waiting for me to come a cropper!
Besides who wants to research companies (zzzzzzz) when you can be playing a guitar, painting, having fun with your family?
Best of luck
Phil
Hi Jack
First, a shout out to PhilH (comment 12 above) for showing me (and anyone else who has read his previous posts) the returns that can be achieved by investing abroad.
I must admit to never even considering investing abroad before I saw his Fantasy Portfolio and I'm sure others, like myself, have benefited from his openness.
As for my own strategy, I'm not even sure where to start.
I've set up numerous screens since signing up to Stockopedia (2 years ago), usually ad hoc creations that were heavily influenced by posts and analysis on this forum (thank you to all contributors), and which all show me different things.
For example, whilst some screens focus on P/S<1.5, others focus on high cash flows, etc.... There are also a few consistencies across my screens, eg quality rank >80, minimum/no debt, etc....
These screens are generally my starting point and any stocks appearing across numerous screens are usually the ones I start with.
Due diligence involves looking into what a company does and trying to understand a little of where their future lies.
My decision to buy is also heavily influenced by the following 4 things:
I'll generally only sell on 2 occasions:
With regards to the latter, I have an approximate way to calculate this, which has no science behind it, and is just something personal to myself.
If a fast growth company eg Align, which is generally deemed expensive, I try and estimate how big the company's market is, and therefore the maximum revenue/profit achievable, and assign a mature company PE (10-12). This gives me my target sell price. Also worth adding that if I think it will take >10 years to get to a target revenue/profit I generally don't buy (eg Ambu).
For every other company I generally only try to look 2-3 years out, with a greater focus on cash flows. 2-3 years is a long time and so much can change that I think it's hard to look any further out without having significant in-depth knowledge of the industry you're investing in.
I keep excel spreadsheets of all results so that I can track period-on-period movements, which I find imperative to the above strategy.
I'm no doubt missing a lot from my investing criteria, and I'm sure that I will occasionally deviate from my own rules, but I think the above gives an approximation of how I like to invest and what has worked well for me so far.
I'm put off investing in international shares by UK brokers' currency charges. It's frustrating!
The broker's websites tend to highlight their modest overseas share dealing costs, when currency costs are far more significant. I can't see why currency spreads should not be a fraction of 1%.
It's a pity, as the universe of UK large cap stocks is limited, for example few tech shares.
Has anyone found a more reasonable broker for overseas? I currently use In iii, Charles Stanley Direct, and Barclays. Have considered IG group for international, but there's something unsettling in using a spread bet company to hold my assets (however much they say the assets arering fenced.)
I agree completely. Broker forex charges are excessive and put me off overseas stocks.
In Singapore, OCBC charged me just 0.4% for buying something in USD.
If I remember correctly, IWEB charged about 0.5% when I started the account many years ago. They have increased it since then.
I can convert money AND transfer it overseas for less than 0.5%.
Finally, the best rates for changing physical cash into foreign currency come in at under 0.5%.
So when brokers charge 1.5% or more, it really is excessive.
Also, I haven't tested the service recently, for reasons stated above, however TDDirect (now ii) would only allow me to spend 90% of any forex held in my trading account. Apparently due to risk of forex movements. This makes no sense when I have other stocks and cash with them, so they are at zero risk of being out of pocket.
[This is of course my taxed account, as holding foreign currency in an ISA is not allowed]
Just to say I think the overall point of this argument is spot on. The UK is about 7% of the global equity market. Why is the UK going to have the best stocks? You can also get international exposure buying UK stocks. Unilever (LON:ULVR) generates 58% of revenue from emerging markets. Diageo (LON:DGE) 's main market is the United states etc etc.
Buying these kind of stocks can help avoid the FX fees of buying internationally listed companies. It is true there are great stocks listed in the US. I think you can reduce the withholding tax on dividends to 10%.
Generally, if you are looking internationally I would go for the US and not Europe. Withholding tax in Europe is more tricky and there aren't as many opportunities.
I think someone also pointed out that the spread on US stocks can be fairly low. There are also fund options (trackers and active funds). US stocks are probably also a bit easier to research. Lastly, the US market just generally performs better than European markets.
Using a Stockopedia based screening system today I have 0 UK stocks and 14 US stocks available to consider. Yes I know I can dispense with Stockopedia and go for Investment Trusts for a global perspective.
So choice is a big factor. Also with US stocks there are tighter spreads and more convenient opening hours - afternoon & evening (UK time). Additionally it seems to me in the USA the supply of Company information is better than in the UK, there is quarterly reporting, and the Stock market system comes across as less corrupt (obviously with occasional exceptions where offenders do go to jail) than in the UK.
The two negatives for shares which others have mentioned:
1/ I have not found an ISA broker who will let me apply "stops" to my US positions, which irks me from a risk management perspective
2/ The exchange rate round tripping, although that is partly off-set by other factors.
Hi Jack,
Are you planning to do regular pieces on international stocks and filtering criteria, etc.?
If you are, I for one would be very interesting in being a regular reader (as, I'm sure, would be many others).
I'm looking at the moment to get back into the big tech stocks, as after the fall, think they are now better priced (Nvidia has fallen over 40% in a few short months and I'm sure amazon still has masses of growth and is now nicely positioned, IMO).
Interestingly, I have just topped up in Berkshire Hathaway in my Pension and, with Hargreaves Lansdown, for just over £2000 worth of shares in BH it only cost me £36 in total (that's dealing cost, FX and spread). I was pleasantly surprised and do not feel now that dealing costs should get in the way of diversifying into US stocks. Of course, I will have to pay the FX fee when selling too, but even so, that's quite reasonable for a mid to long term hold.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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Well done on the fangs!
My current thinking re. overseas is either be a stock picker and spot big, investable sector trends --> research global players in that sector --> research individual players --> invest
or
the systematic, factor-based route, screening for quality + then own due diligence --> invest.
There's no need to rush into anything one way or the other, of course. Time and, as you say, lack of awareness are constraints so I'm thinking when I do start exploring overseas I'll go the factor route.
Successful investors - you're probably right, it would be interesting to find out (worth mentioning that successful US investors have a much bigger market to start with).