Image Credit: Christophe Vorlet
By Jason Zweig | June 2, 2017 11:28 am ET
When you send your money outside the U.S., some of it bounces right back.
In May, U.S. investors added $23 billion to exchange-traded funds holding international stocks, estimates FactSet, even as they pulled almost $2 billion out of U.S. stock ETFs. So far in 2017, U.S. investors have poured $75 billion into foreign-stock ETFs.
But several ETFs specializing in Korea hold at least 20% of their assets in a single stock, Samsung Electronics Co. — which derives about a quarter of its revenue from the U.S. and almost none from Korea.
Or take the second-largest holding in many India funds, Infosys, which does more than 60% of its total sales in North America and only 3% in its home country.
And forget about Finland, where Nokia, the telecommunications firm, and Kone, the maker of elevators and escalators, account for 38% of the total market value of the MSCI Finland index — even though both firms do most of their business outside of Scandinavia.
A new study in the Financial Analysts Journal finds that investors can slightly improve risk and return by shopping for stocks abroad not on the basis of where they are headquartered but, rather, on where they do most of their business.
That research is based on 10 countries, mostly in Europe, and covers a relatively short period, from 1998 to 2012. The authors, finance scholars Cormac Mullen and Jenny Berrill of Trinity College in Dublin, Ireland, weren’t available to comment.
Murray Stahl, chairman of Horizon Kinetics, an investment firm in New York that manages about $5.4 billion, has been pondering what he calls “country misrepresentation” for years.
“Decades ago, more companies did the bulk of their business within their own national boundaries,” he says. “But globalization has deterritorialized a lot of companies. Being listed or headquartered in a particular country doesn’t mean they give you exposure to that country’s economy.”
Sensing that, many investors buy global giants like Coca-Cola, Procter & Gamble, Swiss-based Nestle or British-based Unilever PLC to capture a cut of their sales in emerging markets. Mr. Stahl is more interested in the dozens of local subsidiaries or affiliates of such firms.
Among such domestic versions of global companies are British American Tobacco Malaysia, Coca-Cola Embonor (Chile), Guinness Nigeria PLC, Hindustan Unilever (India) and Wal-Mart de Mexico SAB. They offer targeted access to emerging-market consumers along with developed-world management standards, he says.
Advanced Portfolio Management, an investment firm in New York, has launched a strategy (for institutional clients only) that will invest in Indian companies catering to consumers there — not here.
“Exporters are the one thing we don’t want,” says Robert Kiernan, Advanced Portfolio Management’s chief executive. “We want a pure play on India’s consumers. We think it’s going to be the fastest-growing large economy in the world over the next few years.”
At heart, diversification works best when it relies on common sense.
Many traders sold British stocks in the wake of last year’s surprise Brexit vote, thinking that companies in the U.K. would be hurt by its intent to leave the European Union.
But the top 100 British companies derive roughly 72% of their revenues overseas, according to Paul Marsh, a finance professor at London Business School who studies long-term investment returns around the globe. Even small stocks in the U.K. get about 45% of their sales from abroad, he says.
So the correct, if counterintuitive, decision, was to buy — not sell — British stocks, especially the biggest exporters. Between the vote to exit the E.U. in late June 2016 and the end of the year, domestic-oriented British companies gained 1% on average, says Prof. Marsh. Those with the greatest overseas exposure gained an average of 30%.
Over long periods of time, however, the potential extra gain from a basket of local companies around the world isn’t likely to be great. And buying nothing but mononationals amounts to “the exclusion of broad segments of the market,” says Marlena Lee, head of investment research at Dimensional Fund Advisors in Austin, Texas. That would result in less diversification, not more.
To see why, imagine you wanted to own a mononational U.S. portfolio. S&P Dow Jones Indices estimates that among those companies in the S&P 500 reporting sufficient data, only 42 got less than 15% of revenues from outside the U.S. in 2015. A pure U.S.-only portfolio would have to exclude not just Amazon.com and Apple but even such firms as Costco Wholesale and Home Depot, all of which do significant business abroad.
So the mononational approach makes sense only as a small speculation, says Tadas Viskanta, who blogs about investing at AbnormalReturns.com and has written several research papers on global diversification.
Buying purely domestic companies is probably best-suited for trading on geopolitical events or the growth prospects of a specific country. But it’s not worth overhauling your whole portfolio for.
Source: The Wall Street Journal, http://on.wsj.com/2rsM5G8
Cormac Mullen and Jenny Berrill, “Mononationals: The Diversification Benefits of Investing in Companies with No Foreign Sales”
Elroy Dimson, Paul Marsh and Mike Staunton, Global Investment Returns Yearbook 2017
Philippe Jorion and William N. Goetzmann, Global Stock Markets in the Twentieth Century
Kenneth R. French data library: historical returns on international stocks
William J. Bernstein, EfficientFrontier.com, “The Loneliness of the Long-Distance Asset Allocator”