International Investing in international equities [LICS / ETFs / direct]

Discussion in 'Shares & Funds' started by Zenith Chaos, 19th Feb, 2017.

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  1. Zenith Chaos

    Zenith Chaos Well-Known Member

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    I'm assuming that everyone agrees with the value of diversifying into international equities.

    But how should we do it?
    LICs: One of the most informative and seminal pieces of work on the internet is right next door: Listed Investment Companies (LICs).
    This thread focuses on LICs that buy Australian equities, although there has been mention of PMC, MFF, FGG, TGG HHV etc

    ETFs: Read here but once again, Australian tilt: Exchange Traded Funds (ETFs)
    There are an inordinate number of international ETFs: I have only bought VTS, VEU and VGS. There are many specialised ETFs and specifically remember IXI being mentioned albeit with a relatively high MER for an ETF.

    This site is your friend for ETFs and LICs: Australian ETF and LIC fund list, blogs, news

    Direct shares: Check out Buffet's top 20 dividend stocks: Warren Buffett's Top 20 High Dividend Stocks
    I personally don't want to buy direct shares because of the effort involved but I have included direct shares as an option for completeness. My goal is to determine a simple strategy for the best risk / return.

    Here are some discussion points / questions:
    => Do international LICs compare as favorably with their equivalent ETFs as the Australian LICs?
    => Should I buy the company instead think PTM vs PMC or MFG vs MFF? (This was discussed in the LIC thread around here Listed Investment Companies (LICs))
    => Would anyone buy HHV given recent events?
    => Is MFF a buy now? It is well below NTA but I remember someone mentioning something about options?

    At this point I have VTS/VEU/VGS/PMC/PTM/FGG (DCA @ $1 a day thru commsec :))

    Not advice.
     
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  2. Nodrog

    Nodrog Well-Known Member

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  3. Nodrog

    Nodrog Well-Known Member

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    In relation to:
    Be careful when when comparing LICs with each other and ETFs as from memory the site uses "share" price not NTA!
     
    Last edited: 19th Feb, 2017
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  4. Nodrog

    Nodrog Well-Known Member

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    No, at best guess. But would need to check more carefully.

    The SPIVA report (extract below) continually shows how woeful managed funds are compared to the Index with International investing. So given that LICs are really just "Listed" managed funds I feel that a good broad cap International ETF such as VGS is worth holding:
    IMG_0083.JPG
    Source: https://au.spindices.com/documents/spiva/spiva-australia-mid-year- 2016.pdf?force_download=true

    92% of active International Fund Managers failed to beat the index in the last 5 years!

    I have found that some International LICs have at times struggled to match the index. However these LICs generally try to reward the investor with a higher dividend (plus franking) than a traditional Index ETF. This is helpful for retirees but total return shouldn't be completely ignored.
     
  5. Nodrog

    Nodrog Well-Known Member

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    Re MFF:
    http://www.asx.com.au/asxpdf/20170201/pdf/43fql99xrt2zwz.pdf

    As per the above Jan NTA report reduce pre-tax NTA by 15.4 cents to account for options.

    MFF has been an excellent performer in the past. Great for those looking for a mostly "internal compounder" with little tax drain along the way. Not so good for those wanting dividends however. Most would need to be drawing down capital if intending to live off this one. Then again the same could be said for most International ETFs!
     
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  6. Nodrog

    Nodrog Well-Known Member

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    I think the RAFI ETF (QUS) is worthy of discussion:

    http://www.betashares.com.au/files/factsheets/QUS-Factsheet.pdf

    One of the better smart Beta ETFs available.

    Although I just now remembered it was discussed in this thread:

    Index ETFs: cap weighted vs equal weighted

    It's one I intend to research further at some stage.

    Sorry for all the posts. But my best mate and family will be arriving soon for a few days so I will be preoccupied. His nick name is the "Tequila Kid". So I also don't expect to be thinking straight for some time:cool::cool::cool:.
     
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  7. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Would MFG and PTM be considered international or Australian in the asset allocation?
     
  8. Redwing

    Redwing Well-Known Member

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    Smart Beta (Marketing name for Strategic Beta) of course everyone wants to be smart when investing :D

    10 things investors need to know about smart beta

    1.First, it's important to understand where the name "smart beta" comes from. Professional services firm Towers Watson coined the term, but institutional investors have used the strategy since the 1970s. Roughly 20 years after the first index mutual fund in 1975, the first ETF debuted in 1993. These were not smart beta funds. The first smart beta ETF launched in 2003.

    2. "Beta" measures the volatility of an individual security/portfolio, as compared to the broader, whole securities market. The stock market, which often uses the S&P 500 index as its proxy, has a beta of one. Individual stocks are then ranked according to how much they deviate from that beta.


    A stock with a beta of two has a return that, generally, changes by twice the magnitude of the overall market's returns — whether returns are positive or negative. "Smart" refers to the use of an alternative methodology rather than following an index's size-based (market-cap) allocations.

    A smart beta investment strategy is designed to add value by strategically choosing, weighting and rebalancing the companies built into an index based upon objective factors.

    3. Smart beta indexes are different from their traditional counterparts. Smart beta applies a series of objective, rules-based screens to each index's component company. Companies are then ranked and weighted based upon these specific factors.

    Traditional market-cap weighted indexes, including the S&P 500, weight their constituents based solely on market caps, giving larger companies a bigger slice of the index even if a company is considered overvalued.

    Similarly, diminutive companies are given smaller allocations, even if other characteristics indicate they are poised for growth. Smart beta solves this "size" bias through the use of its objective rules-based screens rather than a cap-weighted methodology.

    4. Smart beta ETFs are passive investment tools that track smart beta indexes. Smart beta ETFs are designed to track chosen or newly constructed alternatively weighted indexes and its component companies. These indexes overlay analysis of targeted accounting metric factors, such as dividends, cash flow, total sales and book value, which results in a new smart beta index.

    Some managers may use other factors, such as low volatility or momentum. Smart beta ETFs, although passive, are still able to leverage active qualities through systematic rebalancing — not done by an active manager, but built into the ETF technology itself.

    5. Smart beta ETFs seek to mitigate the challenges of market cap-weighted ETFs. Instead of blindly weighting companies solely according to their size, smart beta uses screens based on fundamental analysis principles to determine which companies should be given a larger piece of the index pie. The goal is increased returns or enhanced risk profile.

    6. Smart beta strategies are increasingly popular for investors looking for factor diversification. Investors are increasingly turning to smart beta investments in order to seek outperformance. According to research firm Morningstar, at Sept. 30, 2015, there were more than 450 U.S.-listed smart beta products, with a collective $510 billion in assets.

    7. Not all smart beta strategies are alike. Investors must carefully look under the hood at smart beta ETFs and assess what indexes, biases and specific single- or multifactors each uses, what firm is constituting (and reconstituting) the underlying index and how often, and what firm sponsors the corresponding smart beta ETF.

    8. Smart beta ETFs have now been around for more than a decade. Managers of smart beta ETFs have refined and tuned the investment methodologies they employ since the early- to mid-2000s.

    Using factors — low volatility, momentum, quality, value and size — to develop an index's underlying holdings, ETF providers are now offering smart beta strategies. These were not available to investors before ETFs and technology made it possible for individual investors to access different factors of the market from home computers and mobile phones.

    9. Smart beta strategies may help investors' portfolios outperform benchmark indexes; however, outperformance can't be assured. Data from December 1991 through June 2015, based upon five specific factors, show that U.S. smart beta ETF factors and methodologies outperformed the S&P 500 index over five full market cycles and in different economic climates, although absolute performance varied.

    10. One of the most important considerations for investors is to understand how to implement smart beta ETFs. Many investors see investments that feature a smart beta strategy as complementing or tactically enhancing overall performance within a portfolio while providing diversification. Smart beta investments can expand investors' options and should be evaluated based on each investor's investment objectives and time horizon.
     
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  9. Nodrog

    Nodrog Well-Known Member

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    I consider them "International", asset allocation wise, but perhaps not quite as strongly as their International managed funds / LICs.

    Some look at it as a great way to get a strong fully franked dividend by investing in the Australian based management company rather than their International "managed funds".

    But my view only.
     
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  10. Redwing

    Redwing Well-Known Member

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    Is smart beta smarter than your average ETF?

    Eureka Article

    Summary: Relying on just market capitalisation to weight stocks within a fund portfolio has its downsides. So more ETF issuers have moved beyond this strategy by weighting their holdings according to a range of other financial performance metrics.

    Key take-out: Smart beta funds are rapidly becoming the new normal for ETFs across global markets, but some say the quest to outperform the market has become more expensive for investors, and there are no guarantees.
     
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  11. wombat777

    wombat777 Well-Known Member Premium Member

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    Dumb question - @ErYan are you executing 6 x $1 trades each day??? If so what fee structure are you on?
     
  12. The Falcon

    The Falcon Well-Known Member

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    Ok I'm happy to test the conventional wisdom on this and play devils advocate here. Why does one need to diversify into international shares? And I don't want to hear repeated first level marketing stuff from those selling the products. Might be an interesting discussion.
     
  13. Zenith Chaos

    Zenith Chaos Well-Known Member

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    1. Diversification: lower portfolio volatility
    2. Outperformance (e.g. U.S. in the past few years)
    3. Currency diversification (AUD goes down, international stash goes up)
    4. Reduced risk: something very bad happens only in Australia
    5. Opportunity (No Berkshire Hathaway in Australia)
     
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  14. The Falcon

    The Falcon Well-Known Member

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    Ok good stuff. Comments as below, please note I'm treating this as an intellectual exercise (as per most discussion in this sub- forum), I'm not arguing with you.

    1. Doesn't add value
    2. On the back of extremely high CAPE. Look at long run TSR - nothing in it.
    3. Works both ways. Currency is a wash.
    4. Good reason, mitigates single market risk.
    5. Which is fine if buying BRK directly. In an ETF that exposure is negligible (1.5% S&P 500).

    I have some more thoughts on this which is around market efficiency and mobility of capital which frames the way I think about this. I'll post more later when I get a chance.
     
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  15. Nodrog

    Nodrog Well-Known Member

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    "Intellectually" I don't believe International diversification is necessary. Good reasons for having a home bias include if you intend to live most of your life in Australia (spending AU$), no currency risk and magnificent dividends with a tax system that rewards you with franking credits. No double taxation like most countries in the world. In a nutshell Australia is an income investors paradise.

    That said from a deeper "SANF" viewpoint I have around 15% International diversification. Silly, I know. It has little to do with diversification, outperformance, currency, opportunity. In fact it has a negative impact on our income in this investor's view. Our International allocation to shares is purely for SANF and insurance only. That is, if something very bad happened in Australia affecting its long term future. Which I think is very remote.

    Like all insurance you hope it never happens but if it does having some protection will be a relief should the **** hit the fan. But in all honesty it really is the SANF thing. I suppose that's my nervous disposition at play. We've all got our weaknesses unfortunately. Personally I'd like to sell the International holdings and invest the proceeds locally for greater income but I'm not there yet mentally:(.

    So be warned when you read my posts. I'm far from perfect having no shortage of flaws:eek:.
     
  16. Nodrog

    Nodrog Well-Known Member

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    And this I've posted elsewhere which is more in line with my "insurance" reason for investing in International shares and / or other assets:

    Deep Risk Under President Trump
    IMG_0082.PNG
    The good news is that a globally diversified portfolio can mitigate many of these risks. The biggest problem for investors dealing with deep risk is the concentration of assets in a single country. Home bias is a killer if you’re dealing with severe inflation, deflation, war or confiscation."

    And more:
    Understanding deep risk in a portfolio - Morningstar.com.au
     
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  17. Redwing

    Redwing Well-Known Member

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    As per @austing for me personally there's a risk mitigation factor, International stocks add diversification which can reduce volatility over most time periods and even give your portfolio a much needed boost on occasion

    You are also opening yourself up to to some of the largest companies in the world

    Whilst the GFC hit everywhere and we are all becoming part of the global economy, I wouldn't be comfortable with no International or US market exposure, we don't know in advance which countries markets will be future winners.
     
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  18. Ouga

    Ouga Well-Known Member

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    "Trying is the first step towards failure" Homer
    Hi guys,

    For those of us who invest part of their holdings internationally, I am curious to see what you are presently doing with your international allocation given the present valuation of the US market.
    Are you holding back a little?
    Investing as usual?
    Adding a bit more?

    I am thinking of topping up my VGS holding, but pondering how hard to go this time around.
    Of course no one knows the future and VGS is only 60% US, but still curious to see if anyone has been reflecting on this?
     
  19. Nodrog

    Nodrog Well-Known Member

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    Bearing in mind I'm a well off retiree and really don't need to buy I'm in no hurry to add to VGS. So I'm patiently waiting for an opportunity given stretched valuations based on a number of indicators..

    That said as a younger accumulator it's more difficult. No one knows the future so waiting on the sidelines may not be optimal. However the more stretched valuations become the higher the probability of a major correction. So perhaps keep investing to your existing timetable but proceed with caution. Don't give up but lighten up.

    More importantly than what amount you DCA into the market during riskier times is ensuring you keep buying when the inevitable correction comes AND NEVER SELL during these times. It's a long term game. DCA a bit at a time through good times and bad no matter what will result in you way outperforming the typical investor who gets caught up in the bull market frenzy then sells up in gloomy times due to fear.

    Not advice.
     
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  20. Ouga

    Ouga Well-Known Member

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    "Trying is the first step towards failure" Homer
    Sensible indeed. :)