This is the latest edition of our monthly Shareholder Yield Letter released on 2023-11-14. Subscribe here to receive it in your inbox every first Tuesday of the month.

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This month, we tackle a significant investment faux pas that is ubiquitous. Fortunately, rectifying it requires only a modicum of audacity, and the payoff is heightened, more consistent returns.

Before delving into that, let's examine the alterations in the portfolio.

Revamping the Portfolio

Acquisition of Four – Offloading of One

We present four new recommendations this month, particularly as the MSCI World index has surpassed its 200-day simple moving average.

The first pertains to a US-based company specializing in the production and marketing of tobacco, cigarettes, and related products, boasting a shareholder yield of 11.1%, share buybacks of 1.4%, and a dividend payout of 9.6%.

The second involves a German chemicals producer delivering a shareholder yield of 8.6%, share buybacks of 0.8%, and a dividend yield of 7.8%.

The third recommendation centers around a French financial services entity, offering a shareholder yield of 9.6%, share buybacks of 1.6%, and a dividend yield of 8.0%.

The fourth and final proposition pertains to a Retailer based in the United Kingdom with a shareholder yield of 8.8%, share buybacks of 4.8%, and a dividend yield of 4.0%.

Halt Loss – Shedding One

Dispose of ArcelorMittal S.A. sustaining a loss of 15.6%.

A Common Gigantic Investment Oversight

Have you been confined to solely acquiring recommended companies within your domestic market or perhaps one additional market where you feel a sense of ease, such as the USA?

If so, you are not alone, but it's a colossal mistake as it restricts your investment opportunities and leads to diminished returns.

The Reasoning Behind This Tendency

It's widely accepted that expanding the roster of companies (encompassing multiple countries) in which you invest can augment your returns. This is due to the propensity to unearth prospects that harmonize better with your investment strategy.

Yet, this is no straightforward feat.

We often harbor the belief that our homeland is safe, we feel we comprehend the companies better, and it provides a sense of security. I frequently observe this with subscribers who only focus on US or European opportunities.

But is this veracious?

Universal Predicaments

Let's be candid, every country has grappled with predicaments pertaining to accounting fraud and other deceit. If you are skeptical, examine the slew of investment frauds and scams that have unfolded in your homeland over the past half-decade.

It promises to be an enlightening experience, as I discovered here in Germany – consider Wirecard and the Dieselgate scandal.

It's apparent that deception or a swindle can strike anywhere.

If It's Half the Price

If a country is not entirely a banana republic and you can procure a company there at a 50% or even lower cost than in your homeland, you are rewarded handsomely for embracing the risk of POTENTIALLY encountering more lenient accounting regulations, if any.

You're Not Flying Solo

If you predominantly invest domestically, rest assured, you are not alone.

The 2016 research paper The buck stops here: The global case for strategic asset allocation and an examination of home bias published by the investment institution Vanguard featured this graph:

Source: The buck stops here: The global case for strategic asset allocation and an examination of home bias – Vanguard – July 2016

The diagram showcases that US investors do not exhibit significant bias regarding their domestic market, as evidenced by the disparity between the orange and yellow sections. Nevertheless, this is likely attributable to their possession of the most extensive stock market.

Investors in Canada appear to harbor limited trust in even their US counterparts, while Australians markedly demonstrate the most pronounced proclivity for domestic bias.

Germany was conspicuously omitted, likely due to its lack of a robust equity culture, yet I surmise it would also manifest a high degree of bias.

What's the Worst That Could Happen? You Could Lose Everything

If you eschew diversification across countries, you might wonder about the potential ramifications.

You might incur substantial losses.

Indeed, the prospect of enduring substantial losses is palpable, as observed in the case of stock and bond investors in Germany and Russia during the 1920s (and again in Russia in 2022, perhaps). Granted, this is an extreme illustration and relatively improbable.

However, it underscores the fact that the bond and stock markets of countries exhibit disparate performances.

Contemplate the ascendancy of the US market over the past decade in outperforming most markets. While commendable, sustaining this trend over the subsequent decade is improbable given the market's overvaluation.

Predicting which market will flourish remains an enigma, hence disbursing your investments worldwide is a superb strategy for enduring, long-term gains.

Is Global Investment Effective?

But is global investment efficacious? Is it not fraught with hazards?

It is immensely efficacious, as confirmed by a 2019 research paper by the investment titan Bridgewater Associates ($124.7 billion assets under management) titled Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated.

The ensuing diagrams delineate the returns in stock and bond markets of the USA (dark grey line), other nations (light grey lines), and a uniform country weight portfolio (red line).

Source: Bridgewater Associates – Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated

Red line = Uniform weight portfolio, Dark Grey line = USA, Light Grey lines = Varied countries

The rationale behind the robust performance of the uniform weight portfolio (Red line) lies in its reduced slump, delivering more consistent returns that expedite cumulative gains.

of your funds.

The graph below unmistakably presents the decreased downturns of the global equal weight portfolio (Red line):

Source: Bridgewater Associates – Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated

Red line = Equal weight portfolio, Dark Grey line = USA, Light Grey lines = Individual countries

Another study supporting global investment as a promising choice

In a 2008 document titled Going global: value investing without boundaries, James Montier demonstrated that global investment generates higher returns.

Is global value investing effective?

James wrote the paper following a query on whether he had ever encountered any evidence proving that value investing works at a global scale.

With the paper, he aimed to affirm his belief that an investor should have the freedom to invest anywhere globally, where the most appealing investment opportunities can be found.

Exemplary fund managers have proven its effectiveness

This concept is not novel, as numerous esteemed value investors such as Sir John Templeton and Jean-Marie Eveillard have demonstrated the effectiveness of value investing on a global level.

Sir John once commented:

It  seems  to  be  common  sense  that  if  you  are  going  to  search  for  these unusually good bargains, you wouldn't just examine Canada.

If you search solely in Canada, you may find some, or if you look solely in the United States, you may find some. However, why limit yourself? That's what we've been doing for forty years; we search anywhere in the world” (speaking in 1979). 

Evidence from Europe

The following chart indicates that investing across Europe would have yielded higher returns (observe the last bar) and affirms that expanding your horizons across Europe can enhance your returns.

Source: Going global: value investing without boundaries by James Montier

Strong indication from all developed markets

Across three developed markets (Europe, the US and Japan), it is evident that investing in ALL developed countries would have resulted in the highest returns (notice the last bar) except for Japan.

  Source: Going global: value investing without boundaries by James Montier

Strategies to overcome home country bias

In a remarkable article dated 5 December 2019, titled Global Impact of Investor Home Country Bias, Larry Swedroe presented another reason why you should combat your home country bias and pursue global investment.

He wrote (bold comments are mine):

Lastly, I offer this note of caution, one that might help you avoid home country bias.

If a belief in relatively high market efficiency has led you to conclude that you should be a passive investor—accepting market prices as the best estimate of the right prices—you should also accept the idea that all risky assets have similar risk-adjusted returns.

If that were not the case, capital would flow from assets with lower expected risk-adjusted returns to the assets with higher expected risk-adjusted returns until equilibrium was reached.

If all risky assets have similar risk-adjusted returns, there is no reason to have a home country bias—apart from perhaps a slight bias to consider that investing in U.S. stocks is slightly cheaper than investing in international stocks.

On the flip side, if you are still employed, your labor capital is likely more exposed to the economic cycle risks of the U.S. than to foreign market risks.

If that is the case, after factoring in your labor capital as part of your portfolio, you should think about overweighing foreign markets to counterbalance your labor capital risk.

Conclusion, global investment is impactful

As witnessed, investing globally is a rewarding strategy that works! This signifies that it’s beneficial to seek companies that exemplify your investment strategy, irrespective of their geographic location.

This is precisely what we accomplish for you in the newsletter.

Most significantly, it's simple to put into action, merely broaden your investment universe and initiate investments in more countries. You don't have to make a sudden leap and go all in, start with a few investments and progress as you gain confidence.

If you are particularly concerned, commence with smaller positions.

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