One case in point is Australia. For most clients the Australian exposure has been one of the banks. It was of course hit hard but there was never any realistic chance of a deathblow. While I still like the bank I will not put 6% of the portfolio into it and I do not think owning two banks from one foreign country is a great idea. If I turn out to be catastrophically wrong about the bank I own I imagine all the banks would feel that pain.
This leaves me needing to figure out another way in. One obvious place to look would be in the materials sector, it is a commodity based economy after all and there are a couple of mega caps to go with as well as dozens much smaller miners. My hesitancy here is that there are other countries with fewer investment choices but for which materials is a way in so I'd like to try to find something else if possible.
One possibility is infrastructure sorts of thing like Macquarie Airports (MAP in Oz and MQRSF on the pinks, apparently there is no ADR). Macquarie Airports owns airports in Sydney, Brussels, Copenhagen, two smaller ones in England, the passenger terminals at Haneda Airport in Japan (domestic traffic mostly) and several small airports in Mexico. Growth in revenue and earnings from each airport has been mid single digits for the last couple of years or so. Revenue comes from every aspect of the airport including things like restaurants and parking.
The company appears to have cut its debt considerably (I say appears because I found something about one part of Macquarie buying from another which muddies the water some). Really in looking around the website and the annual report there are an awful lot of moving parts. Complicated is not necessarily ideal and from what I know about various Macquarie funds swapping assets it creates a variable that cannot be managed.
The stock has been very volatile per the chart. I would hope that an airport would be a bit simpler as a cash flow story and a smaller debt load but no dice. It is these things that perhaps made the stock more volatile than the ASX 200 as opposed to less.
Transurban (TCL in Oz, TRAUF on the pinks and apparently no ADR) owns toll roads mostly in Sydney, one in Melbourne and 75% of one in Virginia. It used to pay a whopper of a dividend but has had to cut it dramatically for the last two payouts. The debt load is considerable and the average interest paid is 6.8% for an average maturity of ten years (maybe the debt, if accessible would be better). Earnings, revenue and cash flow are all headed in the right direction. It was much easier to move around the website and pick up information. The business is not simple per se but simpler than Macquarie Airports. This may be why the stock has been much smoother than MAP.
I threw in Auckland Airport on the chart but did not look at any info. Interesting to me is that it has been far less volatile than the two Aussie stocks and the Aussie index.
I'm not thrilled with either one (MAP or TCL). MAP is a no and TCL is doubtful. There are two ETFs, one very heavy in the banks and one heavy in the big miners. For now this is a work in progress with no resolution. There are quite a few agriculture related stocks in Australia but there we are drifting into materials. It may turn out that there will be no other Aussie stock. Working through all of this is what it is about. It is interesting to learn a little about these companies even if most of them don't make the cut.
8 comments:
Sometimes I really don't understand what you're trying to accomplish. You say, "This leaves me needing to figure out another way in" as if somehow being overweighted in Australia is a necessity. This statement coupled with the one from a week or so ago about having a knack for knowing what to do and usually being right and numerous others along the way seems to indicate that you might have a serious investment biases. Today's post comes across as the tail wagging the dog.
Sorry to be so critical, but sometimes it takes someone else to point these possible behavioral investing biases out.
And what if you are wrong? You'll say its only 6%, but what were the opportunity costs? I just don't see how this process repeated in several countries and several sectors adds value for your clients. The more you attempt to do this, the more the overall returns will converge to market performance.
Flame suit on and securely fastened.
Well, I won't go as far as anon 6:59, but it does seem like you're trying to fit a square peg into a round hole here, Roger.
If I understand your top down approach, you might be looking to overweight, say, industrials farther into the cycle. Wouldn't you then identify the best stock in that segment--outside the US--and go there? Maybe that's Australia, or Germany, or Mexico.
Or is the bigger macro here that the economic cycle trumps the sector and stock choice? Using today's example, an airport stock in Australia will likely outperform an industrial stock in Germany because they're in different phases of their respective cycles, even though the S&P history book says you should overweight industrials?
I like Australia and I'm already there, too, but I think I'm misunderstanding part of your process here.
Thanks much for the education.
6:59,
not sure if you are new or not but i believe in top down portfolio construction. this means placing more emphasis on country and sector decisions as opposed to the stock picking being the most important.
Australia has been part of the solution from the beginning and it's fundamental make up leads me to believe i would want to increase that exposure. So what is the best way to do that? Is there a way to do that. I imagine there is but cannot be certain. If the top down decision to go from 3% to 5% has been made (I'm just about there) then the question becoems what is the best way to do that in conjunction with the rest of the portfolio.
To repeat, my idea of top down is if decision to increase country exposure has been made then the next step is to figure the best way to do that.
If I am wrong then yes it will only be a small percentage but also in there is the decision what not to own or what to underweight. I've not owned Japan, and had very little western Europe which I believe has been correct. I plan to continue avoiding Japan and having very little western Europe and that will either continue to be right or it will be wrong, just like any decision ever made.
Anon 7:16 my hope would be that if I thought Oz is a better destination than Germany that I turn out to be correct, first of all, second that whatever I select will capture the country, have the volatility effect I hope for, be better than something simialr I could have chosen from Germany, in this example maybe that means Fraport (FPRUF). If I thought Germany was just as good a hold (for different reasons) then I need to figure how to own both countries in conjunction with everything else going on.
And I thought I was critical of Roger at times.
Like I have said in the past this is why the rest of us do not have blogs. But these issues make EPP and VWO all that more appealing to me.
I have to point out that the amount of research available to use in designing a portfolio is usually proportional to the value of assets in the portfolio. Also the more research you do, the more good ideas you could come up with.
Now the best thing to do with a bunch of good ideas is not to bet the farm on the "best" idea because that is a risky process on its own. Also "best" is very hard to determine ahead of time.
If commenters are familiar with information theory regarding optimal bet sizing then you would realize that the best thing to do with your good ideas is to implement as many as possible weighted proportionately to how much of an edge you think you have. AFAIK in a nutshell this is why large portfolios fuss over smaller positions: more research is available.
What Roger is letting us see through his blog is the process he goes through to manage client global equity. He shares research process, position sizing process, risk control, and how to maintain an investment book that is balanced by geography and industry given his investment theses.
Hi Roger
Good call on Australia. I'm not sure if many North Americans recognise just how good things are over here.
We're the only modern economy not to have gone into recession during the GFC. Highest current growth of modern economies and the list goes on.
Australia also gets to borrow in its own currency, yeha!
While resources could have another minor down leg, the secular resources bull has a long way to go. Some would say all the way to the end of the resources.
There are other ways into Australia, e.g. LUK has a large stake in Fortescue, the upstart iron ore producer.
You also might want to check out Biota. Despite the massive run up, they're likely to earn their EV in the next year alone.
I'm writing a series on investing in Australia over the coming weeks. I'd love to know if someone like you would buy direct shares on the ASX or if you stick to ADRs and pinks.
cheers - Dean
large position in Biota, unfortunately none on LUK or FMG.AX
ADRs certainly are the path of least resistance. From there the pinks but but were i to give a verbal order to Schwab they may prefer to send to the local market to get it done. i need the shares i need and i rely on my broker to be correct about the best way to get them.
Roger,
I know you're not a chart guy (neither am I) but I'm seeing a textbook momentum divergence right now.
http://www.regimenia.com/2009/07/duck-and-cover.html
The market might be poised to take a nice breather.
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