Get a FREE subscriber login and read more articles
Public

How to invest overseas without leaving home - as seen in Equity Magazine

By John Addis, Founder at Intelligent Investor

A few years ago, when one Australian dollar purchased one US dollar or thereabouts, the idea of investing overseas carried much credence. US markets were comparatively cheap and, with a strong currency, you got potentially more value for money.

The case played out as we hoped. The US dollar strengthened as its economy recovered from the GFC and the Australian dollar fell as the mining boom went ‘bang’. Investors that got exposure to US markets have done pretty well since then. Our recommendations on CSL and Cochlear for example, both ASX-listed stocks with global earnings exposure, are up significantly since – in the case of CSL more than tripling in price - beneficiaries of stronger earnings and reporting in a lower local currency.

Has the opportunity been lost to time? Not entirely. Even without a strong local currency there are powerful benefits to international investing. Fishing in a global pool means more opportunities and better portfolio diversification. And now there are now many more ways to get it, without the hassle and expense of trading overseas-listed stocks.

Perhaps the first, easiest and often cheapest is to use exchange traded funds (ETFs). ETFs are, as their name implies, funds that trade on a stock exchange, making purchase and sale simple. Select ETFs by country, commodity or sector and you’re guaranteed to earn the market return minus fees, which are usually very reasonable, sometimes as low as 0.25%. ETFs are convenient, cheap and not structured in a way that their prices tend not to stray too far from underlying asset value for long. The trouble is, that last reason means it’s unusual to find a cheap ETF.

The second strategy gets you out of doing the legwork, but still holds the prospect of being able to buy a few stocks for less than they’re worth. By investing in an international listed investment company you get a ready-made portfolio of international stocks run by a professional manager. For inexperienced or time-starved investors it’s a good choice, if you don’t mind the higher fees.

The growth in popularity of overseas investing has meant that choices in this regard are now plentiful (see table) but only one of these companies currently resides on our Buy List.

 

Company

ASX Code

Magellan Flagship Fund

MFF

Templeton Global Growth Fund

TGG

Hunter Hall Global Value

HHV

Platinum Capital

PMC

PM Capital Global Opportunities Fund

PGF

Managed by Paul Moore of PM Capital, PM Capital Global Opportunities Fund is an international but ASX-listed listed investment company (LIC). Hitting the boards in 2013, its goal is to provide long-xzterm capital growth by investing in a concentrated portfolio of global and Australian equities and other investment securities. 

That sounds like boilerplate fund manager-speak but Paul Moore is a little different. As he said in his company’s recent annual roadshow: “When it comes to investing, there is no safety in numbers; you have to be doing something different from what other investors are doing.’ That’s easier said than done. As Moore continued: ‘You must be able to stand your ground under intense pressure and ridicule.’

That pressure is mounting. At 31 July 2016, about 57% of PM Capital’s portfolio consisted of financials, with 21% in foreign banks. When we upgraded the company in January this year, part of the attraction was its exposure to US, UK and European banks, which were much cheaper than their Australian counterparts.

But Brexit hit the share prices of both European and US banks and investors have reasoned that worldwide interest rates would now be lower for even longer – thus penalising banks’ net interest margins. Among the banks in PGF’s portfolio, British-based Lloyds Banking Group declined 38% in the last financial year, Bank of America fell 23% and ING Groep declined 39%. Falls in Sterling have made matters worse (PGF also owns shares in Barclays).

We think the long-term impact of Brexit on both the British and European economies won’t be as bad as many have predicted. And since then, much of the initial shock has dissipated. Patience will be required, though. Being a high conviction contrarian has been Paul Moore’s trademark since founding PM Capital in 1998. The approach can lead to high volatility in returns, including periods of underperformance but the past 18 years are evidence of its success.

PM Capital’s Global Companies Fund – which PGF aims to mimic – has returned more than double its benchmark. This despite its unit value falling 19% since its high point in July 2015, significantly underperforming the 4% decline in its benchmark during this period. The clincher, though, is that you can purchase PM Capital Global Opportunities Value Fund at a more than 10% discount to its underlying holdings. As Moore himself notes, “I find it intriguing that I can obtain exposure to the very same investments at a significant discount to their public market values via an investment in PGF.”

The third strategy is to stay local, buying familiar blue chip companies with overseas earnings at a discount to their intrinsic values. A few years ago there were many such companies on our Buy List, including CSL, Aristocrat Leisure, Macquarie Group and Sonic Healthcare. Unfortunately, those days are over, bought to an end by low rates and the subsequent rush into seemingly safe stocks with attractive yields plus a little growth. There are however two companies that do fit the bill.

Share registry operator and mortgage processor Computershare may be facing tough conditions but management is dealing with them head on. The very first slide in the company’s recent results presentation showed how underlying operating profit before depreciation and amortisation (EBITDA) – ignoring currency movements and the interest the company earns (or doesn’t earn more like) on client cash balances (aka ‘margin income’) – had risen 4% in 2016 and 14% a year over the past three years. It didn’t exactly dispel concerns that the company is diluting the quality of its business with a lower returning mortgage servicing business, but the fears have been allayed. These are both good businesses.

Despite all the optimism, though, underlying EPS still fell 7.9% in 2016, compared to guidance for a fall of about 7.5%, mostly due to the strength of the US dollar (the company reports in US dollars, so a rise in that currency reduces the value of non-US revenues) and lower margin income. The currency effect will come and go and is largely immaterial to Australian investors in any case, since the US dollar value of Computershare’s earnings needs to be converted back into Australian dollars. Indeed, if Computershare reported in Australian dollars, its underlying EPS would actually have risen 6%.

Management would have us believe that Computershare is powering along on an underlying basis but, given the weakness in Registry revenues, that's a stretch. Conditions are difficult and the company is plugging away satisfactorily, and no more. The valuation is the real attraction. Even if we assume the current low levels of margin income continue for eternity, little growth is needed from the rest of the business to justify a price-earnings ratio of 14 and underlying free cash flow yield of 7–8%. That’s the reason why this business remains on our Buy List.

News Corp is the only other ASX-listed blue chip that holds a similar place. The recent results were a mixed bag with its part-ownership of REA Group a standout success and Foxtel at the other end of the spectrum. News Corporation is cheap but it requires a leap of faith. Quite a big leap, in fact. You’re betting that Rupert Murdoch and the intelligent people he employs are right, and that the market is wrong. There’s no doubt buying structurally challenged businesses is difficult but there’s clear value in this unusual conglomerate.

News Corporation’s wonderful Digital Real Estate business, together with its cash, effectively justifies more than 80% of the company’s market capitalisation. You get the remaining businesses – with revenues of around US$7bn – for not much more than US$1bn. The price has risen lately, but it remains a compelling opportunity.

Disclosure: The author owns shares in Computershare and ResMed.

John Addis is the founder of Intelligent Investor. This article contains general investment advice only (under AFSL 282288). Authorised by Alastair Davidson. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership at http://landing.intelligentinvestor.com.au/asa

 

 

 

Comments

There are no comments. Be the first to post