Go Global – Investing Around The World April 15, 2019

Part 1. Why?

Why do you trade? To make money I hope.

But where do you trade? Our data on YOUR trading behaviour suggests that YOU suffer from a home country bias. Majority of you trade only on the Singapore stock exchange at SGX!

Recently, I celebrated a birthday (not mine) with an upscale international buffet. The buffet prides itself on its plethora of international selections, and goes further to offer different themed nights on a daily basis so consumers may enjoy a different culinary experience with each visit.

Then it dawned upon me. If I were the one dining, how should I eat? And what should I eat? This introduces the economic concept of utility maximization:

How can I derive the greatest satisfaction (pocket or belly-wise) with the given time constraint and absolute amount of food I can possibly eat in one trip?

Buffet veterans will probably suggest wearing loose clothing; avoiding carbs like rice or noodles; or drinking less water. Only eat the good and expensive stuff. Beef, crabs, lobsters and finish off with desserts. This should give us the most bang for our dollar. Utility maximized.

Do we approach our investments in the same way though?

The following chart plots the performance of nine World Equity Indices over a ten-year period.

Take a guess: Which line is the Singapore Straits Times Index (STI)?

Answer: While all the Indices grew and all your investments would have made money, STI (red line) performance ranks 2nd from the bottom!

Only the UK:UKX FTSE 100 performed worse than the STI index at 0.62% lower returns per year. If the returns were adjusted for risk, the STI would have performed the worst! Investors are only compensated with 0.4% of returns per unit of risk held!

This brings us back to our opening statement: Why do you trade?

If your answer is the same as mine – to make money, then we suggest:

Why not approach your investments as you would with an international buffet spread?

We understand that some of us are conservatives and we like local – preferring a hearty well-known local breakfast to start the day, while dabbling in household blue-chips such as DBS, Singtel or CapitaLand. One way or another, both your choice of breakfast and investments will almost never go wrong.

But if you have the appetite, going foreign brings about its benefits:

Global Diversification

You would have probably heard of this phrase: “Diversification is the only free lunch in the world”.

The idea is simple. Different stocks each have a unique risk factor. A handful of stocks held together in a portfolio, each drifting in different directions should cancel out each other’s “unique risk” and make your small portfolio behave more “market-like”.

A study by Fisher and Loire in 1970 [1] suggests that a portfolio of just 30 stocks reduces its standard deviation down to that comparable to the Russell 3000 Index (consisting of its namesake 3000 stocks)!

BUT even if you hold 30 eggs (highly correlated positions) in one basket (STI), if one day someone comes along and trips the basket (e.g. financial crisis in Singapore), what happens to your eggs and your holdings? Are you truly diversified?

To know and measure the effects of diversification (or di-worse-sification), we consider its Correlation, which ranges from +1 (perfect synchronization) to 0 (no relation) to -1 (perfectly opposite movement).

To improve returns, reduce risk or improve risk adjusted returns, mix and match combinations of portfolios, holdings or Indices with close to zero correlation to each other to get better results.

Here are the correlation of various World Equity Indices with each other:

A 50/50 combination of the Indices with the lowest correlation with each other – VNI/KLCI, N225/KLCI and N225/VNI produces the following results.

In all three cases, Risk Adjusted Returns were better compared to if each index was to be held alone.

Eat some Vietnamese Pho then drink some Penang Chendol. Weird combination, but it works.

The Singaporean “Rojak” Portfolio

Suppose you are holding on to some Singaporean staples (purchased through Central Provident Fund – CPF or otherwise) and don’t wish to liquidate, you can simply add some other flavouring into the mix:

We present four simple examples:

a. For the conservatives seeking low Standard Deviation, put an equal weightage (20%) into each of the Developed Markets (US, JP, HK, SG and UK). This also provides for good geolocation diversification.

b. The aggressive investors focusing on absolute returns can construct a mixture of South East Asian indices (HK, SG, Indo, MY, Thai, Viet)

If you have noticed the high correlation between HK and SG (0.82), you can even opt to remove HK from the mix. For both conservative and aggressive portfolios, it either increases returns, lowers risk, improves the risk adjusted return or achieves all three! This truly shows the benefits of diversification and the important role correlation plays in achieving diversification benefits.

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