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Internationally diversifying your share portfolio

The case for diversifying your equity portfolio internationally is obvious given that Australian equities are such a small component on the overall international equity market and given the strong growth potential in many newly emerging markets.   One way of doing this – that I have in the past thought was a sound idea is to buy “low load” (low transaction cost) exchange traded funds from firms such as Vanguard.   I have increasingly developed reservations about pursuing this path.

Consider the VEU fund from Vanguard. It has very low management costs (around 0.15%) and covers all the world markets except for the US – investment in the US itself is covered by a variety of other funds.  It sell as around $58 Australian and is freely traceable at normal brokerage fees.  The difficulty for me is that it sell as a 61% markup to its asset backing.  Its popularity has made it expensive.

What would make sense here are funds that make available investment in the range of equities covered by VEU but which are available in perfectly elastic supply at a slight markup to asset backing.  That would facilitate diversification but without the hefty markup.

The difficulty here is that in a downturn the premium over set backing is likely to fall.  In a downturn the assets will be valued at less but the markup over asset backing would likely be less too  creating large capital losses.

There are a few investment funds out there that currently sell at a discount to their asset backing.  One is Argo Global which invests mainly in US infrastructure assets (electricity, toll roads, airports).  It is currently selling for around $1-70 but its asset backing is around $1-90.   It charges much higher fees (around 1%) and has nothing like the coverage of the Vanguard ETFs but, on balance seems to me a better bet.

The above is not to be construed as advise to buy or sell anything.  It is mainly intended to clarify my own investment thinking and to receive feedback.  I am not a qualified financial advisor.

5 comments to Internationally diversifying your share portfolio

  • Tom Davies

    It seems odd to me that there can be such a difference? Isn’t there an arbitrage opportunity there, to short the ETF and buy the underlying shares?

  • hc

    Well true if you believe the price difference will narrow in finite time.

  • The 1.6 price to book ratio is that of the companies the ETF is invested in, not of the fund itself. The idea of ETFs is that the issuer continuously buys and sells them at the net asset value and so the market price doesn’t diverge from that. This isn’t the case with closed end funds known as listed invest companies in Australia. Most (but not all – e..g Clime Capital CAM.AX) of these are trading for a big premium to the value of the securites they hold currently.

  • hc

    Vanguard operates closed funds. Perhaps I should noyt have used the language “Exchange Traded Funds”. The Vanguard funds are listed on the ASX.

  • Peter Rickwood

    Aren’t there other funds that trade at very close to underlying assets? For example Hunter Hall Global Value (HHV) used to have a diverse mix of local and O/S assets and trade at close to value of underlying assets in the portfolio. Maybe this is still the case, though perhaps with Peter Hall’s departure it may be less appealing. Also, if you plan to stay in Australia, maybe you don’t want to be exposed to currency fluctuations?

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