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This is a follow on from another thread:

http://boards.fool.com/1228/one-of-those-days-31655315.aspx?...

and posted here to allow better visibility and hopefully attract good discussion. All my posts in this discussion will be from a US point of view and the word foreign should be read as "non-US".

My approach WILL NOT involve setting up any foreign accounts. It also will not involve using ETFs or ADRs. Instead I will trade directly on foreign exchanges in local currency through my US brokerage account. Fidelity appears to make this very easy (I haven't done it yet, but I've enabled the feature and done a bit of research on potential pitfalls). The currency exchange issues can be as transparent as you like, or you can actively manage currency issues. I'm pretty sure other brokers offer similar capabilities.

I accept that there will be additional costs (trading fees, currency fees / exposure) and minor tax complications (foreign dividend with holding and US tax credits for such). Liquidity and geopolitical issues are other areas requiring attention. Tax advantaged accounts are also off limits (at Fidelity) for foreign trading, but that's not a show stopper for me. With the foreign withholding on dividends, it would make sense to keep things out of IRAs anyway.

I'm going to stop now and give others a chance to talk and see where this goes.

Ed
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There's always MF Pro in Australia!

Neil
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Hi Neil - That indeed does seem like it might be a good source of advice for that part of the world. I've already made some inquiries about how I might get signed up for that.

Ed
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A little more background for anybody else reading this thread (who may be too lazy to look at the original thread ;-), or at least from my perspective ...

The idea is that some of us are interested in increasing our non-US market exposure, but aren't quite sure how best to do it. Fooldom doesn't seem to offer a lot of choices along these lines, so we have the question for discussion as to how best to find ideas.

as always, i am full of carp
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Excellent point, Ed. I always forget that option; one of the reasons I think is because they don't support it in the websites and you have to call in the order. At one time, Schwab allowed it through their website, but they took it away. (Like, a decade ago.)

I guess the real question is which currencies do you want direct exposure to? Because picking a company is less than half the battle if the currency is really headed the wrong way.
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How to find the best ideas is, of course, critical. But I also would really like to talk about the mechanics. ADRs came up on the other thread. Why bother with direct investment in foreign stocks through foreign exchanges when you can just buy ADRs?

1) not all potentially interesting foreign stocks will be available as ADRs on the us exchanges.

2) direct foreign investment using foreign currency, perhaps even maintaining some percentage of my cash balances in foreign currency offers a means of leveraging current US dollar strength to diversify some of what I perceive as significant US dollar risk longer term.

3) Other reasons?

Ed
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Excellent point, Ed. I always forget that option; one of the reasons I think is because they don't support it in the websites and you have to call in the order. At one time, Schwab allowed it through their website, but they took it away. (Like, a decade ago.)

I guess the real question is which currencies do you want direct exposure to? Because picking a company is less than half the battle if the currency is really headed the wrong way.


Hi Robert - I wonder why Schwab dropped the capability? Fidelity offers it through their website (but not their desktop platform).

Not only do you have to get the company and currency right (or at least not horribly wrong), there are political / regulatory concerns. And language can be another big barrier to get over. I think I would limit my initial investments to Australia and the UK. Moving on to other asian countries and west european countries at some future point.

These would be long term investments for me rather than trading positions, so that should wash out some (but certainly not all) of the currency concerns.

I have experience buying foreign companies (whole or controlling interests) but none being a direct passive public investor. It's a lot easier (but not easy) to separate the wheat from the chaff when you get to have a team of crack analysts do detailed in depth due diligence on a prospective foreign investment. Having to rely on sparse (and possibly very sketchy) public info is a major concern. It may ultimately keep me from getting very far with this.

Ed
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I think Schwab dropped it because the brokers wanted a service they could provide that the site couldn't. As I said, it was a long time ago. Maybe more than a decade! I just remember you could definitely trade on Toronto via the website at one point and then they took it away.

I see you are thinking of sticking to the stronger currencies/political systems, UK / AUS, but is there anyone whose currency you think can appreciate against the USD in the next several years? Because getting that tailwind would greatly reduce company risk. Swiss Franc, British Pound are all that comes to mind for me. AUD and CAD are so commodity driven (their economies) there's little telling what will happen to their currency based on their economies.

I like Japanese companies for their exports, but I don't think the JPY is a good situation long term. I believe government debt there exceeds 2 times GDP now? (Might have that wrong, I sometimes get terms mixed up!)

The Korean Won seems like a good bet; Hyundai and Samsung are exporting "machines" and the rest of their car industry is strong, too. That brings a lot of heavy industry along with it, having a strong auto industry.
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Ought to throw in that this week I dropped a little money into VGK (VANGUARD FTSE EUROPE ETF) Mutual Fund. I specifically didn't want to spend too much time trying to figure out the regulatory risk, but I decided I ddi want some more exposure to Europe. I think I am early on the Euro valuation, but I am willing to put more into it later if the Euro really tanks. I think the combination of the low Vanguard fees and re-investment of dividends will work out okay for me.

Have to say, one of the benefits of the brokerages tracking cost basis for our 1099s nowadays is that owning a mutual fund in a taxable account is not the same huge headache it once was. (Still have to pay along the way for other peoples' turnover, but reporting a sale doesn't drive one as crazy as it once did.
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picking a company is less than half the battle if the currency is really headed the wrong way

Can't you borrow the currency? I've only bought a stock on a foreign exchange once (on the TSE), so I don't have much knowledge or experience in these matters, but it seems like the ideal would be to buy half of your foreign currency and borrow the other half, if that's feasible. I know IB lets you borrow currency, but not sure about other brokers. Just thinking out loud.

Neil
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Why bother with direct investment in foreign stocks through foreign exchanges when you can just buy ADRs?

Ed:

A lot of ADR's seem to be very thinly traded. IB also makes it very easy to trade on foreign exchanges. I bought BMW a while ago on the German exchange in Euro's. I haven't paid for the Euro's yet, so it seems like I'm getting a double whammy - I'm long BMW and short Euros. Of course the trick is to know when to cover the Euro short. I have a modest position in Vanguard European Stock Index Fund (VEUSX) and have owned a Vanguard Emerging markets index fund in the past. I'm looking at these two Vanguard ETF's for some emerging market exposure:

FTSE All-World ex-US Small-Cap (VSS) annualized 14.83% since 04/02/2009
FTSE Emerging Markets (VWO) annualized 7.68% since 03/04/2005

John
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see you are thinking of sticking to the stronger currencies/political systems, UK / AUS, but is there anyone whose currency you think can appreciate against the USD in the next several years? Because getting that tailwind would greatly reduce company risk. Swiss Franc, British Pound are all that comes to mind for me. AUD and CAD are so commodity driven (their economies) there's little telling what will happen to their currency based on their economies.

I like Japanese companies for their exports, but I don't think the JPY is a good situation long term. I believe government debt there exceeds 2 times GDP now? (Might have that wrong, I sometimes get terms mixed up!)

The Korean Won seems like a good bet; Hyundai and Samsung are exporting "machines" and the rest of their car industry is strong, too. That brings a lot of heavy industry along with it, having a strong auto industry.


Hi Robert - I like to believe that the commodity driven economies can strengthen their currencies vs the dollar over the coming decade. The current commodity weakness is something that is attracting me to Australia right now. Canada is another I may look at sooner than later. As well as some of the Nordics.

I think the GBP and CHF can trade flat to slightly ahead of the USD over time. I don't think I would lose sleep worrying about investments denominated in those currencies. I also think of them as more of a lifeboat currencies than a potentially tailwind generating currencies.

Japanese markets seem to have a lot of extra requirements for direct foreign investment. I also am not entirely comfortable with Japan's prospects. It's on my "skip it" list for direct investment.

For personal reasons, I will likely not invest directly in Korea. I found the business ethics / practices there to be sufficiently different from what I expect as to make me more than a little nervous. The experiences that shaped my views are more than 15 years old now, but still vivid in my memory. In addition, Supreme Leader adds another level of worry.

Ed
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Can't you borrow the currency? I've only bought a stock on a foreign exchange once (on the TSE), so I don't have much knowledge or experience in these matters, but it seems like the ideal would be to buy half of your foreign currency and borrow the other half, if that's feasible. I know IB lets you borrow currency, but not sure about other brokers. Just thinking out loud.

Hi Neil - I don't trade on margin in the US markets. I can't think of any reason why I would want to use margin on foreign currency denominated investments. It's not that there is anything wrong with using margin. I just don't have a need and don't want to take on the task of managing the risk of leveraging investments.

It may be a moot point for me anyway because I think (but I'm not 100% sure) that direct foreign investment at fidelity can't use margin and must be fully paid in cash.

Ed
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Hi John - Thanks for the input. I've primarily done my international investing through ETFs to data. I've tended to use iShare products because they can be traded commission free at Fidelity and they are typically relatively low cost (some only because of subsidies that need to be watched to insure they don't vanish leaving unacceptably high annual costs). Plus, anything that starts with a small "i" must be really cool and destined for success. Maybe owning "i" ETFs compensates for my having shunned all "i" products. Maybe not.

Ed
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Interesting article that makes a case (*1) for offshoring some of your investments. Light reading.

http://www.marketwatch.com/story/why-warren-buffett-is-wrong...

Ed

(*1) More of an opinion piece than a fact driven analysis, but I still found it to be entertaining low stress pre-dinner reading.....
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Interesting discussion, guys, though as a Brit and a HK resident, I'm not sure where I'm at is entirely relevant to you.

There's always MF Pro in Australia!

I follow Joe @Magyer on Twitter

https://twitter.com/Magyer

and see some of his ideas though do not subscribe to FoolOz. I'm not too sure where Oz is going, property prices are beyond hot, they are seeing a drop off in raw material production as China tightens which is shaking up mining but the beaches are great!

FoolUK does have some newsletters, I pick up one from my bro, not quite on a par with Pro - is anything? - and they were recently recommending firms such as Polar Capital and GVC Holdings.

if the currency is really headed the wrong way - sure but on what time scale? My Ozzie mates are delighted with the current weakness of the AUD (and NZD) on the back of domestic weakness and the strengthening USD. I'm functionally paid in USD, though actually HKD, so as long as I want my assets in GBP, that works for me. Yet many of the Pro stocks see currency headwinds, retain profits offshore, maybe picking the stock is more important than sweating currencies? Didn't the Swiss just scare the living daylights out of the markets with their move on the CHF?

And language can be another big barrier to get over. - why?

and possibly very sketchy - now that I understand. But really what's the point of limiting to Oz or the UK? Aren't they really proxies for the US? And many of their major stocks are available in the US. I believe iVish - John can clarify - is a fan of HDB. I guess that takes us into the realms of emerging markets, and we already have a dabbling:

http://boards.fool.com/1228/pros-wisdomtree-emerging-dgs-119...

here in Pro. Top ten EM countries in DGS:

1. Taiwan 26.68%
2. Thailand 11.32%
3. South Africa 10.01%
4. South Korea 9.62%
5. China 8.78%
6. Brazil 7.57%
7. Malaysia 6.08%
8. Turkey 5.77%
9. Indonesia 4.06%
10. Poland 2.59%

Robert already mentioned Korea, maybe Taiwan for tech - the home of Foxconn - then the list becomes "interesting" with political risk: Thailand (military rule), South Africa (reverse apartheid), China (corruption, opacity), Malaysia (cronyism), Turkey (religion), etc. Yet that risk might be the basis for ultimate reward.

Supreme Leader adds another level of worry - I think he's north of the border. And if he plays up, it will not just be South Korea that suffers.

How about Europe? Where jesterking1? When Angela finally realises that Germany needs to spend on infrastructure, it might be good to be in a few stocks there?

Anyone for Tencent, 0700:HK? I'm in.

Andy
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Hi Andy - Thanks for the perspective.

And language can be another big barrier to get over. - why?

Without something like Pro to provide trusted advice I have to do it myself. For me, that is much easier if the research materials are available in English. It's something that I can deal with over time, but the more languages that I have to translate, the harder it becomes.

But really what's the point of limiting to Oz or the UK? Aren't they really proxies for the US? And many of their major stocks are available in the US.

There may be a strong US/UK market linkage at the moment, but I could see future cases where that diverges (to the UKs favor) over an extended period of time. AU I see as something very different than a warm UK, which means I don't see the strong US link at the moment. I see lots of long term potential benefits from currently adding AU positions to ameliorate some US risk.

For me, AU, UK and (probably next) CA are easy starting points for a new (to me) investing approach. But I don't intend them to be an end point.

Supreme Leader adds another level of worry - I think he's north of the border. And if he plays up, it will not just be South Korea that suffers.

If Dear Leader decides to roll the dice or overplays his had, it will be bad news for the entire world, but it will likely be catastrophic for South Korea. Whatever the probability of any of that, I have other personal reasons for avoiding KR.

Ed
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Ed,

thank you for opening up a discussion pushing towards new horizons. An invitation to new perspectives promises unique individual perceptions.

My plans towards direct Foreign investment might take a while as I'm literally also planing to build a new house in place of the old once demolished later this spring.



Andy,

Did you open your 0700:HK position after last May?

I don't remember what happened back then!? New control measures?
They own WeChat which certainly is pervasive.

From my Global Gain days I still have a losers next to a few winners indirectly from China and Japan. My wife owns shares in a few Chinese companies directly... overall she feels the market do be opaque to rigged.

Maybe a gradual shift from real-estate to accelerating exchange holdings will bring increased transparency.

I'm a longtime HDB shareholder to which options moreover occasionally contribute income.

Daniel
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Sorry about the typos.

... moreover I see now there was a split back in may of 0700:HK.


Daniel
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I like to believe that the commodity driven economies can strengthen their currencies vs the dollar over the coming decade. The current commodity weakness is something that is attracting me to Australia right now. Canada is another I may look at sooner than later. As well as some of the Nordics

Really, Ed? Going all macro now? Is SWMBO traveling? ;-)

I remember Pro getting a load of (deserved) flack several years ago in the early years, when they picked a big Pharma company on the basis of a top-down filter, without doing any meaningful micro analysis (competitors, portfolio etc).

If you want to play geographies, then (I suspect but am quite prepared to be corrected that) there are loads of ETFs that can be used to do so very effectively.

But didn't we get into this thread out of a desire to identify specific OUS companies for diversification reasons?

If so, it sounds like the 'how' has been answered and so now you're down to the 'what'. In addition to the MF's foreign offerings with which I am not familiar, there is a UK publication with which I am also no longer familiar called Investors Chronicle. It is less focussed on education and amusement than the fool - or it was 15+ years ago when I was a subscriber - but it did a good job of reviewing and highlighting UK and European companies. It was a magazine that came every 2 weeks iirc. No idea if it is available electronically or not, but if I was going to get back in to European investing, it would be my first port of call.

Hope this helps

Cham
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Hi Cham - Thanks for the data leads. I'm also in the process of tracking down the equivalent of the SEC/EDGAR for different countries. At first blush it looks like there may be a significant amount of reasonably accessible information available in many countries.

Also, it appears that FT.com might have a fairly comprehensive database of financial data for international countries. It's behind a paywall, and that will be something to investigate as (if) I expand my efforts beyond the initial country or two.

I'll be honest and admit right up front that I have no idea if direct international investing is going to be worth it to me from a purely economic perspective. But it is motivating me to learn a lot of new things and I enjoy learning new things. All I've got to lose is time and money.

Ed
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Ed

You guys had a quiet day; thought there would be more comment overnight, well, overnight for me.

I subscribe to the standard level of the FT. They list 90k funds/ETFs if you want to bug Cham and go macro. Obviously extensive commentary on stocks, markets, stuff and detailed breakdowns. Investors Chronicle was mentioned earlier was mentioned; the FT links UK stocks to a brief recap from IC so, for example, if you look for DGE (Diageo, my preference instead of KO), you'd see this:

https://dl.dropboxusercontent.com/u/31466098/Investors%20Chr...

They seem to list most major markets and provide snapshots of things like the movers, eg in Oz:

https://dl.dropboxusercontent.com/u/31466098/ft_oz_movers.PN...

As well as Investors Chronicle, you might consider

http://www.iii.co.uk/

and/or

http://www.digitallook.com/

And for Daniel, I bought Tencent after May, not that it matters as 2013 or earlier would have been better. As an aside Naspers still own a third of Tencent, I think, and Naspers might also be an interesting company to consider.

Andy
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