How to diversify your portfolio: 5 global equity best ideas
Australian investors are particularly prone to home-market bias, which could see them miss out on opportunities presented by spreading their risk internationally.
Australian investors are particularly prone to home-market bias, which could see them miss out on opportunities presented by spreading their risk internationally.
We recently revealed that up to 75 per cent of Australia’s 11 million investors hold only local equities. While there are valid reasons for this home bias, the key point is that investors may be failing to spread their risk.
What’s more, broadening your investment horizons can be lucrative, says Clint Abraham, associate director and portfolio manager with Morningstar Investment Management Australia.
"Investing internationally gives us access to an enormous and diverse range of companies," he says, "which in many cases are more attractively priced than peers in the Australian market.
"Considering that roughly 60 per cent of the Australian sharemarket is comprised of financial and mining companies, investing in different countries and sectors can help with diversification."
Isolation risk
It’s a sentiment echoed at Platinum Asset Management, voted Morningstar Australia’s most recent fund manager of the year. Its chief investment officer Andrew Clifford says that as the world changes, home bias risks isolating Australian investors.
"There’s this world of opportunity out there but we’re not taking advantage of them as investors.
"Rather than Australian banks, there’s Indian banks. Rather than Australian retailers, there’s Chinese ecommerce. The missed opportunity by looking at home is that we’re not taking advantage of the really interesting things happening in the world," Clifford says.
By looking at home, we’re not taking advantage of interesting things happening globally.
Global stocks: food for thought
Looking at various regions, among our list of selections for the Americas is multinational manufacturer Procter & Gamble. Following the company’s multi-year effort to cull around 100 brands from its mix (leaving it with 65 brands), we think the firm is poised to benefit from an enhanced focus on its highest-return opportunities. It carries a five-star Morningstar Rating and is trading at 20 per cent premium to our fair value estimate of $98.
Another selection in the consumer defensive sector is General Mills. The consumer food company’s leading share across several domestic food categories, including ready-to-eat cereal (17 per cent of revenue; 30 per cent market share), where it owns three of the top five brands in the US, and yoghurt (15 per cent of revenue; 18 per cent market share), has helped form a wide moat. It carries a five-star Morningstar Rating and is trading at 24 per cent premium to our fair value estimate of $59.
Among China stocks, Great Wall Motor Co is the Middle Kingdom’s most profitable automotive original equipment manufacturer. Over the past five years, adjusted return on invested capital averaged 21 per cent, far exceeding its cost of capital of 11.3 per cent. Superior market positioning and effective cost controls are key to Great Wall’s tremendous success. It carries a five-star Morningstar Rating and is trading at 56 per cent premium to our fair value estimate of $15.50.
In Europe, Imperial Brands has made great strides, reducing its total brand count by 32 per cent by the end of fiscal 2017, and targets a total reduction of 50 per cent by 2020. Execution on the brand migration program has been impressive, with a consumer retention rate of about 95 per cent. The streamlined portfolio should allow for more focused brand investments, and sustainable cost reductions. It carries a five-star Morningstar Rating and is trading at a 31 per cent discount to our fair value estimate of 3900 pounds.
In healthcare, Swiss giant Roche is in a unique position to guide global healthcare into a safer, more personalised, and more cost-effective endeavour. As the market leader in both biotech and diagnostics, the company’s drug portfolio and industry-leading diagnostics form sustainable competitive advantages. It carries a five-star Morningstar Rating and is trading at 32 per cent premium to our fair value estimate of 325 Swiss francs.
Full detail about these stocks features in our Global Equity Best Ideas, a monthly report covering up to 80 international stocks, available to Morningstar Premium subscribers.
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Lex Hall is a Morningstar content editor, based in Sydney.
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