A contrary approach to going global

The arguments in favour of having a little international diversification are well known, but their proponents have had their patience severely tested in recent years. It’s been hard staying loyal to the cause when international markets have mostly been returning a few per cent a year while the resources-rich local market delivered four straight years of 20 per cent-plus growth – until recently of course. And the Australian dollar’s unrelenting rise, particularly against the US dollar, has compounded the problem, further diminishing the international performance in local terms.

No surprise, then, that the benefits of foreign share ownership have given way, in managed fund advertisements, to new hot cakes like agribusiness and green energy. But this shift is just the sort of thing that should pique the interest of contrarian investors; the case for some international diversification is as strong as ever, and the value on offer is better than it’s been for years.

Contrarian investors should now be looking closely at international listed investment companies (LICs).

Templeton Global Growth Fund is the most diversified of the international LICs we cover. It owns shares in roughly 100 different companies. We like the fact that the company doesn’t hedge its currency exposure – because hedging reduces some of the diversification benefits – but that’s worked against it recently.

Because of the fall in the value of its portfolio, the company is currently restricted from paying a dividend. That’s happened before, in 2003-04 after the last bear market, for example, but the stock has also been a big dividend payer in the good years, such as the late 1990s. In fact, historically the best time to buy this stock has been when it wasn’t paying dividends.

Templeton Global has the lowest fees of those covered in this article: a base fee of 1 per cent and no performance fee. It’s trading at a 19 per cent discount to its June 30 net tangible assets (NTA) of $1.08. There’s also 7.7 cents of deferred tax assets not included in that NTA, which should add value over the years.

Chief investment officer of the Magellan Flagship Fund, Chris Mackay, has bought approximately 5 million shares since November 2007. Magellan is far from a conventionally diversified portfolio, with more than 60 per cent of its assets invested in its top five holdings. But the companies, while generally listed in America, are big global brands like American Express, Nestlé, Yum! Brands (owner of KFC and Taco Bell) and eBay.

Mackay and partner Hamish Douglass are big fans of Warren Buffett and, like the inspirational sage, they look for businesses with big moats and high market shares.

The fees are high, with a base fee of 1.25 per cent and a performance fee of 10 per cent of outperformance, subject to a few additional hurdles. But the company is well managed and the stock is cheap.

The most recently reported post-tax NTA was $0.68, so the current price of $0.605 offers an 11 per cent discount. But, as with Templeton, there’s 10 cents worth of deferred tax assets which will provide tangible benefits over the years.

Hunter Hall Global Value has an even more unusual approach to portfolio diversification. It has a decent spread of companies, but they’re not names you’re likely to recognise. The top five holdings are Swedish gas explorer PA Resources, Korean education group Woongjin Thinkbig, French steel group Vallourec, Korean energy distributor Samchully and Kiwi dairy farmer NZ Farming. But don’t let that scare you – the manager’s track record is impressive.

The company has been buying back stock aggressively recently, having already bought back nearly 20 per cent of its capital at opportune times (when the discount to NTA was greater than 10 per cent).

The June 30 NTA was $1.01. Some of the stocks in the portfolio have fallen a bit in the past few weeks, but the discount to NTA of 20 per cent provides a fat buffer for this and compensation for the high fee structure (1.5 per cent base, plus 15 per cent of outperformance).

If you or your clients are interested in having some portfolio exposure to international stocks, these three LICs are our pick of the bunch. You get diversification, talented management and, best of all, they’re available at reasonable prices.