My Overseas Guidebook

Over the past few months I’ve visited several blogs when one topic in particular has been addressed. For the past year or two I’ve been expanding my international holdings to my current mix which is highlighted below. Time In The Market got me thinking with his comment.  Although he tends to be more an ETF investor, he was experiencing similar trends as I.  Then there was Bert’s CM purchase.  He was agnostic to the CAD/USD correlation probably because the US and Canadian markets are usually tightly correlated with exchange rates.  Then there was Tawcan, illustrating his top five.  In his post he mentioned his use of ETFs for international diversification.  Finally there was The Dividend Pig musing on portfolio hedging.

My endeavors in overseas investing have delivered an education of some obscure items that hopefully will benefit an investor looking out of country.

Create a Strategy

Before starting, perform your due diligence and run an issue through your screening algorithm.  Then ask the question, “Is my home currency overvalued?”.  In the case of US investors, the simpler question is “Do you believe Trump’s policies will result in a stronger or weaker dollar?” and secondarily, “To what degree?”.  I like to use foreign exchange as a tailwind.  But by investing in dividend stocks in the event I’m wrong the sting is mitigated.

Be Aware of Monthly Deviations

Currency fluctuation will result in either positive or negative moves in both portfolio value and dividend amounts.  As an example January to August 2017 saw the US dollar depreciating against most currencies.  One example is the Euro which has appreciated 8.95% since last October – making US exports cheaper and imports more expensive.  One anomaly with the currencies I track – the relative value has been stable when compared to each other whereas the US dollar has been the outlier.  Also many companies pay annual dividends or interim/final (with variable amounts) dividends.  Some are capped at a percentage of profits.

Be Wary of Tweetstorms

In recent months, fluctuations have occurred as the result of Presidential tweets.  Most recently was the posturing on NAFTA.  This was a buying opportunity for Canadian and Mexican issues.  Conversely, dividends received took a hit.

Understand the Tax Implications

The US engages in tax treaties on a country by country basis which establishes the withholding rate and the application of said rate.  Ones that I’ve found with caveats include Canada (15% unless in an IRA and a part of DRS – then no withholding), Australia 15% (unless reduced via franking), Singapore – verify on a company basis whether dividends are qualified (may impact the decision to place in a taxable or tax-deferred account) and Switzerland (15% if registered, 25% if not – check your broker).  The good news is that at tax time foreign withholding can be credited (with some limits) under current law.

Stay Abreast of Local Events

This can be issues not normally aired in the US such as the Australian deflation discussion (generally groceries) or the Customs workers strike in Chile.  These wildcard issues have the ability to impact the profitability of the investment.

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The lessons I’ve learned have been many and these are but a few.  However, foreign investing can be rewarding as long as there is an awareness.

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Overheard in Texas

Though not as juicy as THE conversation between attorneys in DC a few weeks ago, the opportunity to eavesdrop landed in my lap a couple of weeks ago.  Sitting across from me at my local Starbucks were three individuals.  Although not aware at the time, (or I would have paid closer attention sooner), I fast realized one was a locally based money manager, the second an aide of some sort (perhaps a lobbyist) and the third a Republican Congressman (not from my district – but the next one east of here).  They were engaged in a spirited discussion when some topics arose that got my attention (and my phone set to take some notes).

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A Look ‘Down Under’

It’s been about two years since I first invested in Australian issues, choosing to take a slow approach while I obtained some practical experience first hand.  Certainly many of the yields are good, but the economy – much like Canada – is resource based.  Then there’s the whole franking deal.  Plus the foreign exchange conversion – but this has been relatively stable at 75 – 80 cents per USD.  Add to that, until recently the selection was limited to ADRs or using a cost prohibitive foreign desk.

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September 2017 Update

This month for my portfolio was choppy to say the least.  Impacts were the start of calculating hurricane damage, data breaches, fears of a primary tenants’ possible bond default, continuing geopolitical fears and a strengthening of the US dollar at month end (again). With a portfolio currently weighted 15.35% pure international and a little overweight towards Texas it’s not too surprising the S&P index outperformed by increasing 1.93% versus my 0.36% increase.  For the year I’m still ahead by 2.9%.  On the other hand, dividends received set a new monthly record.

Headlines impacting my portfolio (bold are owned):

  • 9/7 – SQ to apply for UT banking license as an industrial loan co.
  • 9/7 – BANF acquires First Wagoner Corp and First Chandler Corp
  • 9/7 – EFX announced massive dB hack
  • 9/11 – UNH makes formal offer to acquire BANMEDICA.SN
  • 9/11 – Cdn approval for POT/AGU merger received. awaiting  US, India and China.
  • 9/14 – MMP forms JV w/ VLO for marine termimal in Pasadena, TX
  • 9/21 – GBL (Mario Gabelli) increases stake to 7.74% in BATRA
  • 9/25 – GE sells industrial solutions unit to ABB
  • 9/28 – DGX acquires Shiel Medical Laboratories from FMS
  • 9/28 – IVZ buys Guggenheim Ptnrs ETF business
  • 9/29 – AIG sheds SIFI designation

Portfolio Updates:

  • added to FFIC prior to ex-div on market weakness (N. Korea)
  • added to NWFL (stock split)
  • added to AROW (stock dividend)
  • added to HOMB and lost SGBK (merger)

Dividends:

  • September delivered an increase of 47.56% Y/Y with the about half of the increase being attributable dividend increases and the other half purchases with an assist from a merger premium.
  • September delivered an increase of 16.87% over last quarter (June).  Semi-annual payers, a purchase and dividend increases being the reasons.
  • Declared dividend increases averaged 10.98% with 65.54% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
  • YTD dividends received were 92.61% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in late October.

Spinoffs:

Spirit Realty Capital (SRC) has been announced.

Mergers:

AGU/POT (Nutrien) remains pending, SGBK/HOMB completed September 26th.

Summary

With the primary goal of exceeding last year’s dividends in sight, my focus turns to developing a strategy for 2018 – which will likely hinge on the degree of success – if any – to be expected in Year 2 of this administration.  Otherwise I’ll probably continue with the current adding to the underweight holdings unless news erupts.

‘Tis The Season

It’s getting to be that time of the year and since I don’t think the grandkid reads this thing, I figured I’d share one of the presents she’ll be getting.  Just to review, each year since she came to live with us she has received shares in a company as a gift. This gift has been purchased in a company DRIP, established as a Custodial Account of which I’m the custodian. Generally, the company is one in which she can relate, i.e., Trix was her favorite cereal as a kid hence the General Mills stock.

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It’s Not Our Fault

There is a trend occurring that I find troubling to say the least. It is the inability of people in power – essentially those in control of a given situation – to take ownership of a failure. Gone are the days of Harry Truman who popularized the concept of accepting personal responsibility rather than assessing blame with his famous desktop sign stating, The Buck Stops Here. We accept the fact that in politics the notion of assigning fault to a predecessor is commonplace, although not necessarily right. It is what it is. To that end, I feel this is but one reason the majority of citizens have a significant disdain for politicians.

Recently I’ve noticed an increasing number of people in business who appear to subscribe to this political theory.  Forget about asking forgiveness of their customers and outlining remedial actions to remedy the problem. In my book, corporate officers who make the choice to deflect blame rather than accepting responsibility should be replaced as this easily could be a sign of more significant problems simmering beneath the surface.

The first resident of my Wall Of Shame is Reggie Fils-Aimé, president of Nintendo of America. In an interview discussing delays on the Switch, said, “We don’t want to have a consumer disappointed by not being able to get one for the holiday season. But managing that complex supply chain is a challenge.” and “… what I don’t know is what the demand is going to be. And there is a potential that demand is going to outstrip supply.”

Regarding the SNES Classic, he blamed problems “outside our control” at retailers. Looks like they could use a new forecasting methodology, less complex supply chain and greater control over the retail channel? Perhaps even communicate with buyers.  Maybe the answer is much simpler – as in reshuffling maybe the C-Suite?
The second entrant is Rick Smith of Equifax which fessed up to a massive data breach on September 7th. The hack was discovered July 29th (and began in May) and about August 2nd and 3rd, three executives (reportedly in a planned 10b5-1 sale) sold about a combined $1.8m. While the optics don’t look good on this event, it only gets better.

They then blamed a flaw in the open-source software created by the Apache Foundation (STRUTS) without disclosing whether the patches released by Apache since March were properly applied. In a response September 14th, Apache said they weren’t. Also September 14th, CNBC reports that ‘admin’ was used as the database password in Argentina.

The wisdom of using open-source versus proprietary software should be questioned as well as the sheer stupidity exhibited by their administrators.  Then in an attempt to limit liability, their “free” credit monitoring had a provision limiting the legal actions affected consumers could use.  This was subsequently updated with a statement saying, “enrolling in the free credit file monitoring and identity theft protection products that we are offering as part of this cybersecurity incident does not prohibit consumers from taking legal action.” At week’s end, two exeutives “retired” effective immediately.  But not the CEO.

The Fool highlights some other examples but none are nearly as brazen as these two.  I do not own Nintendo (NTDOY) but have them on my watch list.  Perhaps their actions are little more than a misguided marketing ploy to stimulate sales.

I do own a small slice of Equifax (EFX) which is now under water.  As this space is controlled by the tri-opoly of Equifax, Trans Union (TRU) and Experian (EXPGY) there is not significant competition.  In fact, most US mortgages are scored using a merged report of these three bureaus.  So my game plan is to ignore TRU (no dividend), wait to add to my EFX position (so as not to catch a falling knife) and look closely at initiating a position in Experian.  There are rumors that EFX may now be a takeover target as well.

Update 26 Sep 2017 – Rick Smith CEO of EFX has retired effective immediately

So any thoughts on the data breach or other blame games?