Is there really a need to invest in foreign companies in the name of geographical diversification?

This year, Singaporeans celebrate five decades of nation-building. Development, transformation and progress of this once fishing village into a modern city has been nothing short of an economic miracle. As we look forward to the next 50 years, how will SG100 be like? Will Singapore still prosper? Will Singapore still be relevant in the distant future? It is no secret that the Singapore market is lagging other major global indexes in recent years. The 2013 'penny stocks debacle' has somewhat dealt a crippling blow to the confidence of local retail investors. So naturally, people are starting to shift their funds towards foreign stocks which offer potentially better returns and diversification as there is no guarantee that a tiny island Singapore will still be around 50 years from now.

Well, in my opinion, blue-chips such as DBS, UOB, OCBC, SingTel, ST Engineering, SingPost and CapitaLand have already spread their businesses deep into other countries for years. In fact, some of them are not as 'local' as they seem although they have the term 'Sing' in their names. For instance, SingTel gets the bulk of its annual revenue from overseas subsidiaries like Bharti in India and Optus in Australia. Some REITs offer exposure to other countries too. For example, Mapletree Logistics Trust has a massive portfolio of logistics real estate spanning across Asia.

So do not fret. You can still achieve geographical diversification by being vested in these 'local' companies.

Building your own 'ETF'? Why not?

Recently, more local investors are warming up to the benefits of ETFs, more specifically the STI ETF. In general, ETFs offer diversification and low cost. In his will, even Warren Buffet endorses the merit of owning low cost ETFs from Vanguard. He is confident that over the long run, a low-cost index fund will outperform actively-managed funds with high fees.

However, simply buying the STI ETF is not really optimal for local investors. When Warren Buffet said buy an index fund, I guess he is referring to one which tracks the S&P 500 index. That particular index is made up of Fortune 500 companies! Being vested in the top 500 corporations in USA is great diversification. Now, compare it to the STI's meagre 30 companies. So, if you live in America, for sure you should invest in some kind of S&P 500 ETF. Unfortunately, I live on a tiny island nation. 30 companies is not really great in the diversification department.

Secondly, the constituents of STI are not equally weighted. The three local banks (DBS, UOB, OCBC), Singtel and Keppel make up almost half of the index. So, if an investor is already vested in these five companies,  adding STI ETF to his portfolio will lead to concentration risk instead of diversification. So remember, if you are buying the STI ETF, you are mainly investing in these five companies.

Lastly, and most importantly, there are a few companies (Noble, Yang Zijiang Shipbuilding, Keppel Corp, Sembcorp, SIA, Capitaland) in the STI which I do not wish to own. Not to mention the STI totally lack any healthcare stocks which goes against my investment strategy. Buying the STI ETF is like going to a buffet and being told you have to try all the dishes, whether you like them or not.

In my opinion, it is better to build your own portfolio according to your investment vision, conviction and financial needs. Who says you cannot build a portfolio as if you are building an ETF. For me, I prefer to customise my portfolio into a dividend-oriented ETF or income-oriented ETF.


DK