Broadening horizons

There may be one rather obvious way to improve my investment performance that I haven’t yet exploited. It has been on the back of mind for some time. This is to broaden the universe of stocks I invest in to beyond those that trade on the London Stock Exchange. I think the benefits of this have the potential to be quite dramatic.

The advantages of a broader horizon

The advantages of investing in businesses listed on foreign exchanges are pretty obvious:

  • By expanding the universe of shares I screen, I can improve the quality of the shares on my watch list. This means that on average I should end up investing in higher quality businesses.
  • I can also expand the watch list itself. As the watch list grows, the chances of me identifying decent buying points in time to exploit them also grows. This allows me to raise the bar on what I think a decent opportunity is.
  • I benefit from geographic diversification. Stocks listed in different countries will have less correlation with the UK market. This means that I should have more opportunities to profitably invest even when the UK market is not doing so well. While the UK market is fairly geographically diverse, in that many of the businesses listed on it have international operations, there is still a big skew to UK-centric businesses and to financials and natural resource companies.

In addition to this, the wonderful Stockopedia has extensive coverage of different global markets, allowing me to run the same screens as I do in the UK to identify candidates for my watch list.

The disadvantages

There are some disadvantages, in the form of costs, risks and obstacles, of venturing beyond the London Stock Exchange. These have held me back from doing so until now.  On further investigation, they are probably not as important as I thought.

First and foremost, I can trade international stocks within my ISA (I hadn’t realised this!) The range of exchanges and shares I am able to trade in within my ISA is actually surprisingly large. However, I don’t quite understand exactly why I can trade some shares and not others and this has been a little frustrating. I did quite a bit of research into one promising prospect (Trigano – listed in France) only to find that I could not buy it.  The other practical downside is that I am unable to make direct online trades in some markets so I have to use a limit order or call my broker – though this is not really a big deal.

Trading costs are larger for foreign listed companies as, in addition to the costs I face for UK shares (commission, tax and spread), my broker takes an additional cut in terms of the exchange rate I face when buying foreign currency denominated assets. However, my initial tests suggest this isn’t very large.

The major concern holding me back from investing abroad was the additional difficulty I might face in selling shares e.g. if there was a profit warning. On looking into this a bit further, it seems the only difficulty I actually face in practice is the need to call my broker in this eventuality. Needless to say I don’t think this is a good reason to be put off in practice.

Finally, I have had a quick look into whether I am equally able to get up to speed with news on foreign companies given possible differences in reporting and/or language barriers. I’ve found that this isn’t really an issue as most companies report in English and financial reporting services (e.g. Reuters etc.) have good international coverage of different stock markets.

Overall, I think the additional costs and risks suggest I should have a somewhat higher bar for investing abroad, but the difference is not very material and does not outweigh the additional benefits identified above.

Where to invest?

Broadening my investing horizon from the UK to the rest of the world is a little overwhelming. I’ve therefore decided to slowly expand my coverage in stages. Initially I’ve decided to also look at European stocks. If all goes well with this I intend to later expand my coverage to the US and possibly then to Asia too.

New additions to the watchlist

I’ve carried out some screening of European stock markets to identify some new shares for my watch list. In doing so, I’ve had to decide whether I should keep the number of shares on the watch list fixed (so for each addition I would eliminate an existing member of the watch list) or to expand the watch list further. A larger watch list means a greater chance of identifying decent buying points but at the expense of lowering the bar for inclusion. The additional constraint is that more stocks on the watch list means more work to monitor them, updating their scores on the spreadsheet periodically. I’m minded to allow the watch list to grow to some extent but I’m not sure by how much in practice yet. The top limit is ultimately going to be 100 stocks or fewer, but that this is going to be determined in practice by how much work it is for me to monitor.

To start with, I’ve carried out a screening of European stocks, following the principles I set out in an earlier post. This has thrown up quite a few candidates that I’ve then looked into in more detail. Emerging from that process so far are the following stocks that I think are of sufficient quality for the watch list:

  • Atoss Software: Atoss is a German IT business providing workforce management software. I was impressed on reviewing its website and latest annual reports and believe that it is likely to benefit from a competitive advantage due to the quality of its software as well as the costs its customers would be likely to face if they wanted to switch to a competitor. It makes consistently enormous returns on capital and margins and the prospects of continued growth look good.
  • Euronext: Euronext is a European stock exchange resulting from the merger of the Paris, Amsterdam and Brussels stock exchanges. It since also acquired the Lisbon stock exchange. I think it fairly obviously benefits from a substantial competitive advantage and is the dominant European stock exchange. It is extremely profitable. I think it has decent prospects for further growth, though its growth is dependent the volume of trading that occurs on the exchange, which means it is correlated with the performance of European markets to a large extent.
  • Melexis: Melexis is a Belgian company that designs and manufacturers semiconductor devices for automotive electronics. It appears to have a strong competitive advantage from its IP and makes very healthy returns on capital and margins. I anticipate that the demand for its products is likely to experience secular growth for a long time to come.
  • Nemetschek: Nemetschek is a German software developer for the construction industry, specialising in CAD and other similar products. It appears to be an industry leader in what it does though likely faces some competition. It has high returns on capital and margins and has a good track record of growth.
  • Rational: Rational is a German company that provides technology products for thermal food preparation for industrial and commercial kitchens. Rational oozes quality and is very clearly the world leader at what it does. Returns on capital and margins are very high and growth has been very consistent over the longer term. I am pretty sure this would make a very decent long term investment, though it does appear to be pricey right now given its likely growth rate.
  • Washtec: Washtec is a German company that makes technology for car washes. It looks to be the world leader in this particular niche and so appears to benefit from a substantial competitive advantage. It has huge returns on capital, decent margins and a good recent track record of growth. The share price has risen almost 9-fold over the last five years though I think it could still have quite a way to go.


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