How to easily measure geographic diversification

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Mouly
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How to easily measure geographic diversification

Post by Mouly »

For stocks, the same way I have targets for a certain balance across sectors, I also have targets for market location. I break down into three groups: Canada, USA, and Other.

Up till now I have been doing this by considering the location of the stock exchange. So Canadian stocks are those I buy on the TSE, US stocks are those from US market, and Other are those that are ADRs on the US market.

Now that's certainly about the simplest way to do it, but are there significantly better ways that can be done somewhat simply? Of course the first thing you have to decide is WHY you diversifying internationally. I'm assuming the primary reason is to reduce risk. And the way you are reducing risk is by increasing the number of markets your investments are working in, i.e if any one economy tanks it does not impact a large part of the portfolio. So by that train of thought it looks like I would want to analyse companies by where they make their earnings. So right now if I own Toyota, I consider it a 100% entry in the Other bucket. But if I could somehow learn that they got x% of profits in Canada, y% in USA, and z% Other then I would allocate it that way.

Is there an easy way to learn those earnings breakdowns geographically? Then I would revisit/update those values something like annually.

Now I know every approach to this will have pluses and minuses and that there are simoultaneous things to consider, things like dictatorships, emerging countries, etc. I think I can only consider one as the primary, in my case I am leaning towards the earnings by country. The others would be in the back of my head while making decisions.

So two questions: Is there a better way than the earnings approach to breakdown by location? Where can I find those earnings numbers?

I'll be happy to learn that I'm just re-inventing a wheel that has already been addressed , but its something I've not considered before.

<I also consider other diversification measures when investing, small cap vs large, growth vs value, etc. But right now I just want to consider diversification by country>
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AltaRed
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Re: How to easily measure geographic diversification

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Mouly wrote: 14 Sep 2017 13:25 Is there an easy way to learn those earnings breakdowns geographically? Then I would revisit/update those values something like annually.

Now I know every approach to this will have pluses and minuses and that there are simoultaneous things to consider, things like dictatorships, emerging countries, etc. I think I can only consider one as the primary, in my case I am leaning towards the earnings by country. The others would be in the back of my head while making decisions.

So two questions: Is there a better way than the earnings approach to breakdown by location? Where can I find those earnings numbers?

I'll be happy to learn that I'm just re-inventing a wheel that has already been addressed , but its something I've not considered before.
It is a subject that has been discussed in FWF, other forums, and various Internet articles. I know of no easy way to break down geographic split of operations, and specifically earnings which I believe would be the right measure. Some companies break out sales, revenue, operating costs, etc. by geographic region but I've not known them to do so at the earnings level.

I see geographical diversification more as a currency hedge, and to a lesser degree economic hedge. Will I make better investing decisions by being able to break down how much of TD's earnings are attributable to ex-Canada? I doubt it since I am not certain what the right allocation split should be in the first place. Is 15% Int'l right? 10%? 13.45% if I could split company earnings by geographical location? Not likely and perhaps worse decisions because I become focused on the trees rather than the forest.

IOW, I don't see what is to be gained beyond a high level understanding that much of the TSE 60 and S&P500, and FTSE 150(?) in Europe are multi-nationals with International operations. Indeed, that high level thinking causes me to NOT hold emerging markets as a separate holding because I know that a good portion of emerging market economies is already reflected in multi-national companies operating in those places, and often is a small component of multi-national earnings anyway.

I use that same high level thinking to generally pick Cdn equities with ex-Canada operations since I feel Canada's economy will continue to experience headwinds, and especially in recent times due to unfriendly gov't policy (e.g. carbon tax, raising minimum wage, JT's new tax proposals, lack of political will to undertake national projects..and on and on it goes).

So... I just allocate my equities on the basis on where they are domiciled recognizing:
1. I have more International component than my AA says due to multi-national operations and especially emerging market component
2. I might have more US component than my AA says due to Canadian multi-national operations stateside, somewhat offset by 1. above from the likes of Apple, MMM, Microsoft, etc.
3. I have less Cdn holdings than my AA would suggest due to 2. above.
4. I have no practical choice with my ETF holdings (which are almost 50% of my portfoiio) and only break down geographic regions by company domicile anyway.

I don't know what would be gained if I was able to dig within.... Nothing I suspect.
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