The Lemon Fool

Is there any reason for investing primarily or exclusively in shares listed on the London Stock Exchange? Or in FTSE trackers? Surely the main idea is to invest in what is most likely to make you the most money?

MrUnsure wrote:Is there any reason for investing primarily or exclusively in shares listed on the London Stock Exchange? Or in FTSE trackers? Surely the main idea is to invest in what is most likely to make you the most money?

Totally correct! At least for those of you who "know" what is likely to make the most money. For the other 99.9% of us, we're quite happy with trackers and the like.

--kiloran

kiloran wrote:For the other 99.9% of us, we're quite happy with trackers and the like.

Obviously no one knows which shares are guaranteed to "win". Hence the popularity of trackers. But why FTSE trackers over, say, world or S&P trackers?

MrUnsure wrote:

kiloran wrote:For the other 99.9% of us, we're quite happy with trackers and the like.

Obviously no one knows which shares are guaranteed to "win". Hence the popularity of trackers. But why FTSE trackers over, say, world or S&P trackers?

Isn't it the same problem? For the S&P,do you know if the S&P will do better than the FTSE? Do you know what will happen to the GBP:DLR exchange rate?

There is no right answer, so many people just feel more comfortable with a"local" FTSE tracker

--kiloran

kiloran wrote:Isn't it the same problem? For the S&P,do you know if the S&P will do better than the FTSE? Do you know what will happen to the GBP:DLR exchange rate?

There is no right answer, so many people just feel more comfortable with a"local" FTSE tracker

Is the exchange rate relevant, given that most big companies have earnings in various currencies? So they just gets converted to whatever currency your tracker is in.

Sure, if the share you invest in pays its divi in dollars and the exchange rate goes against you in that period, you will receive less divi money. Which is why some funds which invest internationally are hedged to protect against this uncertainty. You, of course, pay a small percentage for the privilege of the hedging.

You get a better spread of risk by investing in the global index than you do investing in the UK, which is currently about 5% of the global index. Here are some videos from a former hedge fund manager who advocates doing just that:

https://monevator.com/this-former-hedge ... ck-videos/

There is, however, a case for over-weighting your home market:

https://www.vanguard.com/pdf/ISGGEB.pdf

The average UK weighting for UK institutional investors is about 25%.

I believe there is a good case for being over weight in the UK. We've just been through a ten year bull market for US stocks and by the metrics looks like it's over valued. You can argue both ways.

But if there is a correction in US tech stocks, everyone after will be saying they saw it coming. Ftse 100 has been out of fashion cause of Brexit and UK economy under performing. The blue chips high yield giants there will be a safe haven in a correction. BP, Shell, Hsbc etc are very high dividend payers with good yields.

Having said ll that I'm mainly in global trackers as well

airbus330 wrote:Sure, if the share you invest in pays its divi in dollars and the exchange rate goes against you in that period, you will receive less divi money.

Disagree. In the long run, it doesn't matter what the divi is paid in. It matters what the company profits are earned in.

75% of FTSE100 profits are now earned overseas anyway. So the FTSE100 is a slightly-UK-biased global tracker. Probably just about perfect for someone who lives and spends in the UK.

Of course, that's true of other stock markets too. AIUI well over 50% of NYSE earnings are also foreign (ie Non US). It's actually quite hard to buy truly one-nation shares. Some REITs perhaps?

Gryff

One, perhaps minor, issue is that of withholding taxes on dividends taking an irrecoverable slice out of every dividend. But I too have over the years shifted more to overseas but mainly through ITs like SMT and trackers like VWRL.

Moving away from trackers (though they do make sense) and back to investing in individual shares, it can be more difficult to trade in overseas companies.

Basicaly you need a broker who trades in them. Possibly more than one broker to deal with different countries.

Likewise withholding tax has been mentioned. There is a 35% withholding tax on Swiss dividends, which effects anyone with holdings in Nestle. There is an agreement so in theory you can reduce that tax rate to 20%. However the paperwork is horid. Most give up.
Here is a link to an article that I read.
https://www.investorschronicle.co.uk/ta ... ing-chore/

This would be a reason "for investing primarily or exclusively in shares listed on the London Stock Exchange", as in the OP.

Now it's a different matter if you invest in IT's, Unit Trusts, ETF's or trackers. Hence those who desire international exposure often go that route. It does however seperate you from the companies that you are investing in.

gryffron wrote:In the long run, it doesn't matter what the divi is paid in. It matters what the company profits are earned in.

75% of FTSE100 profits are now earned overseas anyway. So the FTSE100 is a slightly-UK-biased global tracker. Probably just about perfect for someone who lives and spends in the UK.

Of course, that's true of other stock markets too. AIUI well over 50% of NYSE earnings are also foreign (ie Non US). It's actually quite hard to buy truly one-nation shares. Some REITs perhaps?

But the discussion isn't about "pure one-nation British" shares, but about investing primarily or exclusively in shares listed on the London Stock Exchange, and there is a "common sense" reason for doing so, although I'll readily agree that common sense doesn't always work out for the best results and happily admit that I've got stacks of non-UK ETFs, OEICs & ITs, indeed, am more "global" than UK...

Anyway, it's this ... you live in the UK and invest and spend mostly (aside from holidays) in GBP, and are very likely saving/investing for your old age in GBP.

Now, who is more likely to try and optimise shareholder returns in GBP:

a) the directors of a company whose accounts are reported in GBP, shares are listed in GBP, dividends paid in GBP -- and where the directors' share options and/or bonuses are dependent on the company's GBP performance,

or

b) the directors of a company that has no such GBP connections at all?

Note, that's nothing to do with where the company gets its earnings. The directors of company (a) may decide the best way to optimise shareholder returns in GBP is to open up shop in Timbuktu. Also note it's not necessarily to do with listing on the LSE. Some LSE listed companies, e.g. the oil majors, report etc in US$.

And, of course, for all of company (a)s best efforts, company (b) may still end up providing the best returns in GBP, even though they were making no specific effort to do so....

mc2fool wrote:
Now, who is more likely to try and optimise shareholder returns in GBP?.

I don' t follow the logic of your thinking. When the central bank of a foreign country raises their domestic interest rate then for a UK investor their return in GBP will rise if the share price remains stable in local currency. So surely that makes a case for buying foreign shares in a country such as Sweden for example which has great companies but currently has interest rates set lower than UK?

I understand the arguments for investing locally, but investing purely in the FTSE100 is excluding a huge number of highly successful companies worldwide. For example the biggest creators of wealth in the last few decades have been US tech companies and, personally I don't see why deliberately choosing not to invest in them is a good plan if your aim is to gain a long term increase in wealth.

I follow a guy on Youtube who made a video recently about home country bias and it's effect on returns: https://www.youtube.com/watch?v=qYedjI03Q0g

If the British economy does well, our stock market is likely to do well and vice versa. If the British economy does well, you are likely to be able to find a job, if you are or working age. Alternatively, if you are retired, your pensions are likely to paid in full. If the British economy does badly, you do not want your investments to do badly too.

colin wrote:

mc2fool wrote:
Now, who is more likely to try and optimise shareholder returns in GBP?.

I don' t follow the logic of your thinking. When the central bank of a foreign country raises their domestic interest rate then for a UK investor their return in GBP will rise if the share price remains stable in local currency. So surely that makes a case for buying foreign shares in a country such as Sweden for example which has great companies but currently has interest rates set lower than UK?

So are you seriously telling the forum that you believe that the directors of Swedish companies are trying to optimise shareholder returns in GBP?

Or perhaps you didn't read and/or answer the actual point posted -- or any of the equivocation around it -- as you seem to be answering a totally different point altogether ...

mc2fool wrote:

colin wrote:

mc2fool wrote:
Now, who is more likely to try and optimise shareholder returns in GBP?.

I don' t follow the logic of your thinking. When the central bank of a foreign country raises their domestic interest rate then for a UK investor their return in GBP will rise if the share price remains stable in local currency. So surely that makes a case for buying foreign shares in a country such as Sweden for example which has great companies but currently has interest rates set lower than UK?

So are you seriously telling the forum that you believe that the directors of Swedish companies are trying to optimise shareholder returns in GBP?l:

the directors of Swedish companies have no need to actively favour UK shareholders . We just need to buy their shares at a time when their currency is relatively cheap v GBP. When the Swedish economy improves their central bank will raise interest rates providing a currency boost to GBP holders of anything valued in SEK. It's just about relative currency valuations.
Whatever intentions if any the directors of foreign companies may have regarding currency will be overwhelmed by changes in relative interest rates between currencies.

colin wrote:

mc2fool wrote:

colin wrote:I don' t follow the logic of your thinking. When the central bank of a foreign country raises their domestic interest rate then for a UK investor their return in GBP will rise if the share price remains stable in local currency. So surely that makes a case for buying foreign shares in a country such as Sweden for example which has great companies but currently has interest rates set lower than UK?

So are you seriously telling the forum that you believe that the directors of Swedish companies are trying to optimise shareholder returns in GBP?l:

the directors of Swedish companies have no need to actively favour UK shareholders . We just need to buy their shares at a time when their currency is relatively cheap v GBP. When the Swedish economy improves their central bank will raise interest rates providing a currency boost to GBP holders of anything valued in SEK. It's just about relative currency valuations.
Whatever intentions if any the directors of foreign companies may have regarding currency will be overwhelmed by changes in relative interest rates between currencies.

So, you've decide that SEK is a good currency to be in for a while and so you invest in companies whose directors will try and optimise shareholder returns in SEK ... sounds like you're validating my point.

You are however also adding active currency speculation to the mix, and I do believe your ideas of the relationships of currencies and interest rates are rather generalised. Currencies may strengthen when interest rates go up in text books but in real life it's often not so; they can instead weaken if markets think the rise has been overdone or is unnecessary, or if it's already in the price. And I know of no rule or precedent that says that just 'cos one country has a lower interest rate than another it will rise (or the other will fall).

Then, of course, you have to take a view on when a currency is "cheap" in the first place....

mc2fool wrote:

colin wrote:

mc2fool wrote:So, you've decide that SEK is a good currency to be in for a while and so you invest in companies whose directors will try and optimise shareholder returns in SEK ... sounds like you're validating my point.

You are however also adding active currency speculation to the mix, and I do believe your ideas of the rep...

I'm saying that your point is irrelevant to the gains or loses enjoyed or suffered by a UK investor or a Swedish investor in Swedish shares because exchange rates add a layer of volatility beyond the control of company directors whatever they may wish to do. While it is true as you say that changes in interest rates may not allways be positively correlated with increases in the value of a currency, for example when interests rates are raised to defend a currency which is under attack, generally it is the case that rising interest rates are a sign of a strengthening economy and attract foreign buyers of that currency, therefore a foreign buyer of index or other diversified funds can increase their chances of future exchange rate moves adding value by buying when the investors domestic economy is stronger than the economy of the target country. Of course there are no guarantees, their never is, the Swedish economy and currency may strengthen next year while the UK takes off like a rocket but that"s diversification for you. Currency changes will occur whether you engage in " speculation" or not .

The logical implication of your thinking mc2fool is that a US investor in an S&P index fund can expect a higher return than a UK investor, which is absurd!