Thrifty 30 Portfolio
Dec 15, 2011
Richard Beddard
6 Comments

The future of the Thrifty 30

In which I moot a foreign adventure and then get cold feet

As the end of the year approaches, I’m having some end of year thoughts. How can I improve the Thrifty 30? Maybe you can tell me…

It must be coincidence. On Monday I mooted adding foreign shares to the Thrifty 30 portfolio in a discussion with the editor and the editor-in-chief of the Interactive Investor mothership. Yesterday fellow value blogger John McElligott suggested it to me.

John was responding to my own, somewhat frustrated, search for value in the UK and proposing that I broaden my search by looking abroad. I was responding to the value instinct, which tends to take you wherever value might be. It took Geoff Gannon to Japan, for example, last year, and it’s bringing other value investors to Europe now.

Having mooted a foreign adventure, I’m having second thoughts now. I doubt many UK investors would join me in the adventure, and whether I actually want to embark on it myself.

There are four reasons why I don’t follow that value instinct abroad:

  1. Tax. The necessity of claiming tax relief against tax paid in foreign jurisdictions is an administrative burden I haven’t relished when I’ve done it.
  2. Familiarity. Reading annual reports and calling the financial director of a company is easier if you speak the same language and live in the same time-zone. Experiencing the product or service is easier if it’s available locally.
  3. Cost and opportunity. UK brokers are inconsistent in the selection of foreign companies they trade, and in the associated fees. Often, where the selection is limited, it’s limited to large American and European companies, which may not offer the best value.
  4. Mistrust in Jonny Foreigner. My apologies for the use of a pejorative term but it accurately sums up the prejudicial nature of this objection. We have little choice to put our faith in the British legal and regulatory system and, on the presumption it’s one of the better ones, I doubt I have the stamina to evaluate others.

Reasons like these lead most UK investors who buy shares in individual companies to use funds to diversify abroad (I think). That’s what I do in my self-invested pension.

So, with a foreign campaign postponed, I must redouble my efforts in the UK, and that means embracing the full spectrum of value, hence the title of yesterday’s post. That’s the plan any way, I’ll elaborate as it evolves as this year closes and the new year begins.

6 Comments

  • blippy December 15, 2011 at 1:51 pm

    “I doubt many UK investors would join me in the adventure”

    Speaking purely personally, I’d agree. There probably are opportunities in Japan and Europe, but I think that most people would be more interested in UK shares. Perhaps you could dedicate a limited portion of the portfolio to foreign shares, if you thought the case was compelling.

    BTW, BRK (Berkshire Hathaway) is interesting, trading at nearly book value. The evil empire that is MSFT (Microsoft) is trading on single-digits, and it has enormous returns on equity. David Einhorn owns a slice of AAPL (Apple) (no pun intended). It’s trading on a PER of 14, has a growth story, and excellent returns on capital. Or, what about IBM, one that Buffett has bought lately. It’s trading on a PER of 15. Any of those grab your fancy?

    Reply
  • blippy December 15, 2011 at 2:31 pm

    “Maybe you can tell me”

    Pfft, beats me, many of us are suffering. I have yet to find the Holy Grail.

    I think that one thing that is suggested by the results so far is that micro-caps are not in general mispriced. Whatever mispricing does exist must be winkled out. So, I think you have to decide whether you’re going to run a diverse value-weighted portfolio (of non-micro-caps), or else you’re going to have to be more concentrated, and cherrypick your opportunities.

    One area you could look at is director purchases. There’s been some interesting ones lately. There’s been purchases in HSV (Homeserve), which was mentioned by UKVI. It’s a magic formula-esque company. Contrarian play, or value trap?

    Directors have recently been tucking into SIA (Soco International), for about £300k’s worth. Forward PE is 4.7, and it has cash of 81m.

    Or how about IND (Indigo Vision) – you’ll like that, it’s a real weeny company. Directors stomped up nearly £500k, so you have to think they see some value there.

    I’m not saying that any of them are necessarily good ideas, but I think if you’re going beat the pack, you may have to start pulling these kinds of things apart.

    All the best, one and all.

    Reply
    • Richard Beddard December 15, 2011 at 4:32 pm

      Hi Blippy I don’t know what I have to do to disabuse of the fact that I only add micro-caps to the portfolio but I really am agnostic about size. The current portfolio contains smaller companies because that’s where I see value at the moment, but I wouldn’t describe Northgate (£300m), Games Workshop (£200m), and Castings, Dart, and Thorpe (£100m) as micro-cap companies and I’m prepared to consider big companies like £5bn Smith & Nephew if I think it will be worth it. Since it takes years for value to come out, though, I’m only expecting to beat the market over a 5 year period.

      Thanks for the suggestions, the US mega-caps you list are very alien to me. While it would be fun to form an opinion on them I’d worry about how long it would take, and how useful that opinion would be. Berkshire is really an investment holding company, and I prefer to chose my own investments. Of the others, since it’s the cheapest, not only on a one year PE, but, I suspect, using average earnings over many years, I’d probably start with MSFT. But it’s a moot point, the foreign adventure is postponed indefinitely!

      Homeserve is too speculative, its business model was unethical and even assuming it is a paragon of virtue from now on I don’t fancy saying with confidence how profitable it might be. Soco International – it’s speculative too, as any estimate of future profits depends on oil prices I presume. They may be good investments, but I’m pretty confident they’re not my kinds of company.

      Indigo Vision does look more interesting. It’s not on my screen because of the decade of losses before 2006, but it’s posted six years of profit so it’s on the way to respectability :-)

      “If you’re going beat the pack, you may have to start pulling these kinds of things apart.”

      I’m not sure exactly what you mean by this, but if its get into the business fundamentals of particular troubled companies like Homeserve or guesstimating future oil prices I’m actually thinking the opposite, that you can get confidence from the information you learn or project, but it can often be misplaced confidence. Perhaps it’s better to stick closer to the basic financial statistics, and verify them. More on that another day!

      Reply
  • Nate December 16, 2011 at 12:39 pm

    It was fun reading this post, home country bias is strong no matter where the investor is from. I know that no matter how many foreign companies I research and invest in I always get a bit of a warm fuzzy feeling when I find an American company. It just seems more comfortable to invest in a company in Topeka Kansas than Hamburg Germany even if the Germany company is world class and the US one is unknown.

    I have worked to break myself of this habit personally. I’ve found most companies in Europe report in English. I look at standard metrics on a company and if I really don’t understand something I will pass. I sometimes demand a larger margin of safety. What I am really worried about is the directors or management “stealing” the company in some way from shareholders. Of course I’m just blind to what happens in my own backyard, most companies outside the US report more conservatively, and there is a lot of dirty business here in the States as well.

    If you want to stay in the Anglosphere New Zealand is relatively untouched, and I know there are some Thrifty 30 type of stocks in Canada as well.

    Seeing how you aren’t finding much value it might be time to just sit in cash and wait. Often times when I can’t find anything compelling the market works with me pretty quickly. Of course back in the 90s you might have said there was no value in 1996 and had to wait five years.

    Reply
    • Richard Beddard December 16, 2011 at 2:00 pm

      Hi Nate, thanks for your comments, a valuable perspective. I should have mentioned your blog in the post because it’s so admirably international.

      I think one day I will go on another foreign sortie, I did for a few years invest in US stocks but in the end I was glad to withdraw – I found it quite exhausting keeping track of two markets, which may just be a reflection of the way I do things.

      Reply
  • Monevator December 16, 2011 at 10:00 pm

    I think there are cheap small companies in the UK right now. I know it’s a dangerous thing to say to a fundamentals-based value investor, but maybe you need to tweak your fundamentals filter?

    The market is always changing.

    *ducks and runs away*

    Reply

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