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Investing Internationally Through The STI

The Straits Times Index (SGX: ^STI) is the likely investment choice for many investors who wants a broad slice of the stock market in our country. And to do so would be easy, given the choice of two exchange-traded funds that tracks the index, the SPDR STI ETF and Nikko AM Singapore STI ETF.

But, for investors who choose to invest in the index due to fear of diversification in foreign countries, they might be in for a mild shock.

Diversification into Spain…really?

Asset management firm Horizon Kinetics published a commentary for the third quarter of 2013 and included a neat table on the top 10 holdings of the iShares MSCI Spain Index Fund. Usually, country-specific index funds like the aforementioned have typically allowed investors to gain exposure to the country, for whatever reasons those investors might have.

But with the iShares MSCI Spain Index Fund, investors ended up investing outside of Spain, despite its ostensible nature of investing only in major Spanish companies found in the index.

Here’s the table created by Horizon Kinetics explaining why. It details the percentage of revenue for the index fund’s top 10 holdings that came from outside Spain.

Company % of Revenue From Outside Spain
Banco Santandar SA 85%
Telefonica SA 76%
Banco Bilbao Vizcaya Argentaria 70%
Inditex 78%
Iberdrola SA 52%
Repsol YPF SA 49%
Amadeus IT Holding SA 94%
Abertis Infraestructuras SA 55%
Banco Popular Espanol 8%
Ferrovial SA 62%

Source: Horizon Kinetics’ 3rd Quarter Commentary.

We can see that besides Banco Popular Espanol and Repsol YPF SA, the other eight companies actually derive majority of its revenues (as high as 85%) from outside Spain.

That’s why Horizon Kinetics wrote that (emphasis theirs), “Unfortunately, [with an investment into an ETF like the iShares MSCI Spain Index Fund], all that’s really been accomplished is to invest outside of Spain, not inside.”

Are we adequately exposed to Singapore with the STI ETFs?

singapore globe

So, we have seen what one of Spain’s major index funds look like. Let’s take a look at the index trackers for Singapore’s ubiquitous market barometer.

As of 30 Sep, the top 5 constituents in the STI, namely DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), Singapore Telecom (SGX: Z74), United Overseas Bank (SGX: U11), and Jardine Matheson Holdings, make up almost half the index.

The two tables below show the geographical source of these companies’ sales and assets for their last completed financial year:

Company Percentage of Revenue Not From Singapore
DBS 36%
OCBC 31%
SingTel 63%
UOB 42%
JMH* 31%
* Sales originating from the entire South-East Asia are used as a proxy for sales from Singapore for Jardine Matheson Holdings

Source: Companies’ annual reports

Company Percentage of Total Assets Not From Singapore
DBS 35%
OCBC 39%
SingTel 78%
UOB 38%
JMH 65%
* Assets originating from the entire South-East Asia are used as a proxy for Assets from Singapore for Jardine Matheson Holdings

Source: Companies’ Annual Reports

Turns out, investors in the two STI ETFs also inadvertently end up investing a significant sum outside of Singapore due to the geographical distribution of the STI-constituents’ sales and assets.

Foolish Bottom Line

The two tables above on the local shares are not meant to say that Singapore’s economic growth will have a muted impact on local stock market results over the long-term. What it does mean, however, is that even an investment into Singapore’s most well-known index entails the exposure to various geographical risks due to the index-constituents’ multi-national operations.

Investing into the Straits Times Index does not mean we’re cocooned into purely local developments. In addition, using the iShares MSCI Spain Index Fund as an example, a desire for exposure into another country’s market might not always be as simple as choosing country-specific index funds.

As investors, we should bear that in mind.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.