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The easiest way to add some Australian or South African exposure to a portfolio is to buy an exchange-traded fund (ETF) listed on an American stock exchange, says Gail Bebee, an independent personal finance writer, speaker and teacher. (Tory Zimmerman/The Globe and Mail)
The easiest way to add some Australian or South African exposure to a portfolio is to buy an exchange-traded fund (ETF) listed on an American stock exchange, says Gail Bebee, an independent personal finance writer, speaker and teacher. (Tory Zimmerman/The Globe and Mail)

The Shrewd Investor

Look to southern hemisphere for investing opportunities Add to ...

I’ve been checking off far-flung travel destinations on my bucket list over the past few years. Retirement from the corporate grind has meant more time to explore countries that one cannot adequately appreciate within the confines of a miserly Canadian employee vacation allotment.

My bucket list trips to New Zealand, Australia and South Africa have all been excellent adventures, opening my eyes to unique geographies, novel cultures and ways of life much different from our own.

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When travelling, I invariably size up the investing possibilities of the places I visit. The economic potential of the three above-mentioned former British colonies impressed me. These southern hemisphere nations could provide some much needed portfolio diversification for Canadians.

As registered retirement savings plans are usually brimming with fresh contributions during the first quarter of the year, now is the ideal time to consider investing in these countries. Foreign stocks are best housed in tax-deferred retirement accounts because their dividends do not qualify for the Canadian dividend tax credit and are fully taxable.

In March of 2009, as we hiked the vast unpopulated Flinders Range in Australia and enjoyed the spectacular flora and fauna of the Great Barrier Reef, economies throughout the world settled into recession. Australia was the only developed country with an economy that did not suffer such a fate during that so-called Great Recession. While this implies a strong financial system and government, the endless demand for Australia’s plentiful natural resources from China, a major trading partner, has much to do with its economic good fortune.

Buying Australian stocks allows Canadians to invest in China, but dodge the relatively lax regulatory and accounting standards that govern Chinese stocks. The easiest way to add some Australian exposure to a portfolio is to buy an exchange-traded fund (ETF) listed on a U.S. stock exchange.

The iShares MSCI Australia ETF is the largest, oldest and most liquid ETF with a mandate to invest in Australian stocks. The fund aims to capture 85 per cent of the total market cap of the Australian equity market. It holds 71 stocks heavily weighted (70 per cent) in the financials and materials sector. The top 10 holdings make up 60 per cent of the fund with the top two stocks alone, mining giant BHP Billiton Ltd. and the Commonwealth Bank of Australia accounting for almost a quarter of the fund. To the end of 2012, the ETF returned 21.56 per cent over one year, 7.13 per cent over three years and 1.48 per cent over five years. It pays a semi-annual dividend of 5.17 per cent and sports a total expense ratio of 0.51 per cent. MSCI Australia ETF is an excellent all-in-one solution for gaining exposure to the broad Australian stock market and indirectly to China.

If stock picking is your game, there are a dozen Australian companies that Canadians can add to their portfolios by buying American depository receipts or ADRs. An ADR is an investment product that trades on a U.S. stock exchange, but owns shares in a non-U.S. company. My preference would be the five ADRs on the New York Stock Exchange: Alumina Ltd. , BHP Billiton , construction firm James Hardie Industries PLC , Sims Metal Management Ltd. and Westpac Banking Corp.

Across the Tasman Sea, 4.4 million people, 30 million sheep and 700 wineries occupy the tiny, scenic island nation of New Zealand. There are limited opportunities for Canadians to invest in the country’s largely service-based economy. One possibility is the iShares MSCI New Zealand Investable Market Fund trading on the NYSE. The ETF, which began in 2010, holds just 22 stocks. It returned a respectable 29.24 per cent in 2012. However, the fund is in the process of changing its investment policy, leaving its future performance under question. There are no ADRs of New Zealand companies trading on a major U.S. exchange. At this point, I think Canadians should take a pass on investing in New Zealand.

Besides the amazing wildlife that draws so many tourists, South Africa owns the largest and most-developed economy in Africa. The burgeoning natural resources, agriculture and tourism industries speak to the potential for a bright economic future. While government and political problems could be South Africa’s undoing, I think the future looks promising for this diverse nation of more than 50 million people.

Canadians can easily invest in South Africa through the iShares MSCI South Africa Index Fund , an ETF trading on the NYSE. It holds 51 large- and mid-cap stocks and is reasonably well diversified across all economic sectors. The top two sectors, financials and materials, comprise 45 per cent of the fund and the top 10 holdings account for 55 per cent. To the end of 2012, returns were 17.91 per cent over one year, 10.22 per cent over three years and 5.05 per cent over five years. The expense ratio is 0.61 per cent and the fund pays a semi-annual dividend of 3.07 per cent. MSCI South Africa Index Fund is a noteworthy choice for adding some emerging market diversification to a Canadian portfolio.

For direct investors, the NYSE lists six South African company ADRs, all resource-based stocks: AngloGold Ashanti Ltd. , DRDGOLD Ltd. , Gold Fields Ltd. , Harmony Gold Co. Ltd. , paper producer Sappi Ltd. and oil and gas firm Sasol Ltd. .

Over the past five years, the Australian and South African ETFs discussed above have consistently delivered better returns than the comparable Canadian ETFs. Higher returns, enhanced diversification – two good reasons for Canadians to add some Australia and South Africa to their portfolios.

Gail Bebee is Canada’s independent voice on personal finance and author of No Hype –The Straight Goods on Investing Your Money, a popular book of investing basics for Canadians from a financial industry outsider viewpoint. Through her writing, speaking and teaching, Gail shows people how to take control of their money and achieve their financial goals. Her column will appear monthly on the Financial Road Map site. Her website iswww.gailbebee.com

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