What Does Soccer Teach Us About Investing?
I played soccer in my youth, have children that play and love to watch the game at the international level. I will even play the occasional FIFA 2013 with my kids on our PS3 gaming system, although my record is not worth bragging about to my dismay!
The UEFA Champions League final that was played and won by Bayern Munich two weeks ago (was a great game) gave German’s bragging rights on the European continent.
I found an interesting post on Vanguard’s Financial Advisor Blog that caught my eye that I thought I would share written by Jim Rowley:
What makes this year’s final unusual is that both teams, Bayern Munich and Borussia Dortmund, are from the same country. With two German teams battling to be number one, some fans are saying Germany has built a football dynasty.
Thinking about the players on each team led me to question just how “German” the teams were, so I looked at each team’s roster from its recent semifinal match and counted the number of players from each country. It turned out half of the players were not German nationals! (Source: www.uefa.com)
Believe it or not, my thoughts immediately jumped to the topic of thematic single-country investing. The rationale for this strategy suggests that it allows investors to capitalize on the economic fortunes of a specific country.
But I don’t think it works that way. Just as I was curious about the nationalities represented in the two German teams, I was also curious about the economic exposures inherent in German companies. In other words, how “German” are they?
One of my Vanguard colleagues and I decided to use the regional source of company revenue as a proxy for economic exposure. Based on our estimates, about 68% of German companies’ revenue is sourced internationally (i.e., outside Germany). (Source: Vanguard calculations using FactSet as of April 30, 2013, based on the FTSE Germany Index.)
How can these stocks be German if such a large portion of their economic exposure is international? Okay, that’s a somewhat rhetorical question, and readers shouldn’t get too bogged down in the figures on these pie charts. I think my question and the data speak to a bigger point: It is a bit presumptuous to assume that single-country investing provides only domestic economic exposure when the companies might very well have substantial international exposure anyway and also be concentrated by sectors or constituents.
If that’s the case, investors would likely be better served by gaining international exposure through a more broadly diversified, broad-market stock or bond ETF instead of a single-country ETF.
So remember that even though the two teams walking onto the pitch are based in Germany, their success will be greatly influenced by their international exposures.
I would like to thank my colleague John Escario for contributing to this blog.
Notes:
Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
All ETF products are subject to risk, which may result in the loss of principal. Investments in securities issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Diversification does not guarantee a profit or protect against a loss.