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Country weightings in the portfolio

Reading time: approx. 5min (fast), approx. 8min (slow, @leveragegrinding 😛), think so 3min (@DonkeyInvestor 🙉)

In the last few days I have been thinking about the weighting of some regions in my portfolio. There is always a hot debate about how much you should weight the US, Europe, Asia and the rest of the world in your portfolio. Should one have "China stocks" at all or how much USA share is too high?

Especially when it comes to the weighting of US corporations there is a hot debate: for some an overweighting of US corporations is perfectly fine, for others it is a cluster risk. In the MSCI World for example, the USA is weighted at 60%. That is why in the classic 70/30 strategy MSCI World ETF as well as an Emerging Markets emerging markets ETF is added. It gets even more complex if you add a Europe ETF on the STOXX Europe 600 is added.

Something that rarely plays a role in the debate, however, is the fact that this weighting only reflects the countries of origin of the stock corporations. Corporations like Apple $AAPL (+1,24 %) , Microsoft $MSFT (+1 %) or Google $GOOGL (+0,64 %) may be U.S. companies on paper, but they generate their sales worldwide. A LVMH $MC (+1,54 %) may be from Europe, but generates most of its sales in North America and Asia. Toyota $7203 (+1,5 %) is from Japan, but generates sales worldwide.

I think you see the problem: important to get an impression of your own regional exposure exposure are not the countries of origin of your shares but rather the question of where the sales are generated are generated. I wanted to get to the bottom of this question specifically for my portfolio.

Inventory

In my personal portfolio, the distribution of individual position sizes (as of May 24, 2023) looks exactly like this:

19.3% Apple $AAPL (+1,24 %)

11.1% Costco $COST (+2,51 %)

9.9% Allianz $ALV (+0,17 %)

9.5% VICI $VICI (+1,11 %)

8.3% United Health $UNH (+1,12 %)

5.6% Microsoft $MSFT (+1 %)

5.4% Visa $V (+1,22 %)

4.4% KLA-Tencor $KLAC (+0,88 %)

4.1% BJ's Wholesale Club $BJ

4.0% Starbucks $SBUX (+1,37 %)

3.4% Paychex $PAYX (+1,95 %)

3.3% DEFAMA $DEF (+0 %)

3.1% Air Products & Chemicals $APD (+1,43 %)

2.9% Rio Tinto $RIO (-0,47 %)

2.7% McDonald's $MCD (+1,15 %)

1.4% Greencoat UK Wind💚 $UKW (+1,32 %)

0.5% Coca Cola $KO (+1,25 %)

This corresponds to a weighting of 81.4% USA and 18.6% Europe. Mind you, this weighting corresponds to a weighting according to countries of origin of the companies. So do I have a huge cluster risk as far as the USA is concerned? In addition, there are no Asian shares in my portfolio.

Now I have made the effort (in a sweaty manner) to all annual reports of the 17 companies on the corresponding investor relations pages. In some cases, sales are broken down by region. Unfortunately, it is clear that not every company provides the same breakdown. For example Apple breaks down its sales in [1] according to Americas, Europe, Greater China, Japan and Rest of Asia Pacific on. The situation is different for Visawhere in [2] sales are only broken down by U.S. and International is broken down.

After a lot of toing and froing, I finally decided to split into the regions North America, Europe and Asia & Rest of the World to the rest of the world. North America includes the USA, Canada and Mexico. Europe is mainland Europe and Great Britain. The last category then includes China, Japan, South Korea, Australia and everything else.

Just about every company reports the percentage of revenue that is generated in the US. As mentioned in the example of Visa, this is not necessarily useful to find out the share of sales for Europe and Asia if reported according to the principle "USA and the rest of the world".Partly I had to find values with a "good guess" guess. Smaller researches in the net helped me here. The last decimal place is not important here, but rather a correct order of magnitude of the sales distribution.

Result

Before I present the results of my analysis, I would like to say a few words about the methodology. In my calculation, the sales shares of the individual companies are weighted according to portfolio share.

ExampleApple has a 19.3% weighting in my portfolio and generates 18.8% of its sales in Europe. The 18.8% European share is then weighted at 19.3% in my calculation. Apple thus provides for a roughly 3.6% European share in my portfolio.

Without further ado, here is the result of the weighted sales distribution by region in my personal portfolio:

56% North America | 24% Europe | 20% Asia & Rest of World

The difference to the country weightings in my portfolio are therefore:

-25.4% North America | +5.4% Europe | +20% Asia & Rest of the World

Despite an 81.4% weighting of the USA in my portfolio, only 56% of sales are generated in North America and this despite the fact that I have real USA-pure-plays like VICI and BJ's Wholesale, which generate 100% of their sales in the US, are highly weighted in the portfolio. The European share is about 5% larger than the countries of origin of my companies would suggest and despite not having a single Asian company in my portfolio, 20% of the weighted sales are generated in Asia and the rest of the world.

Conclusion

Diversification by country is important. However, in my opinion, too much attention is paid to the countries of origin instead of really looking at where the companies' sales are actually generated. Unfortunately, there is no quick way to find out. The way over the individual investor relations sides of the enterprises is laborious and nevertheless incomplete. Here I would wish for greater transparency from some companies. Exemplary here were above all Apple and KLA-Tencor.

In addition to the pure "sales risk", it is of course still necessary to consider the political- and regulatory risk. I can sleep soundly with the revenue distribution in my portfolio even if it might be a nightmare for others.

What is your opinion on this?

Sources:

[1] Apple Financial Report 2022: https://annualreport.stocklight.com/nasdaq/aapl/221338448.pdf

[2] Visa Financial Report 2022: https://s29.q4cdn.com/385744025/files/doc_downloads/2022/Visa-Inc-Fiscal-2022-Annual-Report.pdf

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