Invest In Countries Where You'd Be Willing To Live: Let Risk-Takers Put Their Money In Corrupt Dictatorships, Fiscal Basket Cases

Canadians seeking non-U.S. foreign content for their portfolios have a bewildering array of investments from which to choose. If you walk into a bank branch and ask an advisor for help, you’ll be steered toward international mutual funds owned by the bank. If pressed, the advisor may offer bank-owned international exchange-traded funds that carry lower fees, but either way, a visit to a bank branch may not be the most objective way to narrow down your choices.

Among ETFs, there are funds that focus on continents, regions and specific countries, currency hedged funds, low volatility funds, large-cap and small-cap funds and sector-specific funds, with a new ETF launched every few days. Morningstar’s ETF Finder lists 2,021 U.S. and 649 Canadian funds, with 70 funds that track developed and emerging markets in Asia, 47 that track markets in Europe, 24 in Latin America, 13 in Africa, 27 in Japan and nine for each of the United Kingdom and Australia.

Those who can’t be bothered choosing can throw up their hands and buy an ETF that holds everything outside the United States, such as the Vanguard All-World ex-US Index Fund ETF Shares (VEU/NYSE), which has shares in 2,561 companies.

Those looking to capitalize on momentum can simply check sites such as Seeking Alpha’s list of country ETFs and invest in whichever country’s market has been on a tear. The VanEck Vectors Poland ETF (PLND/NYSEArca), for example, is up 34.9% over the past year, 33.5% in 2017 and 15.5% in the past three months.

Investors seeking long-term growth, however, should remember Warren Buffett’s first two rules of investing: 1. Don’t lose money and 2. Never forget rule number one. While almost every country in the world is worth visiting and risk-takers are welcome to invest in emerging markets, the easiest way to pick country funds is to find those where you'd be willing to live.

Although there are exceptions, investors who want to avoid losing money should stay away from investments tied to countries run by corrupt dictators, those in danger of defaulting on their debts and those hostile to business. The countries described here all have a low level of perceived corruption, investment-grade credit ratings and economies that encourage investment and entrepreneurship. As a bonus, they’ve done really well for investors over the past five years.

Transparency International’s Corruption Perception Index for 2016 provides a reasonably accurate and unbiased measure of corruption, which it defines as “the abuse of entrusted power for private gain.”

The major credit-rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings should help you avoid fiscal basket cases. Most developed nations have investment-grade credit ratings, but not all. Greece, ranked a fair 69th of 176 on Transparency’s corruption index, carries a “highly speculative” B- sovereign debt rating from S&P -- a warning echoed by Moody’s and Fitch.

Finally, even reputable, honest governments that pay their debts can put up onerous regulatory roadblocks to business, so each country was checked against its ranking on the World Bank’s Doing Business list, which examines a country’s regulatory environment to measure how conducive it is to starting and operating a local firm.

The country scoring highest on the least-corrupt list is Denmark, followed by New Zealand, Finland, Sweden, Switzerland, Norway, Singapore, Netherlands, Canada and Germany. (The United States is 18th.) As a by-product of being reputable, all have growing economies and governments that pay their debts, resulting in top-tier prime AAA or high grade AA credit ratings.

Here are the top performers, ranked by their total average annual return since inception. Companies such as Global X offer a few country-specific funds, but BlackRock’s iShares funds dominate the sector.

Denmark

Along with topping Transparency International’s list of reputable countries, Denmark carries a top-tier sovereign credit rating and ranks a lofty third on the World Bank’s Doing Business list for its level of entrepreneurial ease. It is regarded as one of the world’s largest maritime shipping nations.

You can invest in Denmark through the iShares Denmark Capped ETF (EDEN/BATS). Like many country funds, EDEN trades on the BATS exchange, a global stock exchange operator based in Kansas and owned by CBOE Holdings. The fund tracks the performance of the MSCI Denmark IMI 25/50 index through its stakes in 43 Danish companies. EDEN’s main holdings include pharmaceutical giant Novo Nordisk, well-known wind power generator maker Vestas Wind Systems, brewer Carlsberg AS and shipping container operator AP Moller-Maersk AS.

The fund, which carries a management expense ratio (MER) of 0.53%, was set up in January 2012 and has climbed steadily ever since, producing a five-year gain of 136%, including a 21% gain this year. When combined with its distribution, which has a 12-month trailing yield of 1.1%, investors have enjoyed an annual total return of about 15% over the past five years.

New Zealand

After Denmark, the next best reputable country in which to invest over the past few years has been New Zealand, which ranks second on Transparency International’s Corruption Perception Index and is the number one country on the World Bank’s list of best countries for doing business. New Zealand’s economy is strong and growing, its government debt is under control, and it has a civilized social safety net that renders the risk of revolution somewhere around zero.

The iShares MSCI New Zealand Capped ETF (ENZL/NYSEArca) tracks 27 major New Zealand companies, including telecom operator Spark New Zealand Ltd. and Auckland International Airport.

The fund, launched in September, 2010, carries an MER of 0.48%. Although the fund’s unit price is up only 67% since its launch, ENZL is well-suited for income investors, as its distribution has a 12-month trailing yield of 4.5%. When the distribution is factored in, ENZL has an average annual total return of 13.2% since inception.

Ireland

Ireland ranks 19th on Transparency International’s list of least corrupt nations, carries upper medium grade credit ratings and sits in 18th place on the World Bank’s Doing Business list.

Ireland has enjoyed the fastest-growing economy among countries that use the euro for the past three years, and indicators for the last few months show Ireland’s economy remains on a solid footing, says FocusEconomics, a site that provides economic analysis and forecasts for 127 countries.

Although the distribution yield is just 1.2%, investors with stakes in the iShares MSCI Ireland Capped ETF (EIRL/NYSEArca) have enjoyed an average annual total return of 10.6% since the fund was set up in 2010.

Finland

Finland ranks third on transparency’s list of relatively “clean” corruption-free countries, while all three major credit rating agencies see its sovereign debt as high grade, just one notch below prime. Finland ranks 13th on the World Bank’s rankings for ease of doing business.

The iShares MSCI Finland Capped ETF (EFNL/BATS), which carries an MER of 0.53%, has stakes in 40 Finnish companies, with 19% of the fund’s assets in communications and information technology giant Nokia.

Since its launch in 2012, EFNL has achieved a average annual total return of 9.4% and is up 20% this year.

Other Countries

Not that you would want to, but investors still can’t buy funds that track the performance of stock markets in places like Somalia, South Sudan, North Korea, Syria, Yemen, Sudan, Libya, Afghanistan, Guinea-Bissau, or Venezuela -- the bottom 10 names of the 176 countries on Transparency’s 2016 list.

Among countries that have ETFs tracking their stock markets, the most corrupt on Transparency International’s list is Nigeria, which, not surprisingly, also carries low credit ratings from Standard & Poor’s and Fitch Ratings. The BBC News country profile for Nigeria warns:

“After lurching from one military coup to another, Nigeria now has an elected leadership. But the government faces the growing challenge of preventing Africa's most populous country from breaking apart along ethnic and religious lines.”

Nigeria is the largest producer of oil in Africa and the sixth-largest producer in the world, and like major oil producers Canada, Russia and Norway, its market suffered along with the oil price in 2015. While Canada and Russia have since largely recovered, Nigeria’s has not, and the Global X MSCI Nigeria ETF (NGE/NYSEArca) is down about 70% since its launch in 2013. Units of the fund stayed nicely above US$50 for about a year and a half after its launch, then went into a long slide, prompting Global X Funds to institute a one-for-four reverse share split in March.

Another victim of the oil slump, Norway, is a safe, democratic, prosperous nation, with a prime AAA sovereign credit rating and few regulatory hurdles that would impede business. Despite those positives and a 2.9% distribution yield, the iShares MSCI Norway Capped ETF (ENOR/BATS) is down 14% since its launch in 2012, with a total average annual return of -0.34%. The slump is likely linked to the fund’s heavy stake in debt-laden oil and gas producer Statoil ASA, which has been in the doldrums for the past two and a half years.

The three criteria described here are only intended to reduce the risk of losing money, based on the assumption that relatively corrupt nations with poor fiscal practices and roadblocks to entrepreneurship are less likely to be able to solve their economic problems. And if worse comes to worse, you can always move there.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca