As I mentioned a while back I will be speaking at the ETF Summit in NYC on June 15th.I spent some time on Saturday putting together some notes for a powerpoint for when I speak (I have a deadline coming up to get this submitted).
My topic is international investing. I think I am closing out my portion with a quick tidbit on frontier investing.
I have mentioned a couple times my preparing for below average returns for US stocks in the coming years.
If this turns out to be correct it will be even more important to study, understand and invest in foreign markets. For a lot of markets I prefer stocks but do use products for some markets. We know from the latest filings from iShares that there will be more markets accessible through funds.
As a top down manager I think it is more important to be right about the country than anything else. Being right about the best product for that country is usually, but not always, less important.
If you have read this site for a while you know I don't believe that broad based products like EFA or VEU offer great diversification because the attributes of the various countries get blended away.
In assembling the foreign portion of the equity portfolio I start with the countries I want to own; usually the reasons are a combination of cyclical and the type of economy the country is; Australia is commodity based and Ireland is wildly pro-growth as two examples.
The stocks I pick for these countries might be because a given country is known for a certain sector, like Switzerland and health care, or a certain sector might just make sense to me for that country like China and the oil majors.
I think that the way investing will evolve we will need to know about a lot more countries than we do now. There are a lot of little countries in Europe, in particular, that will open up to US investors and maybe a little further down the line the middle east and then Africa after that.
I realize it seems hard to imagine that investing in Slovakia will be something you will do but I am thinking a little further out than Q1 2008.
6 comments:
Roger,
PPI has been accelerating more rapidly than CPI. This has a negative impact on P/E and on the broadly followed Earnings-Yield to Bond Yield ratio.
Some charts depicting this relationship can be found at:
http://wrahal.blogspot.com/
Ok Roger, I understand that you favor stocks over products but if you had to use a core product for the international portion of the portfolio what would you use? I thought I recall you liking one the BLDR's products?
Secondly, how many countries do you cover in a typical clients portfolio by investing in stocks? To me I would think that risk would have to be great. It has to be hard keeping up with all the moving parts that happen abroad. Just thinking here but wouldn't it be better to own a core product and then allocate around the edges with stocks?
johnnyb, I can't say what someone else should just what I think.
First of all keeping track of various moving parts is my job so I do have more time than some other folks.
I think most clients have exposure to 10-12 foreign countries. Some clients (and me too) own ADRE for part of the emerging market exposure. No product, including stocks, is perfect but I do think EFA is very far from ideal.
I think many people smarter than me have proven the risk is not great. It may be too time consuming to follow the moving parts but that has nothing to do with risk.
Have you explored single country funds?
Roger, I have explored single country funds with the emphasis on explored. My comfort level is not that great as I don't understand the economies and potential risks/rewards. I always figured that a capable manager like Julius baer, Mattews or whoever would be better at finding the opportunities than myself. I'll watch and learn a little more from what you post and try to pick up a pearl of wisdom now and them.
Let me ask if there is a reasonable alternative to EFA for those who want a low R2 to SP500 and for those who want to start with broad international exposure?
i don't know the answer about a fund.
I use more stocks than anything else. certain countries do the trick so i own those countries with what I think is the best tool for each country (places I have written about countless times here) which is usually a stock.
Since I don't go as broad as you are asking I have no answer.
Just some quick numbers to help out a bit. These are from early 2000 to now, all are return correlations.
Symbol,Daily Corr to SPY,Monthly Corr to SPY
EWA,0.3964,0.6848
EWC,0.5125,0.8149
EWD,0.5722,0.8731
EWG,0.7094,0.8307
EWH,0.6294,0.6746
EWI,0.5051,0.6831
EWJ,0.5762,0.4885
EWK,0.4216,0.6273
EWL,0.5229,0.6701
EWM,0.2945,0.4447
EWN,0.5978,0.7947
EWO,0.2170,0.4304
EWP,0.5361,0.7664
EWQ,0.6254,0.7935
EWS,0.5173,0.6759
EWT,0.4897,0.5851
EWU,0.6340,0.7925
EWW,0.5653,0.7593
EWY,0.5181,0.7242
EWZ,0.4483,0.6900
-Michael Bommarito
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