First was the Barron's interview this week with Arjun Divecha who manages the GMO Emerging Markets III Fund (GMOEX). Barron's said the minimum initial purchase is $50 million. I thought the minimum was $10 million but either way with that type of minimum I wonder why they even use the OEF format.
Be that as it may he had one particular line of thought in the article that particularly resonated. He said;
The main thing in emerging markets is that getting the country right matters more than anything else. If you can pick sectors and stocks in the developed markets, that is what really matters. But in emerging markets, if you don't get the country right, it becomes much, much harder to add value.
If you've been reading this site for a while you know that broad based funds are not my favorite way into anything. Investing to at least the country level and/or the sector level may or may not lead an investor to the "right" part of the market but it can help people avoid the wrong part of the market which sometimes is easier. Additionally, country and sector selection can help with managing very narrow concepts like volatility and also make it easier to add countries with different attributes that the US which often results in better diversification over a broad fund.
I would place more emphasis on sector selection than Divecha appears to. Certain countries are proxies for certain things like Taiwan and tech or Peru and materials. People willing to select stocks can buy a tech stock from Taiwan, avoid the ETF which does have quite a bit of financial exposure, thus freeing up some of the portfolio for a country you like that may have fewer choices to buy in. The context for fewer choices is that almost every country has a big bank, big oil company and big phone company to invest in or it will be those companies dominate the country fund.
The other item from the web about emerging markets was this interview at Tech Ticker with William Gamble from a company called Emerging Market Strategies. Gamble was generally quite down on emerging markets but his reasoning was baffling to me. He talked mostly about legal risks, different rules for bankruptcy and about it being much more difficult to get information about companies. He also expressed concern that China might be in a bubble because of the manner in which lending has expanded.
As for the legal risks and so forth. These things are true but they are no truer today than they ever were. If you are unlucky enough to buy a stock that goes bankrupt, yes you are likely completely out of luck but this is not new. How much do you think the typical investor knows about US securities law?
Any company, I mean any company, can go to zero. Anyone not much for selling discipline can easily mitigate the consequence of owning a stock that goes to zero by not loading up on any one name no matter where it is from. What difference does it make if you own a large American financial company that goes to zero versus some small Malaysian stock that goes to zero? Putting 15% into a stock that goes to zero becomes the problem not what country it is from.
Anyone that really worries about this could obviously get it done with ETFs or other funds so they take no single stock risk. For China, which seemed to get picked on in the interview, there are several country funds and there are also a bunch of specialty funds with a lot China exposure. For example (and this is just an example) the PowerShares Global Coal Portfolio (PKOL) weights almost a quarter to China. The Claymore Solar ETF (TAN) has 30% in China. The EGShares Energy Fund (EEO) has 19% in China.
So using TAN for part of the industrial exposure and using PKOL and EEO (I saw no overlap between the two) for part of the energy exposure with each fund targeting 3-5% of the portfolio and you can pretty easily get to 3% in China. The point is not to copy that allocation because I do not own any of those funds but realize there are several different ways to build a country exposure with a modest weight so that if the lending-in-China issue does become a problem the portfolio won't be unduly crushed.
The Red Sox are retiring Jim Rice's number tonight which is a really big deal. He becomes only the 7th Sox player to have his number retired.
9 comments:
Intriguing quote from Grantham on bloomberg.com today about trying to resolve the dilemma of being pro-emerging markets but anti-China.
"legal issues" when referring to emerging markets often means issues with rule of law. I.e. there often isn't a rule of law in emerging markets. If the government decides a company should go away or suddenly be privatized, it will be.
"...but realize there are several different ways to build a country exposure with a modest weight so that if the lending-in-China issue does become a problem the portfolio won't be unduly crushed."
Hugh Hendry and Gary Shilling are two of the people who have that in the current market that it is all the same bet. I agree with this sentiment. I do not think diversification is buying you much in the current market. Further I think this will continue for a while.
These are not normal times as central banks are trying to manage debt bubbles. I think they are trying to manage them by keeping to expand these bubbles, but regardless of how or why it looks like markets will be highly correlated during the current expansion and subsequent bust (when ever that is).
VWO and EPP make up a lot of my foreign exposure. I do not need to spend a lot of time dissecting specific stocks or countries and I still get a fair amount of diversification due to the large number of stocks held.
I am sure our portfolios will have varying performance, but I am beating the S&P by roughly 15% this year with a lot less effort, although my higher foreign exposure will likely be viewed has higher risk than your portfolio.
None the less until this financial crisis is over I do not see your concentration on diversification buying you much for several years.
After the crisis passes your efforts may be rewarded, but I do not see it for now.
When I was a neophyte, I always thought the U.S was safer because our "leaders" would legislate laws to protect the populace. Now that we are grownups, it is obvious the risk in investing in the U.S. compared with other countries, is more equal.
Roger,
I know at one time you held a position in PCL. It is getting crushed today.
Who cares.
The most notable thing for me is that China's recovery in equities seems to definitely be U shaped if not V shaped. Other parts of the world still look like L's so far. I have been wading into a fairly focused position in China for the first time this week.
Also this week Decision Moose rotated into EPP, if anyone puts any stock in that as an intermediate term forecast.
It is China's game to lose. They have the cards in place to become the sole 21st century super power.
Similarly to Great Britain during the colonial years, China may first try to economically dominate. If that fails, they may use their soon-to-be unmatched military on and above the globe to take what they want. And no one will stop them.
I believe we are about 15 years away from this situation, so the investor can still crunch numbers and make a buck now. It will be a much different landscape in the next quarter of this century and beyond.
Not to begrudge a profit, but American investors did well owning chunks of companies that did a booming business with the Third Reich. How would you have felt, in retrospect, owning Bayer or IG Farben (or Ford, or Gillette), knowing your profits assisted towards the initial mastery of Germany at the onset of WW2 and the slaughter of millions as the conflict progressed?
Investing in dictatorships could pose an ethical problem that profits cannot mask.
Re. PCL: CNBC just announced lumber prices are up 10% over the last 2 days. Good numbers also on housing.
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