Emerging Markets

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Doc
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Emerging Markets

Post by Doc »

People who are interested in this area might want to take a look at the Morningstar articles this week devoted emerging market investing.

http://news.morningstar.com/articlenet/ ... ?id=621594
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Re: Emerging Markets

Post by FillorKill »

From the article: "For the year to date through Oct. 31, investors poured $33.7 billion into diversified emerging-markets funds and ETFs, the fifth most popular fund category. And what do they have to show for it? So far this year, not much."

If it weren't for EM & REIT I might have to wonder if I was adequately diversified in my equity index portfolio. Fortunately, that's not the case.
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Re: Emerging Markets

Post by nisiprius »

BBL wrote:....From the article: "For the year to date through Oct. 31, investors poured $33.7 billion into diversified emerging-markets funds and ETFs, the fifth most popular fund category. And what do they have to show for it? So far this year, not much."....
Wow, almost one whole year... :shock:
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Re: Emerging Markets

Post by Wagnerjb »

Doc wrote:People who are interested in this area might want to take a look at the Morningstar articles this week devoted emerging market investing.

http://news.morningstar.com/articlenet/ ... ?id=621594
Thanks Doc. It sounds like Morningstar readers will get two days of education and three days of market timing and active management. No thanks. :D
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Re: Emerging Markets

Post by Doc »

Wagnerjb wrote:
Doc wrote:People who are interested in this area might want to take a look at the Morningstar articles this week devoted emerging market investing.

http://news.morningstar.com/articlenet/ ... ?id=621594
Thanks Doc. It sounds like Morningstar readers will get two days of education and three days of market timing and active management. No thanks. :D
I don't do EM so I didn't read the whole weeks worth of articles. However when you do read M*'s articles you do need to separate the wheat from the chaff.
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Re: Emerging Markets

Post by zaboomafoozarg »

Doc wrote:I don't do EM so I didn't read the whole weeks worth of articles. However when you do read M*'s articles you do need to separate the wheat from the chaff.
Don't do EM at all, or just don't do it as a standalone factor? Last time I checked, VG Total Int'l was about 20% EM.

I used to allocate a little bit into EM value, but got rid of it a while ago to simplify things.
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Re: Emerging Markets

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zaboomafoozarg wrote:
Doc wrote:I don't do EM so I didn't read the whole weeks worth of articles. However when you do read M*'s articles you do need to separate the wheat from the chaff.
Don't do EM at all, or just don't do it as a standalone factor? Last time I checked, VG Total Int'l was about 20% EM.

I used to allocate a little bit into EM value, but got rid of it a while ago to simplify things.
Don't do it at all except for a very tiny bit that shows up in an actively managed large value fund or perhaps a little that turns up in a "developed" index.

In general I avoid all high risk sectors like US small growth, EM and high yield and even 10+ year Treasuries. I'll accept the expected lower return in order to sleep better. If I was going to invest in these sectors I would want to hold it in a separate fund not as a part of a larger fund. As a consequence I don't invest in TBM either but rather use the Bar Cap 1-10 Government/Credit Index as my guide. If I was a lot younger I might take a different approach.
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Re: Emerging Markets

Post by Ferdinand »

I don't have an EM fund but am seriously considering it(about 10% of international)! If the S&P 500 is up by almost 30% year to date and most diversified EM funds are flat then as Larry Swedroe puts it, the latter are good diversifiers as they have negative correlation. Am I correct in assuming that?

Ferdinand
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Re: Emerging Markets

Post by livesoft »

If "investors poured $33.7 billion into diversified emerging-markets funds and ETFs" near the lows of the year, then they have plenty to show for it. Sure, not as much as Total Markets, but still up more than 10%.
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Re: Emerging Markets

Post by FillorKill »

livesoft wrote:If "investors poured $33.7 billion into diversified emerging-markets funds and ETFs" near the lows of the year, then they have plenty to show for it. Sure, not as much as Total Markets, but still up more than 10%.
You're right about that. However, In a year like this it's difficult to find a VG index fund of any stripe who's 2013 (and 52W) high were on the first trading day of the year, and yet for VWO that is the case.
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Re: Emerging Markets

Post by selftalk »

This is a good asset class to invest in as the risk is high and the probable returns long term would be the highest of all the major asset classes.
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Re: Emerging Markets

Post by JoMoney »

Ferdinand wrote:I don't have an EM fund but am seriously considering it(about 10% of international)! If the S&P 500 is up by almost 30% year to date and most diversified EM funds are flat then as Larry Swedroe puts it, the latter are good diversifiers as they have negative correlation. Am I correct in assuming that?

Ferdinand
It depends on what your goals are on whether or not it's "good" diversification. Predicting future stock market correlations is not as easy as MPT makes it seem.
Benjamin Franklin wrote:Tis easy to see, hard to foresee
Cash/bonds are reliably good diversification to weather the storms of stock market volatility. Beyond that, things start getting sketchy.
Vanguard wrote: https://personal.vanguard.com/pdf/a125.pdf?2210071412
More exotic asset classes [Including International, EM, REIT, Junk Bonds, Commodities,..] provide the allure of low correlation with U.S. stocks but with higher returns than investment-grade U.S. bonds. The temptation is to use these more exotic investments in lieu of investment-grade bonds, since the arrangement seems to promise higher returns without added risk. ...
The “more diversified” portfolio provided a somewhat higher annualized return than the traditional 50–50 portfolio with marginally higher volatility during the 20 years through 2007. But it had a significantly lower return and much higher volatility in 2008–-2011, during the credit crisis and partial recovery. In those three years, it essentially gave up most of the excess return it built up during the previous 20 years.
Vanguard wrote: https://personal.vanguard.com/pdf/s112.pdf?2210064137
we are concerned about trends indicating that investors are basing decisions either on past performance or on questionable assumptions about the effects of economic growth. If that’s the case, their commitment to diversification may be affected by unrealistic expectations.
John Bogle wrote: http://johncbogle.com/speeches/JCB_NE_Pension_4-00.pdf
Most of the academic community rejects the full market-weight strategy but endorses a more sophisticated form of analysis to set the structure of the global portfolio. The analysis involves the calculation of an efficient frontier, which is designed to determine the precise allocation of assets between U.S. and foreign holdings. The goal is a combination that promises the highest return at the lowest level of risk (i.e., the lowest volatility of return acceptable to the investor). I am skeptical of this approach as well, for the efficient frontier is based almost entirely on past returns and past risk patterns. That bias may be unavoidable—after all, history is our only source of hard data—but past relative returns of stock portfolios and (to a lesser degree) past relative volatility are hardly reliable harbingers of the future, and may even be counterproductive. ...
extremely small variations in risk often separates the optimal portfolio from those deemed less efficient.
These tiny differences in volatility ... are so small as to be almost invisible to any real-world investor, particularly one who is not willing or able to engage in the arcane methodology required for calculating the standard deviation of monthly returns, even assuming that such deviation is a valid proxy for risk ... even when long-term correlations are low, this reduction in standard deviation is often lost in sharp market downturns and in longer bear markets. In the words of Professor Bruno Solnik, “Diversification fails us just when we need it most.” With all these weaknesses, such analysis seems an unwarranted triumph of process over judgement. ...
So I emphasize that while diversifiers may serve a useful purpose, investors are unwise to diversify their equities ever more broadly merely for diversification’s sake. Rather, we must consider the tangential relationship between standard deviation and risk, the implications for long-term returns when we reduce short-term risks, and the amount of real risk we are assuming.
...the record is not at all clear that this more diversified bundle of equities has enhanced returns over what a conventional 65/35 stock/bond portfolio, benchmarked to the accepted market indexes, has provided. What is more, many alternative investments have characteristics that make them considerably riskier than U.S. stocks as a group: the business risk of new enterprises, the financial risk of real estate, the leverage risk of hedge funds. And foreign stocks, too, carry larger risks, for the emerging markets, economic risk; for many nations, severe political risk; for all such markets, currency risk. I urge you to consider the wisdom of reducing short-term volatility risk by assuming the substantially higher financial risk in owning alternative investments in the portfolio. Let’s never substitute the precise analysis of past data for the wisdom God gave us to make sound judgments.
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Re: Emerging Markets

Post by pascalwager »

W. Bernstein considers EM one of the three fundamental asset classes (along with US and DM).

VG recommends owning EM in a total market fund. Otherwise the investor may be overwhelmed by EM volatility.
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Re: Emerging Markets

Post by nisiprius »

How about this for a puzzle. One of my standard nihilistic questions these days but on a shorter time scale.

The term "emerging markets" was only coined in the early 1980s (and it is spin, marketing language, it implies that we know what direction these markets are moving in, that they are destined to become developed markets. I wish these countries the best of luck but we don't know that).

The first emerging markets index was only created in 1988.

I don't know where to look it up, but I assume that in 1988 it didn't include Russia, because the Soviet Union was still in existence... can someone tell me whether it had a stock market and whether it was possible, in 1988, to buy stocks of Russian companies?

I am woefully ignorant of international news and history, but hasn't Czechoslovakia gone through at least one revolution, perhaps two, and... yes, in 1988 it was Czechoslovakia and now it is two separate countries, the Czech Republic (an "emerging market") and Slovakia (a "frontier market").

And some of the emerging markets have emerged and graduated out of the asset class.

What I'm trying to get at here, is, all of these statistics, these averages and standard deviations and correlations and so forth... it's not any kind of coherent entity with any sort of continuity, is it? Does anyone really think that "emerging markets" in 1988 is the same thing as it is today? That the return of the Russian stock market in 2013 is fluctuating around the same average as it did in 1988?

Shouldn't there be some minimum time period needed to qualify something as an "asset class?" That's multi-asset investing methodology language, doesn't multi-asset investing methodology include any criteria for what deserves to be called an asset class? Shouldn't we wait to call something an "asset class" until it meets some objective statistical criterion for believing that we are looking at sampling variation around stable numbers for return, standard deviation, and correlations with other classes?

How can you make an "emerging market stocks for the long run" kind of argument for something that hasn't yet existed for long enough to had a long run?
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Re: Emerging Markets

Post by nisiprius »

P.S. After writing that rant, I did do what I should have done first--read the four Morningstar articles under the heading "Emerging Markets 101." But in fact, as I expected, nowhere in any of those articles does it mention when the term was coined, and nowhere does it mention the fact that the index has only existed since 1988. It's all just taken for granted that there is this "thing," this coherent glob of stuff called "emerging markets," that deserves to be treated as an "asset class," and about whose characteristics we know something.

The series includes a dandy article, For Emerging-Markets Bond Exposure, These Funds Are Tops that recommends three funds by name, and nowhere in the article does it mention that all three of these funds suffered 35%-40% crashes in 1998. It would be perfectly fair for the writer to mention it and give a reason for dismissing it at unimportant, but not to mention it at all seems... improper.

Quick check: do their other stories on EM bonds discuss 1998?

http://www.morningstar.com/Cover/VideoC ... ?id=622524 -- Hasenstab's Guidelines... no.

http://www.morningstar.com/Cover/videoC ... ?id=622417 ... The Four Flavors ... no.

http://news.morningstar.com/articlenet/ ... ?id=622682 ... Bond Breakdown ... no. And it even mentions the 1990s, but only to say "When emerging-markets countries first started issuing debt in the early 1990s, the only way to get investors interested was to issue the bonds in U.S. dollars."

So, which is it: a) these are puff pieces promoting emerging markets bond investing in general, or b) these pieces are not for a lay audience, but for an audience who is done its and already knows about "bond" funds that sometimes do this:

Image
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Re: Emerging Markets

Post by dkturner »

nisiprius wrote:How can you make an "emerging market stocks for the long run" kind of argument for something that hasn't yet existed for long enough to had a long run?
Emerging markets are nothing new, they have been around for at least 200 years. The United States was a classic emerging market during the 19th century. 19th century Brits got burned over and over playing that market, just like modern Americans have gotten burned in places like Russia and Thailand. The countries that constitute "emerging" markets will always be changing, but emerging markets have always been with us. Until recently Israel and Korea were emerging markets. Taiwan may not be an emerging market by the end of the decade. As I understand it, the idea of investing in emerging markets is simply an attempt to buy into rapidly growing economies - sort of a geographical growth stock thing.
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Re: Emerging Markets

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I have to admit that my investment process was not precise or scientific. I just saw Emerging Markets as another asset class to invest in. The asset class looked really volatile but had promising returns and it was something I looked at to put "a tiger in my tank." Something to boost the performance of my portfolio.

I also saw it as a way of investing in a segment of the world stock markets that most investors might overlook. I wanted to go beyond just the United States, Western Europe, and Japan. Investing the conventional route in US and International Stock funds got you just that and in the Large Cap arena. I wanted more.

I wish I could say that I made this decision sifting through mountains of data, studying efficient frontiers, and making precise calculations on how this asset class would affect the volatility and future returns of my portfolio. I just sort of eyeballed it, it looked good to me, and I said to myself "I want to buy some." So this will probably drive the engineers on the forum crazy.

The analogy of my methods of investing and cooking from scratch fits pretty well. Maybe use a recipe as a guide but sort of make it up as I go along. A dash of this and a dab of that. Hmmm. That looks good, I think I will throw a bit of that in there. I certainly believe in portfolio theory and model portfolios and use them as a guide but I do not pretend to construct a portfolio with great precision.
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Re: Emerging Markets

Post by selftalk »

Are we all trying too hard to increase our returns long term when maybe it`s better to adhere to the three ( 3 ) fund portfolio ???
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Re: Emerging Markets

Post by columbia »

selftalk wrote:Are we all trying too hard to increase our returns long term when maybe it`s better to adhere to the three ( 3 ) fund portfolio ???
That seems likely.
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Re: Emerging Markets

Post by nisiprius »

I think there are a huge number of portfolios that have the characteristic that there is no earthly way to tell whether one is better or worse than another, either before OR after the fact. (After the fact, it is always possible to argue that the portfolio with the lower return was nevertheless a better strategy).

The virtue of the simple portfolio is not that it is demonstrably better, one cannot tell that, but that it is a) not demonstrable worse, and b) that it is simpler.

This is echoing what Bogle said:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
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Re: Emerging Markets

Post by Doc »

columbia wrote:
selftalk wrote:Are we all trying too hard to increase our returns long term when maybe it`s better to adhere to the three ( 3 ) fund portfolio ???
That seems likely.
At least we should limit our efforts into increasing our risk adjusted returns. The problem with that is that "risk" means different things to different people and possibly the same person as he ages.
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Re: Emerging Markets

Post by nisiprius »

Another problem is that however one chooses to measure risk, there is sampling variation--one does not know the true "risk" of any asset class any more than one knows the true "return" of any asset class. I posted on endpoint sensitivity on "historic" data observing that even averaging over 80 years, even with something as basic-basic as "the total return of the stock market", the number can fluctuate by a meaningful amount with just a few years' difference in the choice of endpoints.

No matter how you measure it, the "risk" of emerging markets bonds is going to depend on whether or not your sample includes 1998.

At least with U.S. stocks you can say "well, the SBBI yearbook lists 17 "largest declines," all being >20% real, in the history of the stock market since 1870, so that's 17 >20% declines in 143 years = an average of one every 9 years. Dunno whether that's a Poisson distribution or what the statistics books would tell you, but that means something.

But 1998 is a unique event in the 20-year history of the asset class, so how do you know whether it is a once-in-two-decade event or a once-in-a-lifetime event?
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Re: Emerging Markets

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nisiprius wrote: ... endpoint sensitivity on "historic" data[/url] observing that even averaging over 80 years, even with something as basic-basic as "the total return of the stock market", the number can fluctuate by a meaningful amount with just a few years' difference in the choice of endpoints.
Nisi, no no no.

That has nothing to do with risk. Risk is the standard deviation of returns. :D
Doc wrote:The problem with that is that "risk" means different things to different people and possibly the same person as he ages.
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Re: Emerging Markets

Post by steve_14 »

nisiprius wrote:At least with U.S. stocks you can say "well, the SBBI yearbook lists 17 "largest declines," all being >20% real, in the history of the stock market since 1870, so that's 17 >20% declines in 143 years = an average of one every 9 years.
Hmm, I was poking around with Shiller data the other day and noted no less than 24 20%+ declines since 1932 alone, more like 1 every 3 years. That's nominal however.
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Re: Emerging Markets

Post by Doc »

steve_14 wrote:Hmm, I was poking around with Shiller data the other day and noted no less than 24 20%+ declines since 1932 alone, more like 1 every 3 years. That's nominal however.
If your definition of risk is "losing money" you should take a look at using Morningstar's charts in "rolling return" mode.

For example here's a chart that shows how badly Vanguard TBM "screwed up" (underperformed the Bar Cap Agg index) around 2003.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
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Re: Emerging Markets

Post by john94549 »

If one's IPS calls for a certain amount of international flavor, and said international flavor also calls for a bit of a tilt to EM (greater than that provided by VTIAX), then I would not be put-off by one year, two years, or even "X" years. Stuff goes up, stuff goes down. Who knows? Perhaps next year, and the year thereafter, and the year after that, domestic stocks will be but fair to middling (or worse), and EM will take off.
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Re: Emerging Markets

Post by nisiprius »

Doc wrote:
nisiprius wrote: ... endpoint sensitivity on "historic" data[/url] observing that even averaging over 80 years, even with something as basic-basic as "the total return of the stock market", the number can fluctuate by a meaningful amount with just a few years' difference in the choice of endpoints.
Nisi, no no no.

That has nothing to do with risk. Risk is the standard deviation of returns. :D
Doc wrote:The problem with that is that "risk" means different things to different people and possibly the same person as he ages.
Doc, I haven't run the numbers but I am virtually certain that the same kind of endpoint dependency occurs when measuring standard deviation of returns. In fact I'd bet money that standard deviation estimates are more sensitive to endpoints than return estimates, because is harder and takes a larger sample to pin down a standard deviation estimate than a mean estimate.

Unfortunately it would take actual work to check that, as the figures aren't conveniently tabulated for me in the SBBI book. There IS a chart of 5-year rolling standard deviations, and for large-company stocks it varies from about 14 for the 5-year period ending about 1937 down to maybe 2-1/2 for the period ending in 1998. So that's like more than a factor of five difference depending what 5-year period you look at.

One of the things that really frosts me about investment writing is that people will simply present a set of numbers for return, standard deviation, correlation, etc. that are an average over some time period, and they are taken as if they are gospel, simply because the number of years seems large. Political polls are now smart enough to display their numbers with a ± to show the range of sampling error, but I don't think I've ever seen that done with financial data.
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Re: Emerging Markets

Post by baw703916 »

nisiprius wrote: Doc, I haven't run the numbers but I am virtually certain that the same kind of endpoint dependency occurs when measuring standard deviation of returns. In fact I'd bet money that standard deviation estimates are more sensitive to endpoints than return estimates, because is harder and takes a larger sample to pin down a standard deviation estimate than a mean estimate.

Unfortunately it would take actual work to check that, as the figures aren't conveniently tabulated for me in the SBBI book. There IS a chart of 5-year rolling standard deviations, and for large-company stocks it varies from about 14 for the 5-year period ending about 1937 down to maybe 2-1/2 for the period ending in 1998. So that's like more than a factor of five difference depending what 5-year period you look at.
Nisi,

Actually the annualized return is more sensitive to start and end points, because it only depends on the initial and final valuations, not on what happened In between. If you know that the S&P had a value of X on a certain date, and a value of Y on a different date, you know the annualized return in between (well, if you're doing the total return you need to know the dividends too, but you get the idea).

The standard deviation does depend on what happened in between, so it's actually less sensitive to endpoints. What it is sensitive to though, is an inadequate sample size. Five years is simply way too little data, no competent statistician would claim that five data points is enough to estimate a standard deviation even for a Gaussian distribution--which we know the stock market isn't.
One of the things that really frosts me about investment writing is that people will simply present a set of numbers for return, standard deviation, correlation, etc. that are an average over some time period, and they are taken as if they are gospel, simply because the number of years seems large. Political polls are now smart enough to display their numbers with a ± to show the range of sampling error, but I don't think I've ever seen that done with financial data.
They pretty much don't understand the math. Anyone who really wants a believable answer should plan to do he number crunching themselves.
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Re: Emerging Markets

Post by steve_14 »

Doc wrote:If your definition of risk is "losing money" you should take a look at using Morningstar's charts in "rolling return" mode.
Neat tool, thanks, Vanguard certainly goofed there.
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Re: Emerging Markets

Post by Doc »

baw703916 wrote:The standard deviation does depend on what happened in between, so it's actually less sensitive to endpoints. What it is sensitive to though, is an inadequate sample size. Five years is simply way too little data, no competent statistician would claim that five data points is enough to estimate a standard deviation even for a Gaussian distribution--which we know the stock market isn't.
I think that five years gives gives you 60 data points. I know in the few times I have calculated standard deviations I have used monthly data and then annualized the result. I probably checked the calculation against a known result before applying it to an unknown which is my usual procedure but I just can't remember. :?:
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Re: Emerging Markets

Post by midareff »

nisiprius wrote:P.S. After writing that rant, I did do what I should have done first--read the four Morningstar articles under the heading "Emerging Markets 101." But in fact, as I expected, nowhere in any of those articles does it mention when the term was coined, and nowhere does it mention the fact that the index has only existed since 1988. It's all just taken for granted that there is this "thing," this coherent glob of stuff called "emerging markets," that deserves to be treated as an "asset class," and about whose characteristics we know something.


http://news.morningstar.com/articlenet/ ... ?id=622682 ... Bond Breakdown ... no. And it even mentions the 1990s, but only to say "When emerging-markets countries first started issuing debt in the early 1990s, the only way to get investors interested was to issue the bonds in U.S. dollars."

So, which is it: a) these are puff pieces promoting emerging markets bond investing in general, or b) these pieces are not for a lay audience, but for an audience who is done its and already knows about "bond" funds that sometimes do this:

Image
Nisi,

You might want to try that chart again at M* .. and possibly not cherry pick dates. $10K in New Markets Income starting 1/1/98 through today provided over $44K vs. 18.9K from the Total Stock Market. Showing drops from extremely isolated periods is just that ... and can be meaningless in the longer run.
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Doc
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Re: Emerging Markets

Post by Doc »

midareff wrote:Showing drops from extremely isolated periods is just that ... and can be meaningless in the longer run.
Picking endpoints that coincide with market cycles like top to top can be helpful in reducing this bias.
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FillorKill
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Re: Emerging Markets

Post by FillorKill »

nisiprius wrote: I don't know where to look it up, but I assume that in 1988 it didn't include Russia, because the Soviet Union was still in existence... can someone tell me whether it had a stock market and whether it was possible, in 1988, to buy stocks of Russian companies?
Sure. They did not and you could not. The Moscow Stock Exchange was created as I recall in 1990 and Gorbachev signed an order in October, 1990 permitting Soviet citizens to purchase securities. Trading in securities was outlawed following the 1917 Bolshevik revolution (and the stock exchange in St Petersburg was closed).
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Re: Emerging Markets

Post by denovo »

nisiprius wrote:P.S. After writing that rant, I did do what I should have done first--read the four Morningstar articles under the heading "Emerging Markets 101." But in fact, as I expected, nowhere in any of those articles does it mention when the term was coined, and nowhere does it mention the fact that the index has only existed since 1988. It's all just taken for granted that there is this "thing," this coherent glob of stuff called "emerging markets," that deserves to be treated as an "asset class," and about whose characteristics we know something.

The series includes a dandy article, For Emerging-Markets Bond Exposure, These Funds Are Tops that recommends three funds by name, and nowhere in the article does it mention that all three of these funds suffered 35%-40% crashes in 1998. It would be perfectly fair for the writer to mention it and give a reason for dismissing it at unimportant, but not to mention it at all seems... improper.

Quick check: do their other stories on EM bonds discuss 1998?

http://www.morningstar.com/Cover/VideoC ... ?id=622524 -- Hasenstab's Guidelines... no.

http://www.morningstar.com/Cover/videoC ... ?id=622417 ... The Four Flavors ... no.

http://news.morningstar.com/articlenet/ ... ?id=622682 ... Bond Breakdown ... no. And it even mentions the 1990s, but only to say "When emerging-markets countries first started issuing debt in the early 1990s, the only way to get investors interested was to issue the bonds in U.S. dollars."

So, which is it: a) these are puff pieces promoting emerging markets bond investing in general, or b) these pieces are not for a lay audience, but for an audience who is done its and already knows about "bond" funds that sometimes do this:

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If you want to have a debate over the definition of is, you can also have a debate over what is a developed market as opposed to an emerging market. I think as long as you stick with one company who uses the same index for all, you'l be covered with no overlap.
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Re: Emerging Markets

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Doc wrote:
baw703916 wrote:The standard deviation does depend on what happened in between, so it's actually less sensitive to endpoints. What it is sensitive to though, is an inadequate sample size. Five years is simply way too little data, no competent statistician would claim that five data points is enough to estimate a standard deviation even for a Gaussian distribution--which we know the stock market isn't.
I think that five years gives gives you 60 data points. I know in the few times I have calculated standard deviations I have used monthly data and then annualized the result. I probably checked the calculation against a known result before applying it to an unknown which is my usual procedure but I just can't remember. :?:
Yes, if you're doing monthly variances, there is a reasonable number of data points. But due to momentum I wonder if there is a bias with that approach. If one month causes succeeding months to behave similarly, the variance might appear artificially low.

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Re: Emerging Markets

Post by Doc »

baw703916 wrote:
Doc wrote:
baw703916 wrote:The standard deviation does depend on what happened in between, so it's actually less sensitive to endpoints. What it is sensitive to though, is an inadequate sample size. Five years is simply way too little data, no competent statistician would claim that five data points is enough to estimate a standard deviation even for a Gaussian distribution--which we know the stock market isn't.
I think that five years gives gives you 60 data points. I know in the few times I have calculated standard deviations I have used monthly data and then annualized the result. I probably checked the calculation against a known result before applying it to an unknown which is my usual procedure but I just can't remember. :?:
Yes, if you're doing monthly variances, there is a reasonable number of data points. But due to momentum I wonder if there is a bias with that approach. If one month causes succeeding months to behave similarly, the variance might appear artificially low.

Brad
You are making me go back many decades but when you suspect time trends in your data the variance formula is something like

Sum[(X(i+1) - X(i))^2]/(n-2)

instead of using

Sum[(x(avg) - x(i))^2]/(n-1)

So for five years you go from 59 data point to only 58 which is not a significant difference.

IIRC this still gives you a good estimate of the true variance even if the time trend is not continuous. The time trend only has to be somewhat longer than your interval between n and n+1.

Don't ask me for any more details. I'm using my "Box and Hunter" in the garage as one of the blocks under my 1970 Opel GT which is about as old as "Box and Hunter". :D

Box & Hunter, Statistics for Experimenters: Design, Innovation, and Discovery , 2nd Edition "A Classic adapted to modern times" http://www.amazon.com/Statistics-Experi ... 0471718130 (I have the classic edition.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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