RAFI Intl. Country Rebalancing

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Robert T
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RAFI Intl. Country Rebalancing

Post by Robert T »

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Rick’s book “All About Asset Allocation” shows that a fixed combination of the components of EAFE, namely EAFE Pacific and EAFE Europe (annually rebalanced) had a higher annualized return than EAFE itself from 1970 to 2004 (pg. 120). The reason: the individual Europe and Pacific returns had low correlation over the period (e.g. the Pacific share of EAFE shifted from about 30% in 1970 to 70 percent in 1998, then back to about 30 percent by 2004 – annual rebalancing would have acted to sell 'regions' high and buy them low). As I understand this potential ‘rebalancing return’ is one of the reasons Rick recommends a separate allocation to Europe and Pacific rather than just holding EAFE (and for his preference for the country-weighting-capped DFA EM fund).

I find similar results with the EAFE Value indexes (table below). Fixed combinations of EAFE value components have higher annualized return with similar risk (Standard deviation) over the 1975-2008 period than the EAFE value index itself. Seems to suggest a region/country rebalancing return over this period.

However, unlike the EAFE market series, its not currently possible to hold separate fixed allocations of an EAFE Pacific value fund and an EAFE Europe value fund as no index funds exist that track these respective series.

The RAFI international index seems to offer an interesting alternative. Arnott breaks down the country component shares of a global RAFI index over the period 1985-2007 (pg. 126-27 of his Fundamental Index book). The country shares are much more stable than cap-weighted shares (including cap-weighted market and value shares) [“more stability and much tighter ranges”]. Arnott suggests in the book that country rebalancing added about 0.7% annualized to the global ex-US fundamental index over the period. To me this suggests that a RAFI intl index tracking fund i.e. the Powershares FTSE RAFI Developed Market ex-US Portfolio offers the potential rebalancing returns (in one fund). IMO this likely added to the RAFI Intl excess return of 1.6% (12.2 – 10.6) over the EAFE value index return between 1984-2008 (table below).

Code: Select all

                                                   25:25:25:25
                                                   UK Value
                                     50:50         Europe ex UK Value
                          EAFE     Europe Value    Japan Value           RAFI
                 EAFE     Value    Pacific Value   Pacific ex Japan      Intl
  
1975-2008

Ann. Return, %   10.3     12.1        12.5            13.3                 -
Std Dev          22.6     23.0        22.7            22.5                 -


1984-2008                             
  
Ann. Return, %    8.9     10.6        10.9            11.2               12.2    
Std Dev          25.0     25.7        25.3            23.7               24.1 

Source: Derived from MSCI and Powershares website, and Arnott's book.

Robert
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ScottW
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Post by ScottW »

Interesting results. It's a shame the fund is only available through Powershares--and at a 0.75% expense ratio.
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wbond
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Post by wbond »

ScottW wrote:Interesting results. It's a shame the fund is only available through Powershares--and at a 0.75% expense ratio.
If I understand this correctly, the Schwab fund SFNNX is the same index with a .35% ER and as a fund (so no bid/ask spread and no commission). So, if you have a Schwab account this is a cheaper way to go.
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Post by ScottW »

wbond wrote:If I understand this correctly, the Schwab fund SFNNX is the same index with a .35% ER and as a fund (so no bid/ask spread and no commission). So, if you have a Schwab account this is a cheaper way to go.
You're right--SFNNX is currently the institutional class of the fund, but according to their prospectus, Schwab plans to merge all classes into a single fund by the end of October. The "real" expense ratio is around 0.78%, but as long as Schwab acts as the advisor to the fund, they have agreed to cap the expenses at 0.35%.

I've been looking for an international large value fund for a while, and wasn't thrilled with EFV. I felt it was a little too pricey, the spread was high, and I'm leery of the iShares brand now that it's under new management. I'll have to look into this fund further. Thanks to Robert and Wbond for bringing it to my attention.
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Post by stratton »

Speaking of being wary of etf companies: WisdomTree has cut it's Intl Mid/Small etf (DLS) back to 467 stocks from about 800+ at one time. It looks like they are trying to save a little money by going with more liquid stocks. This is logical seeing as how they are profitable yet as a company. EM Mid/Small etf (DGS) still has its ~360 stocks.

Paul
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siamond
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Re: International Large Value funds

Post by siamond »

ScottW wrote:
wbond wrote:If I understand this correctly, the Schwab fund SFNNX is the same index with a .35% ER and as a fund (so no bid/ask spread and no commission). So, if you have a Schwab account this is a cheaper way to go.
You're right--SFNNX is currently the institutional class of the fund, but according to their prospectus, Schwab plans to merge all classes into a single fund by the end of October. The "real" expense ratio is around 0.78%, but as long as Schwab acts as the advisor to the fund, they have agreed to cap the expenses at 0.35%.

I've been looking for an international large value fund for a while, and wasn't thrilled with EFV. I felt it was a little too pricey, the spread was high, and I'm leery of the iShares brand now that it's under new management. I'll have to look into this fund further. Thanks to Robert and Wbond for bringing it to my attention.
Bump. Any updated views of what's the best choice for an International Large Value fund? EFV (which I currently own)? SFNNX (which seems a tad better)? Something else?
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Re: International Large Value funds

Post by RNJ »

siamond wrote:
ScottW wrote:
wbond wrote:If I understand this correctly, the Schwab fund SFNNX is the same index with a .35% ER and as a fund (so no bid/ask spread and no commission). So, if you have a Schwab account this is a cheaper way to go.
You're right--SFNNX is currently the institutional class of the fund, but according to their prospectus, Schwab plans to merge all classes into a single fund by the end of October. The "real" expense ratio is around 0.78%, but as long as Schwab acts as the advisor to the fund, they have agreed to cap the expenses at 0.35%.

I've been looking for an international large value fund for a while, and wasn't thrilled with EFV. I felt it was a little too pricey, the spread was high, and I'm leery of the iShares brand now that it's under new management. I'll have to look into this fund further. Thanks to Robert and Wbond for bringing it to my attention.
Bump. Any updated views of what's the best choice for an International Large Value fund? EFV (which I currently own)? SFNNX (which seems a tad better)? Something else?
I've held EFV for some time. Began using PXF as a TLH partner and that has become my ILV vehicle of choice. It's got a lower market cap than EFV, lower turnover, and lower yield (good for a taxable account). The regression data - though backward looking - also look slightly better.
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Re: International Large Value funds

Post by berntson »

RNJ wrote: I've held EFV for some time. Began using PXF as a TLH partner and that has become my ILV vehicle of choice. It's got a lower market cap than EFV, lower turnover, and lower yield (good for a taxable account). The regression data - though backward looking - also look slightly better.
I have EFV and am planning to use PXF for new purchases. I may end up splitting my international value allocation between the two. RAFI funds seem to do a good job minimizing negative alpha, and PXF is no exception. It consistently has lower negative alpha than EFV. The loadings on RAFI funds can be somewhat unstable, so I'm not sure if it's stronger value loading will continue going forward.
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siamond
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Re: RAFI Intl. Country Rebalancing

Post by siamond »

PXF has a 0.47% expense ratio nowadays. And a better performance than EFV although the time period is too short to be that meaningful.

SFNNX seems to be basically the same as PXF -same past performance- but with a lower expense ratio, 0.34%. Any reason to NOT go with Schwab?
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siamond
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Re: RAFI Intl. Country Rebalancing

Post by siamond »

siamond wrote:SFNNX seems to be basically the same as PXF -same past performance- but with a lower expense ratio, 0.34%. Any reason to NOT go with Schwab?
I just looked at it in the context of my 401k (Fidelity/BrokerageLink), which is where my EFV holdings are. And... ouch... $49 transaction fee... Gives me cold feet.
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Re: RAFI Intl. Country Rebalancing

Post by grap0013 »

siamond wrote:
siamond wrote:SFNNX seems to be basically the same as PXF -same past performance- but with a lower expense ratio, 0.34%. Any reason to NOT go with Schwab?
I just looked at it in the context of my 401k (Fidelity/BrokerageLink), which is where my EFV holdings are. And... ouch... $49 transaction fee... Gives me cold feet.
I have no preference between Schwab vs. Powershares for these funds. The simple work-a-around for transaction fees is to not buy too frequently. I let money pile up in my standard account option emerging markets(DFEVX) and when I hit a rebalancing band I do a big one time purchase of SFILX with a $75 transaction fee. Since EM has done so poor the last couple of years, transaction fees have become a moot point.
There are no guarantees, only probabilities.
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Re: RAFI Intl. Country Rebalancing

Post by SnowSkier »

Just started investigating International Large Value possibilities, and of course EFV, PXF, and SFNNX are some of the ones frequently mentioned.

Any opinions on FNDF ? (Schwab Fundamental Intl Lg Co ETF, ER 0.32%)

It looks like it almost exactly tracks SFNNX, and is very similar to PXF, for a lower ER of 0.32%
It's relatively new, and only has 81M assets but since it's very similar to SFNNX (808M assets) and PXF (778M assets) with lower ER, I assume it will be growing.

Per Morningstar, for FNDF, avg mkt cap is 35B, P/B 1.29, P/CF 4.89, ~800 holdings. All these numbers are very close to SFNNX, Schwab's equivalent mutual fund.
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ILV (Intl Large Value) choices? PXF, EFV, FNDF, SFNNX, ?

Post by SnowSkier »

trying a potentially more eye-catching subject line (?)...
(was: RAFI Intl. Country Rebalancing;
trying to change it to: ILV (Intl Large Value) choices? PXF, EFV, FNDF, SFNNX, ?)

Just started investigating International Large Value possibilities, and of course EFV, PXF, and SFNNX are some of the ones frequently mentioned.

Any opinions on FNDF ? (Schwab Fundamental Intl Lg Co ETF, ER 0.32%)

It looks like it almost exactly tracks SFNNX, and is very similar to PXF, for a lower ER of 0.32%
It's relatively new, and only has 81M assets but since it's very similar to SFNNX (808M assets) and PXF (778M assets) with lower ER, I assume it will be growing.

Per Morningstar, for FNDF, avg mkt cap is 35B, P/B 1.29, P/CF 4.89, ~800 holdings. All these numbers are Very close to SFNNX, Schwab's equivalent mutual fund.
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siamond
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Re: RAFI Intl. Country Rebalancing

Post by siamond »

Funny, I was going to revive this thread too. I just noticed that SFNNX is a No-Transaction-Fee fund on E*Trade (where my primary securities are).

Now that my personal situation has evolved and I don't mind dividends/capital-gains any more, I am going to rebalance a bit my accounts, reducing the Int'l Large Value (iShares EFV) position on my 401k while developing an SFNNX position on my taxable account. And get the corresponding tax break.
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siamond
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Re: Int'l Large Value choices? PXF, EFV, FNDF, SFNNX, ?

Post by siamond »

Bump. Can't say I am satisfied with the choices as they aren't quite centered on Value...

I am currently using SFNNX, but am now thinking to move back to EFV for this reason. Thoughts?

SFNNX Investment Style (%)
43.15% 29.62% 16.72% Large/Giant
5.61% 3.44% 1.22% Medium
0.21% 0.03% 0.00% Small/Micro
Value Blend Growth
as of 7/31/2014

VTRIX Investment Style (%)
25.12% 37.54% 24.49% Large/Giant
5.73% 2.43% 4.24% Medium
0.45% 0.00% 0.00% Small/Micro
Value Blend Growth
as of 9/30/2014

EFV Investment Style (%)
56.97% 30.93% 3.34% Large/Giant
5.76% 2.20% 0.78% Medium
0.01% 0.02% 0.00% Small/Micro
Value Blend Growth
as of 11/28/2014
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in_reality
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Re: Int'l Large Value choices? PXF, EFV, FNDF, SFNNX, ?

Post by in_reality »

[quote="siamond"] Bump. Can't say I am satisfied with the choices as they aren't quite centered on Value...

I am currently using SFNNX, but am now thinking to move back to EFV for this reason. Thoughts [/quote]

I wouldn't expect nor want RAFI funds to be a straight, typical value tilt. If they were, I'd look for a lower ER.

As they are, they will also include relatively valuey firms in less valuey sectors that might otherwise be excluded in a straight value tilt.

Also, the methology will tilt more towards value after growth outperformane and less towards value after value outperformance.

These funds are simply not a traditional value tilt.

Morningstar had a nice write up recently but I can't find the link just now...
Last edited by in_reality on Sun Dec 28, 2014 2:12 am, edited 1 time in total.
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Re: Int'l Large Value choices? PXF, EFV, FNDF, SFNNX, ?

Post by Robert T »

siamond wrote:Bump. Can't say I am satisfied with the choices as they aren't quite centered on Value...

I am currently using SFNNX, but am now thinking to move back to EFV for this reason. Thoughts?
FWIW - here's the simulated backtests of the international series tracked by various funds (in parenthesis). 1997 is earliest calendar year of data for the Russell Fundamental Developed-ex US series (tracked by SFNNX as I understand). Obviously no guarantees, but perhaps just stick with SFNNX if you already hold it (FNDF, the ETF version will likely be more tax efficient).

1997-2013 – annualized return/standard deviation

8.9%/22.5 = Russell Fundamental Developed-ex US (tracked by SFNNX)
8.7%/24.6 = Dimensional International Value (tracked by DFIVX as I understand)
7.5%/20.0 = Wisdomtree International Large Cap Dividend (tracked by DOL)
6.1%/22.5 = MSCI EAFE Value (tracked by EFV)
5.2%/22.2 = MSCI EAFE (tracked by EFA)

Robert
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siamond
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Re: RAFI Intl. Country Rebalancing

Post by siamond »

Thanks, Robert. Where do you get such historical data about such indexes?
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Re: RAFI Intl. Country Rebalancing

Post by Robert T »

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Siamond,

The Russell series is from the Russell website - http://www.russell.com/indexes/americas ... alues.page
The Dimensional series is from - http://www.robasciotti.com/docs_informa ... 202014.pdf
The MSCI series is from the MSCI website - http://www.msci.com/products/indexes/co ... mance.html
The Wisdomtree series was from the Wisdomtree website. When Wsdomtree first started, they had backtests for all the indexes on their website which I downloaded at the time. The backtests are no longer accessible from the website (as far as I can tell).

Best,
Robert
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