Justification for holding Emerging Markets?

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TheTimeLord
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Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 7:57 am

I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.
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Re: Justification for holding Emerging Markets?

Post by Grt2bOutdoors » Thu May 18, 2017 8:13 am

TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


Cheap asset class, higher growth potential, better risk premium.
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TheTimeLord
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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 8:32 am

Grt2bOutdoors wrote:
TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


Cheap asset class, higher growth potential, better risk premium.


You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.
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Re: Justification for holding Emerging Markets?

Post by BogleAlltheWay » Thu May 18, 2017 8:36 am

I have heard arguments like those from John Bogle, that you really don't need international funds because many of the largest US companies get a large percentage of their revenue from overseas. I think he said if you really wanted international you could do up to 20%.
Other people have said that home country bias adds risk. i.e. the Japan stock market is has high now as it was 30 years ago.

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Re: Justification for holding Emerging Markets?

Post by lazyday » Thu May 18, 2017 8:39 am

TheTimeLord wrote:You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.

Paraphrasing Jeremy Grantham: Within an asset class, individual securities are generally priced efficiently. But asset classes themselves, not so much.

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Re: Justification for holding Emerging Markets?

Post by Grt2bOutdoors » Thu May 18, 2017 8:40 am

TheTimeLord wrote:
Grt2bOutdoors wrote:
TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


Cheap asset class, higher growth potential, better risk premium.


You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.


They become inefficient during times of market duress - yesterday was a prime example of it. Markets fell based on what? pricing? or "animal spirits"?
If you don't believe in it that is fine, however then, that means you hold market weights of broad indexes, all of the indexes and some of those same indexes also hold emerging markets, therefore all of your bases are covered, assuming the former holds true.
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Re: Justification for holding Emerging Markets?

Post by lazyday » Thu May 18, 2017 8:41 am

Answering the original Q: Diversification.

Such as in Swensen's Unconventional Success.

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Re: Justification for holding Emerging Markets?

Post by alex_686 » Thu May 18, 2017 9:10 am

The original argument was that emerging markets was stuffed with value companies that had good growth opportunities. The classic example was Coke distributes. Coke had a winning model. As countries grew richer they would buy more soda.

I think the argument today is diversification. Take a look at the top holdings and you will find familiar names of international mega corps. IIRC the biggest holding tends to be Samsung. If you own Apple passively why wouldn't you want to hold Samsung?

Also, I don't think the argument holds that you can skip EM because a large chunk of American companies revenue is overseas. The largest market for EM is the US.

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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 10:31 am

lazyday wrote:
TheTimeLord wrote:You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.

Paraphrasing Jeremy Grantham: Within an asset class, individual securities are generally priced efficiently. But asset classes themselves, not so much.


How can the components of an asset class be efficiently priced but when taken in aggregate they aren't? Isn't that sort of an anti-indexing argument?
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Re: Justification for holding Emerging Markets?

Post by Valuethinker » Thu May 18, 2017 10:33 am

BogleAlltheWay wrote:I have heard arguments like those from John Bogle, that you really don't need international funds because many of the largest US companies get a large percentage of their revenue from overseas. I think he said if you really wanted international you could do up to 20%.
Other people have said that home country bias adds risk. i.e. the Japan stock market is has high now as it was 30 years ago.


http://www.tradingeconomics.com/japan/stock-market

http://www.macrotrends.net/2593/nikkei- ... chart-data

Just eyeballying that, Nikkei 225 index is about half? Japanese companies never paid much in the way of dividends so the total return is not massively better I don't think. 38,000 in 1990, about 19,000 now?

http://money.cnn.com/2014/12/29/investi ... 1989-peak/

http://www.forecast-chart.com/historica ... i-225.html

http://www.businessinsider.com/stocks-f ... 012-6?IR=T

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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 10:34 am

Grt2bOutdoors wrote:
TheTimeLord wrote:
Grt2bOutdoors wrote:
TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


Cheap asset class, higher growth potential, better risk premium.


You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.


They become inefficient during times of market duress - yesterday was a prime example of it. Markets fell based on what? pricing? or "animal spirits"?
If you don't believe in it that is fine, however then, that means you hold market weights of broad indexes, all of the indexes and some of those same indexes also hold emerging markets, therefore all of your bases are covered, assuming the former holds true.


You defined Emerging Markets as cheap asset class implying a persistence to this state otherwise you are just market timing.
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Re: Justification for holding Emerging Markets?

Post by Valuethinker » Thu May 18, 2017 10:36 am

TheTimeLord wrote:
lazyday wrote:
TheTimeLord wrote:You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.

Paraphrasing Jeremy Grantham: Within an asset class, individual securities are generally priced efficiently. But asset classes themselves, not so much.


How can the components of an asset class be efficiently priced but when taken in aggregate they aren't? Isn't that sort of an anti-indexing argument?


It's definitely not an Efficient Markets argument.

Schliefer had a model, in a famous paper, how if you have "noisy traders" and limits to arbitrage (borrowing limits on hedge funds) it can be a profitable (and rational) strategy to ride the bubble up rather than fight against it.

Arguably this is what happened with CDOs and the US housing bubble in the mid 2000s. No easy way to short, and lots of money to just keep riding the escalator up.

Currencies, also, there is some evidence of inefficient markets. Currencies are not necessarily bought and sold only for reasons of fundamental value. There are large players in currency markets (such as Central Banks) that have other reasons for their decisions. Certainly momentum trading is held to work in currencies.

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Re: Justification for holding Emerging Markets?

Post by harvestbook » Thu May 18, 2017 10:41 am

John Bogle, as much as I admire him and credit him for helping my philosophical path, suffers a wide range of biases. The reality is that the United States might not "win" this century, or, more importantly, the chunk of it in which you're alive and investing. I can't invest in 1960. I have to invest in the world as it is and might become.

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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 10:48 am

harvestbook wrote:John Bogle, as much as I admire him and credit him for helping my philosophical path, suffers a wide range of biases. The reality is that the United States might not "win" this century, or, more importantly, the chunk of it in which you're alive and investing. I can't invest in 1960. I have to invest in the world as it is and might become.

http://awealthofcommonsense.com/2017/05 ... ck-market/


I think he might say while you may be right about the U.S. it is most definitely is likely to finish well ahead of the other countries that currently dominate developed market indexes and trying to pick the winner from amount the others is just too hard.
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Re: Justification for holding Emerging Markets?

Post by oldcomputerguy » Thu May 18, 2017 10:53 am

TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


The Callan chart shows emerging markets being the top- performing asset class eight out of the last twenty years, so I wouldn't be so quick to write it off altogether. Of course that proves nothing about the future, but it does prove that it is quite possible that it could outperform again, so I am holding a market-weight amount.
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Re: Justification for holding Emerging Markets?

Post by bigred77 » Thu May 18, 2017 10:55 am

I overweight EM for the same reason I overweight US SCV.

I believe those equity classes contain more risk, and thus, over the long term, should deliver more reward than well established large cap companies in developed countries. I also believe them to be less than perfectly correlated with total stock market indexes (both US and International) which I hold even more of. I think over weighting both equity classes will improve the return my portfolio generates with an efficient and acceptable amount of additional risk.

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Re: Justification for holding Emerging Markets?

Post by Tamalak » Thu May 18, 2017 10:58 am

Justification: Diversification.

I am not big on the concept of International as a whole being necessary for a U.S. investor.


Neither is it 'necessary' for you to invest in domestic companies with names starting from A-M. You'll get lots of diversification by exclusively investing in N-Z. But why would you exclude available diversification? THAT is what requires justification.

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Re: Justification for holding Emerging Markets?

Post by alex_686 » Thu May 18, 2017 10:59 am

TheTimeLord wrote:You defined Emerging Markets as cheap asset class implying a persistence to this state otherwise you are just market timing.


There is evidence of this. Or rather, there was evidence of this. EM markets, traditionally, have not been well integrated into world capital markets. Poor market regulation. Think lax accounting standards and capital controls. Cost and complexity. Finding a local custodian, having to read annual reports in a different language and accounting standard. Home Country Bias kept investors away. Spotty coverage by security analysis. etc.

As markets integrated stocks got a one time boost, which is why I said we saw evidence of this. Most of the
EM markets have become more or less interrogated so that persistence state is more or less gone. There are some exceptions - China being the big one. However China has other oddities.

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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 11:04 am

http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.
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Re: Justification for holding Emerging Markets?

Post by triceratop » Thu May 18, 2017 11:36 am

TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.


None of the portfolios listed with international allocations had more developed markets weighting than market weight, so I am curious why you think the lazy portfolios had a 'small' allocation. You know that EM is represented in cap-weighted and Vanguard's small-tilted funds right?
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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 11:43 am

triceratop wrote:
TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.


None of the portfolios listed with international allocations had more developed markets weighting than market weight, so I am curious why you think the lazy portfolios had a 'small' allocation. You know that EM is represented in cap-weighted and Vanguard's small-tilted funds right?


none to 5% seems small to me.
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Re: Justification for holding Emerging Markets?

Post by triceratop » Thu May 18, 2017 11:58 am

TheTimeLord wrote:
triceratop wrote:
TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.


None of the portfolios listed with international allocations had more developed markets weighting than market weight, so I am curious why you think the lazy portfolios had a 'small' allocation. You know that EM is represented in cap-weighted and Vanguard's small-tilted funds right?


none to 5% seems small to me.


That's not really the point. The portfolio with 5% allocation to emerging markets has 15% allocated to developed markets. That is 25% of international stocks. Market weight is 19.3%.

Is your question 'how much international' or 'how much emerging markets as part of my international allocation'? As phrased now it reads as the latter, and my point is that the lazy portfolios seem well- or over-allocated to emerging markets. You can't go by the topline figures of '5%' when only 20% of the entire portfolio is allocated to international equities!
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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 12:04 pm

triceratop wrote:
TheTimeLord wrote:
triceratop wrote:
TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.


None of the portfolios listed with international allocations had more developed markets weighting than market weight, so I am curious why you think the lazy portfolios had a 'small' allocation. You know that EM is represented in cap-weighted and Vanguard's small-tilted funds right?


none to 5% seems small to me.


That's not really the point. The portfolio with 5% allocation to emerging markets has 15% allocated to developed markets. That is 25% of international stocks. Market weight is 19.3%.

Is your question 'how much international' or 'how much emerging markets as part of my international allocation'? As phrased now it reads as the latter, and my point is that the lazy portfolios seem well- or over-allocated to emerging markets. You can't go by the topline figures of '5%' when only 20% of the entire portfolio is allocated to international equities!


So in La La land you only measure Emerging Market allocation versus International allocation not versus your total equity allocaton? Sorry if the question is unclear but is it asking what is the justification for holding any Emerging Market allocation.
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Re: Justification for holding Emerging Markets?

Post by Coato » Thu May 18, 2017 12:08 pm

Grt2bOutdoors wrote:
TheTimeLord wrote:
Grt2bOutdoors wrote:
TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


Cheap asset class, higher growth potential, better risk premium.


You have to believe the markets are a very inefficient pricing mechanisms to believe an asset class is persistently cheap and undervalued. Which is not a belief I hold.


They become inefficient during times of market duress - yesterday was a prime example of it. Markets fell based on what? pricing? or "animal spirits"?
If you don't believe in it that is fine, however then, that means you hold market weights of broad indexes, all of the indexes and some of those same indexes also hold emerging markets, therefore all of your bases are covered, assuming the former holds true.


I think the markets fell yesterday because Brazil just had another political scandal and they're in a free fall. Their currency dropped like 10% against the dollar in an hour. (Unfortunately I just got my severance package paid to me yesterday, in Real not dollars, so I know.)

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Re: Justification for holding Emerging Markets?

Post by triceratop » Thu May 18, 2017 12:15 pm

TheTimeLord wrote:
triceratop wrote:
TheTimeLord wrote:
triceratop wrote:
TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.


None of the portfolios listed with international allocations had more developed markets weighting than market weight, so I am curious why you think the lazy portfolios had a 'small' allocation. You know that EM is represented in cap-weighted and Vanguard's small-tilted funds right?


none to 5% seems small to me.


That's not really the point. The portfolio with 5% allocation to emerging markets has 15% allocated to developed markets. That is 25% of international stocks. Market weight is 19.3%.

Is your question 'how much international' or 'how much emerging markets as part of my international allocation'? As phrased now it reads as the latter, and my point is that the lazy portfolios seem well- or over-allocated to emerging markets. You can't go by the topline figures of '5%' when only 20% of the entire portfolio is allocated to international equities!


So in La La land you only measure Emerging Market allocation versus International allocation not versus your total equity allocaton? Sorry if the question is unclear but is it asking what is the justification for holding any Emerging Market allocation.


I do recommend larger international equity allocations than 20%, but again that's a different question than the plain-language reading of your question. Yes, when asking whether to hold any emerging markets, the appropriate baseline comparison is how much international you intend to hold.

It is the same as judging 15% international to be small if one has 70% bonds. Well, yes, it is, but you may have only 15% U.S. stocks, too. The question gets muddled by the overall small allocation.

P.S. my la-la-land location is a joke. :wink:
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Re: Justification for holding Emerging Markets?

Post by Lauren Vignec » Thu May 18, 2017 12:24 pm

TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


The total international stock index holds some emerging markets stocks, so it is easy to have a simple allocation to emerging markets.

As far as why international at all? Because I cannot predict the future. That's all.

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Re: Justification for holding Emerging Markets?

Post by nisiprius » Thu May 18, 2017 12:37 pm

TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.
No, you seem to misunderstand something. They don't have surprisingly small emerging markets allocation. Of the six portfolios that include international stocks, five out of six hold them at close to cap-weight, neither concentrating on them or avoiding them.

Let's look at those portfolios. First, let's throw out #6 and #8 because they have no international stocks at all and therefore don't speak to the question of emerging markets.

Portfolios 1, 3, 4, and 7 all use Vanguard Total International Stock Market Index Fund--some as a mutual fund, some as an ETF--as their entire international stock holding, and therefore hold emerging markets according to their total capitalization, neither overweighting or underweighting it. What the percentage of emerging markets is it tricky, because no two authorities agree on which markets are "emerging", but Vanguard says that the fund is "19.3% emerging markets."

Portfolio 2 is a little confusing, but it seems to trace to this article. It was published in 2009, and I'm too lazy to trace it to David Swensen directly. What the article says is a mess
Swensen’s Model Portfolio (Using Vanguard ETFs)...
Emerging Market Equity (5 percent): Vanguard Total International Stock Index Fund (VGTSX)
Foreign Developed Equity (15 percent): Vanguard Emerging Markets Stock Index Fund (VEIEX)
which... well... wrong way around, funds instead of ETFs... never mind... let's take it that it supposed to be 15% "foreign developed equity" and 5% "emerging markets equity," so... 25% emerging markets, or a slight emerging markets overweight.

Portfolio 5 includes, for foreign equity,
3% Vanguard Total International Stock ETF (VXUS)
3% WisdomTree International SmallCap Div (DLS)
3% Vanguard Emerging Mkts ETF (VWO)
Morningstar is showing DLS as close to 100% developed markets. Doing the math, this portfolio is 3% emerging markets in VWO, + 0.6% emerging markets in VXUS, for a total of 3.6% emerging markets within 9% international stocks, or 40% emerging markets.

In short, of the six portfolios that include international stocks,

1, 3, 4, and 7 include emerging markets at exactly cap weight, neither underweighted nor overweighted.
2 overweights them slightly.
5 distinctly overweights them.

NOT ONE OF THEM suggests that you hold international stocks but underweight emerging markets. That is, not one recommends overweighting developed markets. Only one of them suggests a meaningful overweight to emerging markets. 5 out of 6 of them recommend holding it at cap weight or close to it.
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Re: Justification for holding Emerging Markets?

Post by triceratop » Thu May 18, 2017 12:40 pm

^ What he said.
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Re: Justification for holding Emerging Markets?

Post by NiceUnparticularMan » Thu May 18, 2017 12:55 pm

TheTimeLord wrote:I think he might say while you may be right about the U.S. it is most definitely is likely to finish well ahead of the other countries that currently dominate developed market indexes and trying to pick the winner from amount the others is just too hard.


So much for efficient pricing.

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Re: Justification for holding Emerging Markets?

Post by asif408 » Thu May 18, 2017 1:16 pm

TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.
Plenty of reasonable justifications are available, but since you don't seem convinced, and If you're not big on them just don't buy them. Then I will buy more to offset what you don't buy and we'll come back in 5 years and see who comes out ahead. Deal?

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Re: Justification for holding Emerging Markets?

Post by NiceUnparticularMan » Thu May 18, 2017 1:20 pm

There are many points to be made, but a couple are sufficient for me:

(1) EM has been less correlated to U.S. stocks than developed ex-US;

(2) This:
Image

People who cite the long-term performance of U.S. stocks dating back to the 19th Century and then question why anyone would invest in emerging markets today seem to have rather self-contradictory views, since the U.S. is really the ultimate EM success story. Of course that was helped along by WWII--and then the game was pretty much up. Since the post-WWII plateau from about 1950-1970, the U.S. has been in a generally downward trend. It may or may not ever crash like Japan. But look at, say, the big European markets--the UK, Germany, France, Netherlands, and Austria. They are still important, competitive countries, but their share is way lower now than it used to be. At the end of the 19th Century, they were collectively about 57%. Now they are about 1/4 of that.

People who think that couldn't now happen to the United States as other countries develop seem, to me, to be operating under severe and irrational home country bias. At the end of the day, less than 5% of the world's population lives in the United States. Thinking it is inevitable we retain 50% of the world's stock market wealth makes no sense to me. And where that share will likely go--not steadily, not all at once, but gradually in fits and starts--is what we call EM.

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Re: Justification for holding Emerging Markets?

Post by rustymutt » Thu May 18, 2017 1:29 pm

Because my written investment plan calls for it. The current year return for that asset class for me is over 16%, which makes my portfolio year to date value way better. I'm invested in small value in this market. EWX for the record. :moneybag
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Re: Justification for holding Emerging Markets?

Post by lazyday » Thu May 18, 2017 2:12 pm

TheTimeLord wrote:How can the components of an asset class be efficiently priced but when taken in aggregate they aren't? Isn't that sort of an anti-indexing argument?

I think the idea is that individual securities in an asset class may be priced efficiently in relation to each other, but not in relation to securities in other asset classes.

This is not an anti-indexing argument. In 2000, you might have owned a Smallcap or SV index, today you might own EM or Ex-US indexes.

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Re: Justification for holding Emerging Markets?

Post by lazyday » Thu May 18, 2017 2:15 pm

TheTimeLord wrote:http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

I was surprised how small the Emerging Market allocation was among these 8 popular lazy portfolios. Making feel I am asking the right question.

The Swensen portfolio in that link is outdated. Around the time of the financial crisis when both REIT and EM were battered, he moved 5% from REIT to EM. There might be a quote and/or a chart with allocation % in a Yale newsletter somewhere online.

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Re: Justification for holding Emerging Markets?

Post by lazyday » Thu May 18, 2017 2:23 pm

harvestbook wrote:John Bogle, as much as I admire him and credit him for helping my philosophical path, suffers a wide range of biases. The reality is that the United States might not "win" this century, or, more importantly, the chunk of it in which you're alive and investing.

Agreed. We don't need to follow all the teachings of our gurus.

Even if the US continues to outperform, the stock market might not. As I recall, when comparing nations, there's been a weak negative correlation between GDP growth and market returns.

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Re: Justification for holding Emerging Markets?

Post by flamesabers » Thu May 18, 2017 2:58 pm

TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.


When you're not interested with investing in the international market, it makes sense you wouldn't be keen about investing in emerging markets.

One reason I invest in emerging markets is the growth potential. Mature, well-established economies typically don't have the same amount of growth potential as underdeveloped/undeveloped economies. From what I read on the Bogleheads' Wiki and elsewhere, the emerging markets contains about 80% of the world's population. I figure a lot of economic grow will occur as more and more of these countries improve their living standards.

Another reason is I want to minimize my home country bias on my investments.

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Re: Justification for holding Emerging Markets?

Post by nisiprius » Thu May 18, 2017 3:03 pm

NiceUnparticularMan wrote:...People who cite the long-term performance of U.S. stocks dating back to the 19th Century and then question why anyone would invest in emerging markets today seem to have rather self-contradictory views, since the U.S. is really the ultimate EM success story...
Since the term "emerging markets" was not coined until the 1980s, and the first emerging markets index, the MSCI Emerging Markets Index, was not created until 1998, saying that the United States was an "emerging market" in the 1800s is an exercise in spin. It's a very iffy business trying to backdate definitions and apply them to times before the concept existed. (It's no worse than talking about "the S&P 500 back to 1870" but I hate that, too.)
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Re: Justification for holding Emerging Markets?

Post by rustymutt » Thu May 18, 2017 3:05 pm

flamesabers wrote:
TheTimeLord wrote:I don't have a large amount of emerging markets in my portfolio and I am beginning to question why I have any, especially since I have no real conviction about it and for the most part appreciate portfolio simplicity. What is the justification for having emerging markets? In reality I am not big on the concept of International as a whole being necessary for a U.S. investor.




Overweighting SV emerging markets, and holding more in bonds, is 1 way to reduce your risk significantly. Same with other factor hedges, such as Larry's high SCV holdings, with more in fixed income. Reduces risk well. EM has done well over the last 15 years. History followers? It might work, and it might not. I'm staying pat.
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Re: Justification for holding Emerging Markets?

Post by NiceUnparticularMan » Thu May 18, 2017 3:31 pm

nisiprius wrote:
NiceUnparticularMan wrote:...People who cite the long-term performance of U.S. stocks dating back to the 19th Century and then question why anyone would invest in emerging markets today seem to have rather self-contradictory views, since the U.S. is really the ultimate EM success story...
Since the term "emerging markets" was not coined until the 1980s, and the first emerging markets index, the MSCI Emerging Markets Index, was not created until 1998, saying that the United States was an "emerging market" in the 1800s is an exercise in spin. It's a very iffy business trying to backdate definitions and apply them to times before the concept existed. (It's no worse than talking about "the S&P 500 back to 1870" but I hate that, too.)


You say spin, I say having a broader sense of history.

My point, which I believe is a substantive one, is that the United States was not always the mature, advanced country it is today. For a long period of time, its population was rapidly expanding (in large parts due to immigration), its infrastructure was rapidly expanding and growing, its cities were rapidly growing, and so on--and all this relative to the older more advanced countries, not just in absolute terms. For example, as of 1800 the United States had lower GDP per capita than Western Europe. But during the 19th Century and through about WWII, it had notably higher average GDP increases per capita, causing it to eventually pass Western Europe by.

The term "emerging markets" might be relatively new. But the concept fits these facts. And indeed, investors in Western Europe back in the day faced a similar sort of decision--just stick to investing in the solid older established countries of Western Europe, or invest in the new "emerging" countries like the United States. And those with the foresight to invest in the United States eventually profited, albeit with fits and starts (see, e.g., that dip during the Great Depression).

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Re: Justification for holding Emerging Markets?

Post by HomerJ » Thu May 18, 2017 4:04 pm

NiceUnparticularMan wrote:
nisiprius wrote:
NiceUnparticularMan wrote:...People who cite the long-term performance of U.S. stocks dating back to the 19th Century and then question why anyone would invest in emerging markets today seem to have rather self-contradictory views, since the U.S. is really the ultimate EM success story...
Since the term "emerging markets" was not coined until the 1980s, and the first emerging markets index, the MSCI Emerging Markets Index, was not created until 1998, saying that the United States was an "emerging market" in the 1800s is an exercise in spin. It's a very iffy business trying to backdate definitions and apply them to times before the concept existed. (It's no worse than talking about "the S&P 500 back to 1870" but I hate that, too.)


You say spin, I say having a broader sense of history.

My point, which I believe is a substantive one, is that the United States was not always the mature, advanced country it is today. For a long period of time, its population was rapidly expanding (in large parts due to immigration), its infrastructure was rapidly expanding and growing, its cities were rapidly growing, and so on--and all this relative to the older more advanced countries, not just in absolute terms. For example, as of 1800 the United States had lower GDP per capita than Western Europe. But during the 19th Century and through about WWII, it had notably higher average GDP increases per capita, causing it to eventually pass Western Europe by.

The term "emerging markets" might be relatively new. But the concept fits these facts. And indeed, investors in Western Europe back in the day faced a similar sort of decision--just stick to investing in the solid older established countries of Western Europe, or invest in the new "emerging" countries like the United States. And those with the foresight to invest in the United States eventually profited, albeit with fits and starts (see, e.g., that dip during the Great Depression).


What you say makes perfect sense to me, but the world is very different these days. Yes, in the 19th century, England was the dominant economy, and the United States was the "emerging market". But the 21st century is very different from the 19th and 20th. Everything is global and interconnected now. England didn't get to profit directly from America settling the Western states, and finding oil, etc.

But today, the established countries and their companies do indeed participate directly and profit from the growth in the emerging countries. U.S. companies are EVERYWHERE.

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Re: Justification for holding Emerging Markets?

Post by NiceUnparticularMan » Thu May 18, 2017 4:54 pm

HomerJ wrote:But the 21st century is very different from the 19th and 20th. Everything is global and interconnected now. England didn't get to profit directly from America settling the Western states, and finding oil, etc.


That's actually not true at all. British investors put lots of capital into U.S. railroads, ports, telecommunications, steel mills, coal and oil companies, and so on. Generally London was the dominant financial capital in that period, and that is where many investors would go to invest in the companies funding railroads and such throughout the Americas, including the United States. Britain was also the world's dominant industrial power for a decent length of time in the second half of the 19th Century, and it exported things like locomotives, ships, and so on to the United States and the rest of the Americas.

By the way, up until about WWI, more money was being invested into the United States by foreigners than was being invested out of the United States. And up until about WWII, the British were still the largest investors in other countries in the world (that was when they finally got passed up by the United States). Similarly Britain was a larger exporter than the U.S. and Germany until about WWI.

Of course the relative gains of the United States were probably inevitable, but the British certainly profited off funding them. Unfortunately, in WWI the British ended up cashing out a lot of those U.S. investments to help pay for the war, and then they started borrowing from the U.S., all at the same time they experienced declines in their own production. Those debts to the U.S. contributed to their own economic problems before and during the Great Depression.

You can read more about all this here:

http://www.wikiwand.com/en/Economic_his ... ed_Kingdom

It is actually pretty interesting how many parallels you can draw between the UK of that time and the US of today. Generally, and not to single you out, but it is a common problem that I think a lot of modern people today don't realize how complex and international finance was long before the current era. There were multinational companies, intercontinental trade, export of capital and other foreign private investment of all sorts, and of course colonial control (that last is something I might note which is missing today, although some would say we are not always so far off).

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Re: Justification for holding Emerging Markets?

Post by NiceUnparticularMan » Thu May 18, 2017 5:26 pm

By the way, here is a fascinating paper which goes back to this period of high British investment overseas, and determines optimal foreign investment percentages from the perspective of Modern Portfolio Theory. In the "everything old is new again" category, they calculate British investors should have had about 38% in foreign investments (Vanguard currently recommends 40% for U.S. investors):

http://scholarship.sha.cornell.edu/cgi/ ... t=articles

As an aside, you can also see the vast array of foreign investments available to British investors, including U.S. investments. You can also pick up on how important railways in particular were in this era of investing. All quite interesting.

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Re: Justification for holding Emerging Markets?

Post by telemark » Thu May 18, 2017 6:09 pm

Without addressing the original question, I just want to add that I admire your timing. Most people question an asset class after a period of underperformance, but VWO shows a one-year return of 24.89%. So, points for originality. If you decide to get out, no one can accuse you of selling low.

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Re: Justification for holding Emerging Markets?

Post by TheTimeLord » Thu May 18, 2017 7:59 pm

telemark wrote:Without addressing the original question, I just want to add that I admire your timing. Most people question an asset class after a period of underperformance, but VWO shows a one-year return of 24.89%. So, points for originality. If you decide to get out, no one can accuse you of selling low.


Yeah, it is sort of odd to ask after having an asset perform so well for you. Even stranger I have held them less than 2 years.
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Re: Justification for holding Emerging Markets?

Post by nisiprius » Thu May 18, 2017 8:35 pm

As a side issue, but illustrating the fact that international investing is hardly new, and that investment in the United States was considered risky, I give you a quotation from A Christmas Carol, by Charles Dickens, published in 1843. Dickens sets us up by saying that Ebenezer Scrooge was considered a man of his word, using a financial analogy:
Scrooge signed it: and Scrooge’s name was good upon ’Change, for anything he chose to put his hand to.
In the next chapter--excuse me--stave, he awakes in the middle of the night feeling very disoriented about the passage of time, and decides everything is OK. Dickens tells us:
This was a great relief, because “three days after sight of this First of Exchange pay to Mr. Ebenezer Scrooge or his order,” and so forth, would have become a mere United States’ security if there were no days to count by.
In other words, Dickens' readers in 1843 understood that a "United States' security" meant "shaky, risky, and unreliable."

Not that that proves that the United States in 1843 was fundamentally like Brazil in 2017. For one thing, the "United States security" would almost certainly have been a bond, not a stock. Although the stock market existed since the twenty-four gentlemen met under the buttonwood tree on Wall Street, it was relatively unimportant until the late 1800s.
Last edited by nisiprius on Thu May 18, 2017 8:41 pm, edited 2 times in total.
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Re: Justification for holding Emerging Markets?

Post by HomerJ » Thu May 18, 2017 8:38 pm

TheTimeLord wrote:
telemark wrote:Without addressing the original question, I just want to add that I admire your timing. Most people question an asset class after a period of underperformance, but VWO shows a one-year return of 24.89%. So, points for originality. If you decide to get out, no one can accuse you of selling low.


Yeah, it is sort of odd to ask after having an asset perform so well for you. Even stranger I have held them less than 2 years.


Over the past 7 years (that's how long I have held it), Emerging Markets have done diddly-squat. Even with the big run up recently.

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Re: Justification for holding Emerging Markets?

Post by unclescrooge » Thu May 18, 2017 11:24 pm

HomerJ wrote:
TheTimeLord wrote:
telemark wrote:Without addressing the original question, I just want to add that I admire your timing. Most people question an asset class after a period of underperformance, but VWO shows a one-year return of 24.89%. So, points for originality. If you decide to get out, no one can accuse you of selling low.


Yeah, it is sort of odd to ask after having an asset perform so well for you. Even stranger I have held them less than 2 years.


Over the past 7 years (that's how long I have held it), Emerging Markets have done diddly-squat. Even with the big run up recently.


Very true.

I just read that US markets are up 75% over the previous 2007 peak, Developed Markets are flat, and EM is still 20% below the previous peak.

I just overbalanced into EM by selling some US stock. EM is now 20% of portfolio, with an extremely overweight to China (roughly 8% of portfolio).

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Re: Justification for holding Emerging Markets?

Post by Valuethinker » Fri May 19, 2017 5:05 am

unclescrooge wrote:

Over the past 7 years (that's how long I have held it), Emerging Markets have done diddly-squat. Even with the big run up recently.


Very true.

I just read that US markets are up 75% over the previous 2007 peak, Developed Markets are flat, and EM is still 20% below the previous peak.


That cannot be true? US is not up 75% since 2007? Did you mean 45%?

http://www.cnbc.com/id/100522542 14,200 high on the DJIA in October 2007

DJIA is 20,000 now



I just overbalanced into EM by selling some US stock. EM is now 20% of portfolio, with an extremely overweight to China (roughly 8% of portfolio).


I think that is beginning to push the envelope in terms of risk/ return tradeoffs? Adding volatility without necessarily adding return?

A major concern I have is the Chinese stock market valuation, which I don't think is much about fundamentals, but more about Chinese exchange controls and how the Chinese government manages the monetary and banking system.

With other EM I have much less concern. The Russian market PE reflects the realities of doing business in Russia, for example. The low PE in Korea reflects the industrial nature of the companies and the Chaebol conglomerate discount (families that don't necessarily manage companies for the benefit of external shareholders); similar factors in Taiwan. Same with Japan in fact (not an EM).

China? I am not sure ordinary earnings valuation metrics are what drives stock prices, even in the long run. And the banking system "profits" seem to me to be made up (without having done a lot of work on it).

I should note that I recently bought an EM ETF so heavily weighted to China. So performance chasing ;-).
Last edited by Valuethinker on Fri May 19, 2017 7:02 am, edited 1 time in total.

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Re: Justification for holding Emerging Markets?

Post by Valuethinker » Fri May 19, 2017 5:07 am

NiceUnparticularMan wrote:By the way, here is a fascinating paper which goes back to this period of high British investment overseas, and determines optimal foreign investment percentages from the perspective of Modern Portfolio Theory. In the "everything old is new again" category, they calculate British investors should have had about 38% in foreign investments (Vanguard currently recommends 40% for U.S. investors):

http://scholarship.sha.cornell.edu/cgi/ ... t=articles

As an aside, you can also see the vast array of foreign investments available to British investors, including U.S. investments. You can also pick up on how important railways in particular were in this era of investing. All quite interesting.


Thank you, as a Brit, fascinating ;-).

On the subject of overseas investing, I should note Exchange Controls. I don't know exactly what the position was, but Britain had tough foreign exchange controls and investment restrictions, basically from 1939 to the 1970s. So I am not sure, as an individual investor, that you had many ways of investing abroad in that time period.

Tax rates on dividend income and capital gains were something like 80% as well through much of that period. And there weren't Personal Pensions (401ks), ISAs (IRA like) etc. as we know them now-- so you paid full tax on gains caused by inflation.

The lesson for American investors is that world capital markets can close, as well as open. History is a moving target.

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Re: Justification for holding Emerging Markets?

Post by ajjulee » Fri May 19, 2017 5:47 am

nisiprius wrote:
NiceUnparticularMan wrote:...People who cite the long-term performance of U.S. stocks dating back to the 19th Century and then question why anyone would invest in emerging markets today seem to have rather self-contradictory views, since the U.S. is really the ultimate EM success story...
Since the term "emerging markets" was not coined until the 1980s, and the first emerging markets index, the MSCI Emerging Markets Index, was not created until 1998, saying that the United States was an "emerging market" in the 1800s is an exercise in spin. It's a very iffy business trying to backdate definitions and apply them to times before the concept existed. (It's no worse than talking about "the S&P 500 back to 1870" but I hate that, too.)


Just because we didn't define it doesn't mean the 'idea' didn't exist. To say it's 'iffy business trying to backdate definitions and apply to them to times before the concept existed' is meaningless. Our history is replete with backdating many ideas/concepts after we figured them out. However, in this case, questioning the validity of the concept is understandable - whether EM add value or not to US investors.
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