100% of international developed to small/mid?

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BFRAME
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100% of international developed to small/mid?

Post by BFRAME » Sat Jun 16, 2018 4:45 pm

Hi all,

My portfolio is 70/30 stocks bonds, and my equities are 40% international. Of the international, I have about 35% in emerging (VEIEX) and 65% in developed (VTMGX), comprising 8% and 20% of my total portfolio. I am debating a somewhat Swedroe-ean move of switching the ex-US developed to all small/mid, either through VINEX, VSS, or a combination. My thinking here has nothing to do with trying to beat the market or eek out better gains, but simply because ex-US large developed is highly correlated with US developed due to multinational companies, such that this is little diversification benefit of exUS large cap (the main holding are all heavily invested in the US --- Shell, Samsung, Nestle, Toyota, etc). In contrast, international small/mid are generally better diversifiers relative to the S&P, and so this would help me capture a less correlated class.

Does anyone do something similar? And is there some key issue I am missing that might come back to bite me? Certainly I could do something in between, say 50% in large developed, 50% in small, but again, I fail to see how large developed adds much to a portfolio.

Thanks for any feedback!

livesoft
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Re: 100% of international developed to small/mid?

Post by livesoft » Sat Jun 16, 2018 5:27 pm

I think your premise is false and your math looks fishy to me, too.

Anyways, you can see that in 2018 so far, that Vanguard US Large-cap is up about 5% while VTMGX is down about -0.5%. Those performances are NOT similar and one might say that at least this year, not too correlated.
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tibbitts
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Re: 100% of international developed to small/mid?

Post by tibbitts » Sat Jun 16, 2018 5:39 pm

BFRAME wrote:
Sat Jun 16, 2018 4:45 pm
Hi all,

My portfolio is 70/30 stocks bonds, and my equities are 40% international. Of the international, I have about 35% in emerging (VEIEX) and 65% in developed (VTMGX), comprising 8% and 20% of my total portfolio. I am debating a somewhat Swedroe-ean move of switching the ex-US developed to all small/mid, either through VINEX, VSS, or a combination. My thinking here has nothing to do with trying to beat the market or eek out better gains, but simply because ex-US large developed is highly correlated with US developed due to multinational companies, such that this is little diversification benefit of exUS large cap (the main holding are all heavily invested in the US --- Shell, Samsung, Nestle, Toyota, etc). In contrast, international small/mid are generally better diversifiers relative to the S&P, and so this would help me capture a less correlated class.

Does anyone do something similar? And is there some key issue I am missing that might come back to bite me? Certainly I could do something in between, say 50% in large developed, 50% in small, but again, I fail to see how large developed adds much to a portfolio.

Thanks for any feedback!
It seems extreme to eliminate all allocation to large ex-us companies, although your theory is probably correct. You're exposed to the same issue by having exposure to domestic large companies, no? Or are you going small there, too?

MotoTrojan
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Re: 100% of international developed to small/mid?

Post by MotoTrojan » Sat Jun 16, 2018 5:55 pm

I’ve considered it for my 25% Total International exposure but I think I’ll just add a small tilt someday, like I do with US. As livesoft stated, correlations aren’t the full story; although I’m curious how much of the difference is currency related.

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vineviz
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Re: 100% of international developed to small/mid?

Post by vineviz » Sat Jun 16, 2018 7:50 pm

This approach is totally reasonable in my opinion. Large cap stocks from developed countries are the least potent of the non-US asset classes.

Emerging market stocks, emerging market bonds, and foreign small/mid-cap stocks are all much more powerful and, together, render a fund like VXUS (Vanguard Total International Stock ETF) almost completely redundant.

Statistically, iShares Edge MSCI Mltfct Intl SmCp ETF (ISCF) is a better diversified than VSS is. Might be worth a look. Splitting the international allocation evenly between emerging market stocks and ISCF or VSS seems smart to me.

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whodidntante
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Re: 100% of international developed to small/mid?

Post by whodidntante » Sun Jun 17, 2018 1:36 pm

vineviz wrote:
Sat Jun 16, 2018 7:50 pm

Statistically, iShares Edge MSCI Mltfct Intl SmCp ETF (ISCF) is a better diversified than VSS is. Might be worth a look. Splitting the international allocation evenly between emerging market stocks and ISCF or VSS seems smart to me.
ISCF hasn't attracted a clear critical mass of assets. It might be liquidated in the next big downturn. What are your thoughts on closure risk for this fund?

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vineviz
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Re: 100% of international developed to small/mid?

Post by vineviz » Sun Jun 17, 2018 3:25 pm

whodidntante wrote:
Sun Jun 17, 2018 1:36 pm
ISCF hasn't attracted a clear critical mass of assets. It might be liquidated in the next big downturn. What are your thoughts on closure risk for this fund?
That doesn’t worry me much. The asset base has increased consistently almost every quarter since inception and the managers also manage dozens of other portfolios using similar styles, so it’s hard to imagine that BlackRock would see much benefit from closing the ETF.

Even if they did, in a tax-deferred account a liquidation wouldn’t be an issue IMHO. In a taxable account I guess there would be capital gains to worry about?

BFRAME
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Re: 100% of international developed to small/mid?

Post by BFRAME » Sun Jun 17, 2018 5:50 pm

Thanks for the comments so far. A few follow ups:
livesoft wrote:
Sat Jun 16, 2018 5:27 pm
I think your premise is false and your math looks fishy to me, too.
Care to elaborate?
tibbitts wrote:
Sat Jun 16, 2018 5:39 pm
It seems extreme to eliminate all allocation to large ex-us companies, although your theory is probably correct. You're exposed to the same issue by having exposure to domestic large companies, no? Or are you going small there, too?
I tilt a bit small/value in US, but only 5% total portfolio. But the point of this isn't diversification, it's just trying to gain a bit more exposure to the small/value factor. Otherwise I do have 10% in US REITs, which is primarily for diversification, although I know that in a strong downturn these probably won't provide much diversification.

But I'm still on the fence about this approach, hence my question. This would put 20% of my portfolio dedicated to small cap stocks. Regardless of the diversification benefit, this is certainly a tilt towards small which is way more extreme a tilt than I would normally do. But then again, the point of having international equities is not necessarily a bet that they will outperform the S&P, and so they won't necessarily have the same tracking error regret that can come from US small cap stocks.

livesoft
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Re: 100% of international developed to small/mid?

Post by livesoft » Sun Jun 17, 2018 5:53 pm

BFRAME wrote:
Sun Jun 17, 2018 5:50 pm
Care to elaborate?
I did already elaborate. Please re-read what I posted.
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sal paradise
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Re: 100% of international developed to small/mid?

Post by sal paradise » Sun Jun 17, 2018 7:14 pm

I keep the majority of my equity position in half viov (s&p 600 sv) and the other half in vss. I tend to follow Larry's advice with the barbell approach, all bonds are in IT/ST treasury. I've done this for the last couple years and have been happy with the decision.
I would recommend keeping vss in tax deferred accounts if you can.
I think we all look for some confirmation bias on this forum. You could find any thread that confirms your opinion. Whatever you choose, the most important decision is being able to stick with it for the long haul.

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jhfenton
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Re: 100% of international developed to small/mid?

Post by jhfenton » Sun Jun 17, 2018 8:05 pm

I essentially eliminated all of my large cap developed (VTMGX) a couple of years ago, splitting our 50% international stake between VSS (Vanguard FTSE All-World ex-US Small Cap) (30%) and emerging markets (20%), mostly in VEMAX (Vanguard Emerging Markets Index Admiral). It wasn't so much that I expected VSS to outperform VTIAX (Vanguard Total International Admiral, the comparable all-world market-cap index fund), but that once I decided to own VSS, I didn't see what diversification I got out of VTIAX or VTMGX. So for simplicity, I eliminated VTMGX.

For a while, the only exception was the Vanguard Developed Index Admiral in my employer-sponsored HSA. (It was the best-available fund.) But when I moved my HSA to Lively+TD Ameritrade and invested it in emerging markets, I eliminated that. So for a while, we had no international developed large cap.

But now as of May, I have added VTIAX in my wife's new 401(k). I have no acceptable international in my 401(k) and VTIAX is the only acceptable international fund in her 401(k), so I'm using VTIAX as our best-available 401(k) international.

But where I have a choice, I am sticking with VSS+Emerging Markets.

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siamond
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Re: 100% of international developed to small/mid?

Post by siamond » Sun Jun 17, 2018 10:29 pm

BFRAME wrote:
Sat Jun 16, 2018 4:45 pm
Does anyone do something similar? And is there some key issue I am missing that might come back to bite me? Certainly I could do something in between, say 50% in large developed, 50% in small, but again, I fail to see how large developed adds much to a portfolio.
If you want some numbers, here are a few things I quickly got out of comparing two international splits for the known data (1976-2017) using the Simba backtesting spreadsheet:
- 100% EAFE Developed => CAGR 9.4%, Std-Dev 21%, US Correlation 0.60
- 65% EAFE Developed, 35% EM => CAGR 10.0%, Std-Dev 21%, US Correlation 0.63
- 50% EM, 50% Int'l Small => CAGR 10.1%, Std-Dev 24%, US Correlation 0.51

So... first, it is untrue to view Int'l Developed as being extremely correlated to the US market. Yeah ok, they both dropped like a rock in 2008, but then everything did (except US treasuries). Also, correlation goes in ebbs and flows, you know. Next, EM and Int'l Small could have added a little oompf to your portfolio, but they were not much less correlated with the US market.

Personally, I totally fail to understand why people think that they should diversify while stopping to the US border. This is self-contradicting logic, very likely under the influence of a bias or another (recency bias, success bias, home country bias, personal anecdocts, whatever). Throw all this baggage away, just diversify as much as you can...

I do make a bet of sorts on EM and Int'l Small, mind you. But I don't want to give up on diversification as a matter of principle. So my International equities are split 50% Developed, 25% EM, 25% Int'l Small. I like round numbers, I hope this will keep me disciplined. But that's just me...

OP, whatever you decide to do, please remember, just try your best to stick to the plan for *decades*, don't tinker. It's hard, I know it all too well, but this is really the way to extract whatever premium might be there. Personally, I see nothing wrong with your existing AA.

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