Do you overweight emerging markets?

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Investor2
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Do you overweight emerging markets?

Post by Investor2 » Mon Oct 08, 2012 6:52 pm

I’ve been buying the Vanguard Emerging Market Stock Index Fund (VEMAX) in my taxable and Roth accounts to complement the developed markets index available in my 401k. (My 401k, the federal TSP, does not have a total international fund).

I was originally planning to add EM at market weight, and I’m almost there; I think EM is about 25% of total international.

However, John Bogle has made several statements over the past couple of years suggesting a 50/50 (developed international/EM) split, including most recently at a retirement conference on October 4, 2012.
Wade Pfau’s summary of Mr. Bogle’s comments (bold added):
He has never been much into international stock funds. He has a home country bias, as he thinks U.S. companies dominate and the economic system and financial institutions are most stable here. He is not a fan of taking currency risk. Nonetheless, he does not view emerging markets as excessively risky at the current time, and he doesn’t necessarily think that his views about international stocks are appropriate for everyone. He suggests limiting international equity holdings to 20% of the portfolio at most. He doesn’t see high prospects for European countries either. Perhaps 10% in developed markets and 10% in emerging markets for that 20% international allocation.
http://wpfau.blogspot.com/2012/10/john- ... ncome.html

Also, Vanguard’s Gus Sauter, in an interview published October 6, 2012, stated that his current asset allocation is mostly in U.S. and EM stocks, in a kind of “barbell.” He also said that he has gone from an asset allocation that was about 80% equities 4 years to one that is 90%+ equities now, so he seems pretty positive on stocks generally and U.S. and EM stocks in particular.
As for region, I am widely diversified, but I'm primarily invested in the U.S. and emerging markets, like a little barbell there.
Q. Is that primarily to steer clear of the mess in Europe, or because you like emerging markets?
A. Emerging-markets valuations are appealing -- not as appealing as they were in 2003, but they're OK.
At the same time, my bet is everything muddles through, and developed markets are just fine as well. Again, there is no correlation between economic growth and equity returns; you are merely being compensated for risk. So I think we will get reasonable returns from equity markets. (bold added)

http://online.barrons.com/article/SB500 ... rticle%3D0

I'm wondering what other Bogleheads are doing. Do you intentionally overweight EM? What percent of your international allocation do you have in emerging markets?

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Re: Do you overweight emerging markets?

Post by Noobvestor » Mon Oct 08, 2012 7:17 pm

I intentionally overweight EM primarily because it is less correlated with US stocks than ex-US developed (the latter of which has high concentrations in CA, UK and EU). I also, however, think Bogle's biggest error in judgment is to suggest that people can be fine with mostly- or entirely-US portfolios. History shows there is concentration risk at the country level (Japan being the most obvious example).

It's a bit like the advice to go long on bonds if your bond allocation is small: if most of your portfolio is controlled by one asset class or sub-class (e.g. stocks or US stocks) then anything else you have needs to be fairly different in behavior to really diversify that core (e.g. long bonds or EM stocks). So if you're 90% stocks, that 10% might as well be long bonds which will at least have a visible impact (e.g. reducing downside in flights to safety). And/or if you're 90% US stock, that 10% might as well be EM.

If I were *forced* to have only 20% in ex-US stocks at most (per Bogle's advice), I would have that 20% be 100% EM. As it stands, I'm about 50% EM within ex-US stocks and 60% ex-US out of stocks more broadly, so EM is about 30% of my total global stock allocation. Sound extreme? Not really - when you add up my (US-based) human capital, business capital, real estate capital, bond funds, savings accounts, etc... my net ex-US exposure is actually quite small.

If EM happens to be undervalued at the moment relative to other things, great, but that's not the driver behind my decision.
Last edited by Noobvestor on Mon Oct 08, 2012 7:19 pm, edited 1 time in total.
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Re: Do you overweight emerging markets?

Post by zaboomafoozarg » Mon Oct 08, 2012 7:19 pm

I have my EM at about 10% over its international market weight (33% instead of 24% of the ex-US market).

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Re: Do you overweight emerging markets?

Post by yobria » Mon Oct 08, 2012 7:21 pm

I'm a big fan of EM. You can find the post on the old Diehards board where I note I accounted for 2.2% of the day's volume of Vanguard's EM ETF, VWO, and wonder why no one else is interested. That said, I see no reason to overweight EM beyond its global weighting. I expect it to have somewhat higher returns, and somewhat higher risk, than developed. But I don't see any free lunches - Exxon's oil wells may cough up more oil than expected, or Shell's might, or Petrochina's might. I have no idea which, so I'll maximize diversification by making a market weighted bet on each.

I'd be cautious with any barbell approach, which sacrifices diversification. With a US/EM portfolio, you win if Exxon or Petrochina hits a gusher, but not Shell. To quote Ken French over at the DFA website: Well, when we start saying, ok let's form this extreme portfolio of microcap - S&P 500, what we've done now is said, "Ok we're not putting all our eggs in one basket, but we're gonna put all our eggs in two small baskets. Diversification is about spreading your eggs across lots and lots of baskets.

Beware recency bias as well.

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Re: Do you overweight emerging markets?

Post by livesoft » Mon Oct 08, 2012 7:31 pm

yobria wrote:Beware recency bias as well.
If folks had recency bias, they would be avoiding EM because the YTD, 1-year, 3-year, and 5-year performance is worse than US Total Market Index.
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Re: Do you overweight emerging markets?

Post by gnosis » Mon Oct 08, 2012 7:36 pm

zaboomafoozarg wrote:I have my EM at about 10% over its international market weight (33% instead of 24% of the ex-US market).
I started off with the same plan for the first few years, but I got tired of checking it, so I decided to get lazier... simpler... and went back to plain old, boring, vanilla VGTSX (Total Int'l Stock Market). In my 80/20 stock/bond AA with 1/3 Int'l stock and 2/3 US, the difference between 24% EM and 33% EM is negligible. It's comparing 7% EM vs. 10% EM in the entire portfolio. That ain't gonna change the price of potatoes.

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Re: Do you overweight emerging markets?

Post by yobria » Mon Oct 08, 2012 7:45 pm

livesoft wrote:
yobria wrote:Beware recency bias as well.
If folks had recency bias, they would be avoiding EM because the YTD, 1-year, 3-year, and 5-year performance is worse than US Total Market Index.
Looked to me like the OP was considering underweighting EAFE in favor or EM, and EM has outperformed EAFE by those periods.

At the 10 and 15 years periods, of course, EM has crushed EAFE and US with plenty of room to spare.

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Re: Do you overweight emerging markets?

Post by sscritic » Mon Oct 08, 2012 7:49 pm

Yes, and it has nothing to do with weighting, recency bias or anything else discussed (as far as I can see). It is not intentional (note to OP: your title doesn't use the word intentional, but your OP does - I am answering the title question and not the OP question).

I owned Tax Managed International and EM since TMI didn't include any EM. I sold TMI to TLH and bought Total International. I didn't sell EM because there was no L to TLH. I now own TI and EM. That's an overweight, but it's an accident of the gains and losses I had at the time I TLHed.

Edit Added: Since my TLH was clearly intentional, then I guess my overweight of EM is intentional also. At least it is the unintentional consequence of an intentional act. Which is it?
Last edited by sscritic on Mon Oct 08, 2012 7:54 pm, edited 2 times in total.

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Re: Do you overweight emerging markets?

Post by nisiprius » Mon Oct 08, 2012 7:50 pm

I don't overweight emerging markets. And I seem to be one of the few people in this forum who has read and takes seriously the stuff every Prospectus says about the special risks of emerging markets. But then I even dislike the phrase "emerging markets." It's spin, it's euphemism. Can't we call them what they are: less developed markets? "Emerging" assumes that we know which way they are going to go.
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Re: Do you overweight emerging markets?

Post by SimpleGift » Mon Oct 08, 2012 8:04 pm

Personally, I marginally overweight emerging markets (40% of my international equity, versus 25% total market weight) — but I probably shouldn't. :wink:

Vanguard Research came out with nice study in April, 2010, which you might find helpful to your deliberations: Investing in Emerging Markets: Evaluating the Allure of Rapid Economic Growth
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Re: Do you overweight emerging markets?

Post by iceport » Mon Oct 08, 2012 8:14 pm

The OP might be interested in some of the excellent replies here:

Zweig: A lone contrarian on Emerging Markets?

Since that thread convinced me not to get too wild and crazy, I've allowed my EM tilt to creep up. :-/ (But it can't be too bad, 'cause even Vanguard's portfolio watch doesn't flag it at ~30% of international.)

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Re: Do you overweight emerging markets?

Post by zaboomafoozarg » Mon Oct 08, 2012 8:30 pm

gnosis wrote:I started off with the same plan for the first few years, but I got tired of checking it, so I decided to get lazier... simpler... and went back to plain old, boring, vanilla VGTSX (Total Int'l Stock Market). In my 80/20 stock/bond AA with 1/3 Int'l stock and 2/3 US, the difference between 24% EM and 33% EM is negligible. It's comparing 7% EM vs. 10% EM in the entire portfolio. That ain't gonna change the price of potatoes.
Yeah, I've thought about doing that. Most of my international is in VTIAX, but when I switched to my current company and gained access to DFA's EM Value (DFEVX) in my 401k, I invested in some of that. At 5% of my 401k allocation it's not really going to make or break anything, but it does make things a little more interesting. At this point it's sort of an experiment to see if 1) EM really does tend to result in higher returns over time, and 2) if DFA's value is as awesome as everyone says it is :D

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Re: Do you overweight emerging markets?

Post by gnosis » Mon Oct 08, 2012 8:49 pm

nisiprius wrote:I don't overweight emerging markets. And I seem to be one of the few people in this forum who has read and takes seriously the stuff every Prospectus says about the special risks of emerging markets. But then I even dislike the phrase "emerging markets." It's spin, it's euphemism. Can't we call them what they are: less developed markets? "Emerging" assumes that we know which way they are going to go.
Or how about "Markets in countries that no one knows much about?"

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Re: Do you overweight emerging markets?

Post by tetractys » Mon Oct 08, 2012 9:07 pm

Yes, I like the volatility and risks. Call emerging markets whatever you will, that has nothing to do with it; it's what's in the index that counts. -- Tet

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Re: Do you overweight emerging markets?

Post by grabiner » Mon Oct 08, 2012 9:59 pm

I overweight emerging markets, and they would be 50% of my international holdings if there weren't a cost difference. I pay 0.12% on Tax-Managed International with 100% qualified dividends, 20% on Emerging Markets Index with 60% qualified dividends, 0.28% on FTSE All-World Ex-US Small-Cap with 60% qualified dividends, and 0.69% on iShares Emerging Markets Small-Cap with 40% qualified dividends in its first year. Therefore, I split my 40% international as 15% large developed, 10% large emerging, 10% small developed, and 5% small emerging.
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Re: Do you overweight emerging markets?

Post by Investor2 » Mon Oct 08, 2012 10:21 pm

Thanks to everyone for the great discussion.

After reading these posts and the referenced articles and links, I think I'll resist temptation and stick to my original plan of getting emerging markets up to market weight (25% of international), or possibly up to 33%, but not more than that. My international allocation is 28% of stocks and the difference 25% EM (7% of total stock allocation) and 33% EM (about 9% of total stock allocation) shouldn't make too much difference.

Also, I'll stick with getting up to this level gradually over the next few months, as I've been doing, rather than making a dramatic change now.
Simplegift wrote:Vanguard Research came out with nice study in April, 2010, which you might find helpful to your deliberations: Investing in Emerging Markets: Evaluating the Allure of Rapid Economic Growth


Good article. Yes, I was aware that national growth rates are not correllated with stock returns. My reason (excuse?) for thinking about overweighting EM was valuation (and that both Bogle and Sauter seemed to think this might be reasonable thing to do). As the Vanguard article says:
Overall, this analysis does not invalidate the strategic case for allocating a portion of a global equity
portfolio to emerging markets. However, the future long-term return on emerging market investments—
as with any investment—will depend largely on the relative price one initially pays.


Vanguard's EM index fund is down almost 16% over the past 12 months, so it seemed a good time to buy in. However, there's no reason emerging markets can't go a lot lower, especially if we enter another global downturn, so I think I'll stick close to market weight and continue buying in gradually.

Nisiprius, you can now add me to the list of people on this forum who take the special risks of emerging markets seriously! :happy
petrico wrote:The OP might be interested in some of the excellent replies here:

Zweig: A lone contrarian on Emerging Markets?


Petrico, your opening post on that thread and the replies made me laugh . . . and it convinced me. I'll avoid the siren song for now.

I'll sleep better.

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Re: Do you overweight emerging markets?

Post by Jebediah » Mon Oct 08, 2012 10:27 pm

I'm ramping my ex-us to 25/75 int'l/EM
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Re: Do you overweight emerging markets?

Post by Investor2 » Mon Oct 08, 2012 10:55 pm

grabiner wrote:I overweight emerging markets, and they would be 50% of my international holdings if there weren't a cost difference. I pay 0.12% on Tax-Managed International with 100% qualified dividends, 20% on Emerging Markets Index with 60% qualified dividends, 0.28% on FTSE All-World Ex-US Small-Cap with 60% qualified dividends, and 0.69% on iShares Emerging Markets Small-Cap with 40% qualified dividends in its first year. Therefore, I split my 40% international as 15% large developed, 10% large emerging, 10% small developed, and 5% small emerging.
Grabiner, it sounds like you have 37.5% of your international allocation in emerging markets. I've decided I may go up to 33%, but not higher. I'm 4 years away from retirement and already have an unusually high stock allocation, so I figure I don't need additional risk.

I didn't mention it in my original post, but I also have Vanguard's FTSE All-World Ex-US Small-Cap fund, which is 10% of my international allocation. (This fund also includes EM, presumably at market weight). It's really the remaining 90% of my international allocation that I was puzzling over, and which I've decided to divide as either 3/4-1/4 or 2/3-1/3 (developed-EM).

By the way, does anyone know the current P/E for emerging markets and/or for FTSE All-World Ex-US Small-Cap? I was wondering about this, but was not sure where to find this information.

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Re: Do you overweight emerging markets?

Post by Noobvestor » Mon Oct 08, 2012 10:57 pm

nisiprius wrote:I don't overweight emerging markets. And I seem to be one of the few people in this forum who has read and takes seriously the stuff every Prospectus says about the special risks of emerging markets.
Nis: we've talked about this before, but: what makes you think that if there are additional risks they won't be rewarded? Or to put it more simply: what do you know about the risks that The Market doesn't? I look at those risks and think: great, I'm diversifying my risk/reward profile - that's a good thing!
nisiprius wrote:But then I even dislike the phrase "emerging markets." It's spin, it's euphemism. Can't we call them what they are: less developed markets? "Emerging" assumes that we know which way they are going to go.
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Re: Do you overweight emerging markets?

Post by ClosetIndexer » Tue Oct 09, 2012 2:48 am

I underweight emerging markets because there doesn't appear to be a way to efficiently avoid a large-cap bias, let alone tilt to small or value. ISTM that in an efficient market it should not be possible to produce improved volatility-adjusted returns by over-weighting a segment of that market beyond its market cap weight, unless there is an associated risk element that does not show up purely in standard deviation. In the case of value, I have read reasonable arguments as to what that might be. In the case of EM I have no idea whether it even exists. So I prefer to overweight regions where I can get a known premium (tax benefits, lower costs), or an expected premium (small / value), rather than regions where there may or may not be a premium, but I don't know its nature. (I understand that you can get enhanced volatility-adjusted returns due to the low correlation with developed markets, but if the global market is efficient, there must be a different offsetting risk (such as increased correlation at inopportune times) or a lower expected return.) What I do know is that costs and tracking errors are significantly higher for EM, unless small caps are avoided entirely.

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Re: Do you overweight emerging markets?

Post by nisiprius » Tue Oct 09, 2012 5:06 am

Noobvestor wrote:
nisiprius wrote:I don't overweight emerging markets. And I seem to be one of the few people in this forum who has read and takes seriously the stuff every Prospectus says about the special risks of emerging markets.
Nis: we've talked about this before, but: what makes you think that if there are additional risks they won't be rewarded? Or to put it more simply: what do you know about the risks that The Market doesn't? I look at those risks and think: great, I'm diversifying my risk/reward profile - that's a good thing!
They probably are rewarded. I do not underweight emerging markets (within my international allocation!) either. And of course the riskier an asset class is, the less possible it is for anyone, even the market, to assess its value with any accuracy.

Don't even you feel that the last decade of emerging markets probably has just a bit of frothiness to it? No, no, no, I wouldn't act on that feeling, but doesn't the idea of a) overweighting emerging markets b) now strike you as a little questionable?
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Re: Do you overweight emerging markets?

Post by Call_Me_Op » Tue Oct 09, 2012 6:01 am

I have 50% of my international allocation in EM. But my total in equities is less than 40% of the portfolio.
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Re: Do you overweight emerging markets?

Post by Drain » Tue Oct 09, 2012 6:35 am

I dunno. Seems like it was only a few years ago that the debates were about whether there was any argument for EM at all, and I sometimes felt reckless with a third of foreign-equity allocation there. Now, I'm starting to feel positively conservative.

There should be no illusions that there are persistent truths in rational investment philosophy, outside of trying to keep costs down. Even then, you have to weigh savings against the potential benefits of working some asset class or security into a portfolio.
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Re: Do you overweight emerging markets?

Post by Aptenodytes » Tue Oct 09, 2012 6:50 am

I would characterize Bogle's somewhat off-hand remarks as calling for an underweight position in emerging markets, not overweight. 50% emerging, out of an international allocation that is 20% of equities, underweights emerging market equities. Another way to put it would be that if your international allocation is significantly underweight, as Bogle's hypothetical portfolio here is, then why bother fretting over fine tuning the percentages within the category?

To answer the original question, I try to limit my tilting to small and value, and when it comes to geographical regions stick with market weights. So I neither overweight nor underweight emerging markets. I did look into this a fair amount when I first came up with my AA. My intuition was that emerging markets deserved to be overweight, and I remember being very disappointed, for example, when I discovered that there was no index fund investing in sub-Saharan Africa. But the research, as I read it, told me that my intuition was not supported by any evidence, so I just went with market weights.

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Re: Do you overweight emerging markets?

Post by AndroAsc » Tue Oct 09, 2012 7:34 am

Doesn't total international intentionally underweight emerging markets in the first place? China is the world's 2nd largest economy but it's only 3.5% of the index compared to UK's 15%... Ditto for the other large populous countries with sizable economies like India, Brazil, etc...

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Re: Do you overweight emerging markets?

Post by gkaplan » Tue Oct 09, 2012 7:54 am

Fifty of my equity allocation is international. One-third of my international is emerging markets.
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Re: Do you overweight emerging markets?

Post by HongKonger » Tue Oct 09, 2012 8:17 am

Depends what you call emerging.

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Re: Do you overweight emerging markets?

Post by midareff » Tue Oct 09, 2012 8:32 am

I consider the amount of EM in Total International and Small International (VSS) sufficient.

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Re: Do you overweight emerging markets?

Post by JRA » Tue Oct 09, 2012 10:38 am

An underweight allocation to Emerging Markets would appear to be anything below 13.30% of the equity portion of your portfolio (which is the percentage of EM in the Vanguard Total World Stock Index). If you have 60% of your portfolio allocated to equities, that would be 7.98% of the total portfolio. I am not suggesting that anyone use this as an allocation recommendation, but it does seem rather arbitrary to take the percentage allotment to EM in the Total International Fund and speak of underweighting or overweighting based on an arbitrary percentage that you have chosen to allocate to internationals in your portfolio (i.e. a 30% allocation to EM in an international allocation of only 20% of your equities in not technically overweighting EM).

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Re: Do you overweight emerging markets?

Post by abuss368 » Tue Oct 09, 2012 10:49 am

David Swensen's revised asset allocation reduced REITS by 5% and increased emerging markets by 5%.
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Re: Do you overweight emerging markets?

Post by pascalwager » Tue Oct 09, 2012 1:42 pm

David Swensen's revised asset allocation reduced REITS by 5% and increased emerging markets by 5%.
He reportedly again recommends the original AA in his book.

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Re: Do you overweight emerging markets?

Post by abuss368 » Tue Oct 09, 2012 1:59 pm

pascalwager wrote:
David Swensen's revised asset allocation reduced REITS by 5% and increased emerging markets by 5%.
He reportedly again recommends the original AA in his book.
You may have read that from one of my other posts. I attended a lecture 6 months ago where he recommended the portfolio in Unconventional Success without exception. No mention of the revised portfolio.

Have you read any other documentation noting the original portfolio is once again recommended?

I think it is time for a revised and updated Unconventional Success! He already released an updated Pioneering Portfolio Management.
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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Tue Oct 09, 2012 2:16 pm

Noobvestor wrote:I intentionally overweight EM primarily because it is less correlated with US stocks than ex-US developed
This.

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Re: Do you overweight emerging markets?

Post by Jerry_lee » Tue Oct 09, 2012 2:22 pm

Ideally, (like Int'l developed), you want to use EM as a way to diversify your small and value orientation globally. If we go back to 1997 (inception of MSCI EM Value Index) through 2011, we see the following results for US stocks and "market" allocations of US/Int'l/EM:

(1) 100% CRSP 1-10
ret. = +5.9%
SD. = 20.6

(2) 70% CRSP 1-10, 30% EAFE
ret. = +5.3%
SD = 20.8

(3) 70% CRSP 1-10, 20% EAFE, 10% MSCI EM
ret. = +5.9%
SD. = 21.5

So, when adding EAFE to US, you get similar expected returns with slightly lower portfolio risk--although this period the 70/30 was ever so slightly more volatile. During this period, EAFE<US, so that wasn't the case from a return standpoint. Now, EM beat EAFE (but not US) over this period, but of course EM comes with enormous volatility, so that lifted the global portfolio risk above US risk but brought returns back in line. Lesson 1: go easy with EM. 10% of equities is probably sufficient.

Now, instead of EM, we could, theoretically, tilt to small value in developed markets instead: higher expected returns, higher risk, but small/value developed are good diversifiers to US stocks.

(4) 70% CRSP 1-10, 10% EAFE, 20% Int'l SV
ret. = +6.5%
SD. = 20.4

Lesson 2: THIS is probably what you hope for from Int'l diversification -- similar risk as a US portfolio without the domestic concentration and higher expected returns. Of course, if a bit higher risk is OK, then you can add EM as well, but size/value EM stocks are going to be preferable, just like Int'l:

(5) 70% CRSP 1-10, 10% EAFE, 10% Int'l SV, 5% EM Value, 5% EM Small
ret. = +6.7%
SD. = 21.6

Lesson 3: This mix will have similar volatility to a market portfolio of these geographical weightings, and while ISV and EMV/EMSC are more volatile than EAFE/EM, it doesn't show up on the portfolio level because of the lower correlations between market/size/value indexes globally.

While not ideal, some combo of EAFE Value and Vanguard World exUS Small are probably the best contributions to a US portfolio.
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Re: Do you overweight emerging markets?

Post by Clearly_Irrational » Tue Oct 09, 2012 2:33 pm

Jerry_lee wrote:While not ideal, some combo of EAFE Value and Vanguard World exUS Small are probably the best contributions to a US portfolio.
The international small cap value options are pretty poor, after doing quite a bit of analysis I ended up going with just a standard EM fund to capitalize on the correlation difference with US SCV.

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nisiprius
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Re: Do you overweight emerging markets?

Post by nisiprius » Tue Oct 09, 2012 2:46 pm

AndroAsc wrote:Doesn't total international intentionally underweight emerging markets in the first place? China is the world's 2nd largest economy but it's only 3.5% of the index compared to UK's 15%... Ditto for the other large populous countries with sizable economies like India, Brazil, etc...
No. All of the properties of cap-weighting that are the rationale for indexing are based on the cap-weighting within the market, not within the economy that the market is part of. This notion that one should weight according to the economy seems to be a new and faddish idea, and you will note that the people who advocate it never give a real reason for it. They just say "don't you realize that emerging markets are a much bigger percentage of the global economy than they are of the index?" My answer to that is "so what?"

Seawater has a much larger proportion of minerals in it than "mineral water." That doesn't mean I add magnesium salt to my mineral water. The composition of seawater is irrelevant.

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Re: Do you overweight emerging markets?

Post by grap0013 » Tue Oct 09, 2012 2:51 pm

Yes I do. 50% of my international is invested there. Mainly for simple %s to avoid tinkering. Also, when you include a heathly slice they play nice with other asset classes in a portfolio as a whole. EMs were dogs from 1994-2002, but if you were diciplined and kept buying them according to plan, you were eventually rewarded from 2003-2007. I enjoyed flushing my money down after them in 2011. They'll pay me someday.
There are no guarantees, only probabilities.

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Re: Do you overweight emerging markets?

Post by KarlJ » Tue Oct 09, 2012 2:52 pm

JRA wrote:An underweight allocation to Emerging Markets would appear to be anything below 13.30% of the equity portion of your portfolio (which is the percentage of EM in the Vanguard Total World Stock Index). If you have 60% of your portfolio allocated to equities, that would be 7.98% of the total portfolio. I am not suggesting that anyone use this as an allocation recommendation, but it does seem rather arbitrary to take the percentage allotment to EM in the Total International Fund and speak of underweighting or overweighting based on an arbitrary percentage that you have chosen to allocate to internationals in your portfolio (i.e. a 30% allocation to EM in an international allocation of only 20% of your equities in not technically overweighting EM).
By these criteria I have an equal weighting of EM in my portfolio.

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Re: Do you overweight emerging markets?

Post by Nestegg_User » Tue Oct 09, 2012 4:24 pm

I have my EM at 10%

and my Investment Plan specifically forbids an overweight to EM ...

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Re: Do you overweight emerging markets?

Post by Easy Rhino » Tue Oct 09, 2012 5:10 pm

I shoot for approximate market weighting. I ended up with most of my international in a taxable account, split between an EAFE and an emerging index. So the performance will vary some and I won't take the cap gains hit just to rebalance, so I only rebalance at all with yearly contributions.

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Re: Do you overweight emerging markets?

Post by madbrain » Tue Oct 09, 2012 5:33 pm

Yes. I bought VWO - Vanguard EM ETF - in my 401k, using the brokerage window.
It is about 11% of my overall investment portfolio, or 20% of my equity portfolio, or 34% of my international equity portfolio.
This is also my only holding that went down this year since I purchased it ...

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Re: Do you overweight emerging markets?

Post by Noobvestor » Tue Oct 09, 2012 9:52 pm

nisiprius wrote:Don't even you feel that the last decade of emerging markets probably has just a bit of frothiness to it? No, no, no, I wouldn't act on that feeling, but doesn't the idea of a) overweighting emerging markets b) now strike you as a little questionable?
That's a good question. I think the answer lies at least a little bit in default time periods like Morningstar's (10 years). First, let's look at that ten year as the baseline (Blue = TSM, Orange = EM):

Image

Ten Years: in isolation, it indeed looks like EM is on a bender that is bound to revert sooner or later, right? But now let's look, sequentially, at 5 and 20 year return charts.

Image

Five years: it looks like EM has been lagging a bit since the start of the last big downturn.

Image

Twenty Years: after a long period of being the underdog through the dot-com bubble it took a long time for EM to catch up.

So to answer your question on the terms it was asked: *right now* feels like as good a time as any - better than many - to overweight EM. I worry about the developed world - I think the US and EU have some overlapping and some unique risks (e.g. structural, demographic, fiscal) right now that are different from the risks of EM (e.g. governmental, transparency, liberty). And while the ten year chart *in isolation* looks like a recipe for mean reversion, other (both shorter and longer) charts show a much more balanced picture of periodic ups and downs.

Who knows, though - the US may continue to lead the recovery globally for some time (Ferri's prediction from last year), so I'm glad I have US stocks, too (and Jeremy Grantham always comes to mind - he 'called' the dot-com bubble and switched to EM, but too soon, and spent years catching back up because he had the right idea about overvalued tech stocks in the US but the wrong timing).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Do you overweight emerging markets?

Post by Investor2 » Tue Oct 09, 2012 11:33 pm

Noobvestor wrote:
nisiprius wrote:Don't even you feel that the last decade of emerging markets probably has just a bit of frothiness to it? No, no, no, I wouldn't act on that feeling, but doesn't the idea of a) overweighting emerging markets b) now strike you as a little questionable?
. . . to answer your question on the terms it was asked: *right now* feels like as good a time as any - better than many - to overweight EM. I worry about the developed world . . .
Wouldn't a better indicator of value than the charts be the market's current P/E ratio?

Vanguard Fact Sheets list the following P/E ratios for their funds:
S&P 500 index fund - 15.5 (as of 8/31/2012)
EAFE index fund - 13.5 (as of 6/30/2012)
Emerging Market index fund - 11.2 (as of 6/30/2012)

I think the averge P/E ratio (at least for the S&P 500) is around 14-15, so the above numbers suggest EM may currently be somewhat undervalued compared to historical norms.

This may be what Gus Sauter meant in his recent interview when he said: "Emerging-markets valuations are appealing -- not as appealing as they were in 2003, but they're OK."

Similarly, the Vanguard article linked to earlier concludes: "[T]he future long-term return on emerging market investments—
as with any investment—will depend largely on the relative price one initially pays."

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Re: Do you overweight emerging markets?

Post by pascalwager » Tue Oct 09, 2012 11:38 pm

You may have read that from one of my other posts. I attended a lecture 6 months ago where he recommended the portfolio in Unconventional Success without exception. No mention of the revised portfolio.

Have you read any other documentation noting the original portfolio is once again recommended?

I think it is time for a revised and updated Unconventional Success! He already released an updated Pioneering Portfolio Management.
Yes, your post it was--no other documentation; but your report seemed accurate and reliable.

I don't see much reason for an updated book--maybe just a little guidance on selecting nominal treasuries overall duration, which he provided in a blog, anyway.

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Re: Do you overweight emerging markets?

Post by Noobvestor » Wed Oct 10, 2012 2:58 am

Investor2 wrote:
Noobvestor wrote:
nisiprius wrote:Don't even you feel that the last decade of emerging markets probably has just a bit of frothiness to it? No, no, no, I wouldn't act on that feeling, but doesn't the idea of a) overweighting emerging markets b) now strike you as a little questionable?
. . . to answer your question on the terms it was asked: *right now* feels like as good a time as any - better than many - to overweight EM. I worry about the developed world . . .
Wouldn't a better indicator of value than the charts be the market's current P/E ratio?

Vanguard Fact Sheets list the following P/E ratios for their funds:
S&P 500 index fund - 15.5 (as of 8/31/2012)
EAFE index fund - 13.5 (as of 6/30/2012)
Emerging Market index fund - 11.2 (as of 6/30/2012)

I think the averge P/E ratio (at least for the S&P 500) is around 14-15, so the above numbers suggest EM may currently be somewhat undervalued compared to historical norms.

This may be what Gus Sauter meant in his recent interview when he said: "Emerging-markets valuations are appealing -- not as appealing as they were in 2003, but they're OK."

Similarly, the Vanguard article linked to earlier concludes: "[T]he future long-term return on emerging market investments—
as with any investment—will depend largely on the relative price one initially pays."
A very good point. Also based on a longer view vis a vis valuations, Grantham/GMO is again calling for EM to outperform ex-US developed, and both to outperform US. His valuations have led him to project 7-year returns roughly as follows: 0% for the US, 6% for emerging markets and 5% for developed ex-US. Now, to be fair, he was calling for similar a year ago, and the US has done well since then ... but that's short-term criticism of a longer-term view. Will he be right? And when? I don't know, but the valuations suggest the US, at least, may be a bit pricey, and most definitely isn't cheap.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Do you overweight emerging markets?

Post by yobria » Wed Oct 10, 2012 10:32 am

Interesting to see so many folks overweighting EM at the expense of developed. I don't think a 2X overweight is harmful (50/50 EM/Developed). On the other hand, ignoring this important source of diversification would be a foolish mistake. Certainly financial advisors who did wound up costing their clients a lot of money.

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Re: Do you overweight emerging markets?

Post by garlandwhizzer » Wed Oct 10, 2012 11:13 am

Like Gus Sauter, my portfolio concentrates on US equities (almost all TSM) and emerging markets. The growth engine of the world in recent years has been emerging markets and that will continue to be the case as far as the eye can see into the future. All developed markets including the US have the same problems--slow economic growth, aging population demographics, high levels of personal and governmental debt relative to GDP, and a declining middle class. Research demonstrates that governmental debt is well tolerated until it exceeds 90% of GDP, but above that level GDP growth is impacted significantly. Currently US govt. debt is more than 100% of GDP and growing. This will affect US corporate profitability going forward. We have only begun to de-leverage from excessive personal debt in the US and not even started de-leveraging from govt. debt. This process will take around 5 rather painful years in my estimation before the developed world resumes trend line economic and corporate profit growth. It is important to remember that about 50% of all S&P 500 profits have been generated internationally, mostly in EM, but this alone cannot inflate a slowly leaking balloon where domestic demand lacks growth. The same is true in Europe and Japan, but their challenges, both political and economic, are graver than ours in my opinion. From an equity investing point of view the US is in my opinion the best house in the terrible neighborhood of developed economies and that is where I invest the overwhelming majority of my developed market equity stake. I see no compelling reason to hold substantial positions in Europe or Japan. Their PEs are lower but they have no GDP or corporate profit growth at all and this is unlikely to change in the near or intermediate term future.

Emerging markets on the other hand have robust economic growth (the China hard landing "fear" is based on growth slowing to 6%, more than 3 times our growth rate), growing middle classes, a work force that is younger, capable, and hard working, and much lower levels of personal and govt. debt. On paper investing there for the long run is compelling even in my judgement with the admittedly increased risks of political, currency, and regulatory uncertainty.

I also agree with Sauter on de-emphasizing bonds (he has 10%, I have 30%) because I believe that going forward they will provide very low or negative returns for a decade or more. One needs to keep some bonds for capital preservation, but as far as capital appreciation, I believe they are losers going forward.

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Re: Do you overweight emerging markets?

Post by Bungo » Wed Oct 10, 2012 11:23 am

My international allocation is 50% emerging, 50% developed. I have no idea which of these will perform better over the next few decades, so anything other than 50/50 seems unwarranted.

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Re: Do you overweight emerging markets?

Post by yobria » Wed Oct 10, 2012 11:33 am

Bungo wrote:My international allocation is 50% emerging, 50% developed. I have no idea which of these will perform better over the next few decades, so anything other than 50/50 seems unwarranted.
Of course you could make that claim about any arbitrary division of the global market. I have no idea whether a company in Germany will underperform its competitor in India, so it's hard to see how under- or overweighting one is warranted.

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Re: Do you overweight emerging markets?

Post by Angst » Wed Oct 10, 2012 11:45 am

Bungo wrote:My international allocation is 50% emerging, 50% developed. I have no idea which of these will perform better over the next few decades, so anything other than 50/50 seems unwarranted.
The market cap weighting might be the most defensible allocation when it comes to what is or isn't "warranted".

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