More international in target funds generally

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nisiprius
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More international in target funds generally

Post by nisiprius » Tue Sep 03, 2013 5:46 am

Target-Date Funds Add Stamps to Their Passports. Neat article, interesting chart, good illustration of the degree and rate of increase in conventional-wisdom, middle-of-the-road international allocation:

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Re: More international in target funds generally

Post by JoMoney » Tue Sep 03, 2013 6:35 am

"they did so to reflect the growing influence of international businesses on the global market"
I figured this meant that international stocks would have grown more over this period (4th quarter 2005-2012). At least this would mean they "buy and hold" the equity portfolio, and let the allocation "ebb and flow" with the market. But when I compare the returns of VSTMX and VGTSX over that period, it seems the international allocation is lower....
So, not only are the fund managers actively making decisions to change allocations, the timing of their change probably achieved lower overall returns !!!???
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Re: More international in target funds generally

Post by abuss368 » Tue Sep 03, 2013 6:42 am

Well I guessed that international bonds would be worked into these funds.

I am betting international increases to 40% at some point.
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Re: More international in target funds generally

Post by YDNAL » Tue Sep 03, 2013 6:49 am

JoMoney wrote:"they did so to reflect the growing influence of international businesses on the global market"
I figured this meant that international stocks would have grown more over this period (4th quarter 2005-2012). At least this would mean they "buy and hold" the equity portfolio, and let the allocation "ebb and flow" with the market. But when I compare the returns of VSTMX and VGTSX over that period, it seems the international allocation is lower....
So, not only are the fund managers actively making decisions to change allocations, the timing of their change probably achieved lower overall returns !!!???
There is a stretch !!

What do "returns of VTSMX and VGTSX" have to do with market weights of global equities ?

Since you looked at Vanguard funds, this is what Vanguard thinks.
https://personal.vanguard.com/pdf/icriecr.pdf
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JoMoney
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Re: More international in target funds generally

Post by JoMoney » Tue Sep 03, 2013 7:13 am

All I'm saying is these fund managers chose a bad time to suddenly decide they want to increase their allocation.
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Re: More international in target funds generally

Post by nisiprius » Tue Sep 03, 2013 8:08 am

As for "they did so to reflect the growing influence of international businesses on the global market," I think non-US economies are becoming a greater share of the global economy and that non-US businesses are becoming a greater share of global business. The U.S. has had a pretty good run as a global superpower.

What is not happening is that, over 2006-2013 time period during which target funds were increasing international allocation, international stocks were not becoming a greater share of global stocks. This is the chart from the Vanguard paper cited by YDNAL, with my hand-drawn marks on it. U.S. share has continued to rise past the end of the chart to about 48%.

Image

The main point is that these things, like increasing international in target funds, seem to be more in the nature of fashion trends than any kind of science; and the narratives presented to explain them--in this case "a shrinking U.S."--are just facile rationalizations, of the same kind as "Hit last year's baby blue with a dose of gray. Punch it up with unexpected mint and electrifying orange — because cool girls don't do matchy-matchy." Why? Because!
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Re: More international in target funds generally

Post by Beagler » Tue Sep 03, 2013 8:26 am

Why is anyone surprised that VG would change the asset allocation of its TR Funds? Aren't they aware of the major shifts in allocation just a few years into their inception?

http://www.marketwatch.com/story/target ... -their-aim
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Re: More international in target funds generally

Post by Chan_va » Tue Sep 03, 2013 8:29 am

I don't agree that this is a fad. I think it's a reflection of the greater ease and lower cost of investing internationally. This should inch up to the market weight eventually, once the cost of investing anywhere is equal.

For example, in 1940, if you had asked a financial adviser to construct a "Target Retirement 1970" fund, you would have likely got 20-30 blue chip stocks, and a healthy dose of US treasuries. I don't think you can argue that adding mid/small caps to that mix is a bad thing. It's just that it was impractically hard and expensive to do that in 1940.

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Re: More international in target funds generally

Post by YDNAL » Tue Sep 03, 2013 10:01 am

nisiprius wrote:As for "they did so to reflect the growing influence of international businesses on the global market," I think non-US economies are becoming a greater share of the global economy and that non-US businesses are becoming a greater share of global business. The U.S. has had a pretty good run as a global superpower.

What is not happening is that, over 2006-2013 time period during which target funds were increasing international allocation, international stocks were not becoming a greater share of global stocks. This is the chart from the Vanguard paper cited by YDNAL, with my hand-drawn marks on it. U.S. share has continued to rise past the end of the chart to about 48%.
<< snip picture, no need to burn more bandwidth >>

The main point is that these things, like increasing international in target funds, seem to be more in the nature of fashion trends than any kind of science; and the narratives presented to explain them--in this case "a shrinking U.S."--are just facile rationalizations, of the same kind as "Hit last year's baby blue with a dose of gray. Punch it up with unexpected mint and electrifying orange — because cool girls don't do matchy-matchy." Why? Because!
Other than complaining for the sake of complaining, why should a non-US allocation that goes from 20% to 30% be a fashion trend ??
  • Especially since 1969 [per your table] non-US equities consistently hover around that solid black 50% line, unless my eyes failed in such "estimation." And, since non-US equities represent today more than 50% of global equities (using your "about 48%" for US).
  • We seem too quick to rally behind "market weights" a la Vanguard Total US Stock Market (VTSMX), or Total International (VGTSX) yet "NOT" market weights in US/non-US splits. :confused
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Re: More international in target funds generally

Post by garlandwhizzer » Tue Sep 03, 2013 1:35 pm

In general, international equity valuations are now at significantly better levels than US probably due perhaps to slowing growth in EMs and a long recession in Europe. Our economy is viewed as the safest place in the world for equity investors to place money at present. That willingness to invest in the winner, the US, has substantially affected our P/E ratios and our P/B valuations relative to international options. Perhaps Vanguard is looking at improved valuations internationally and pre-emptively moving assets slightly in that direction. Future stock performance is not at all related to past performance, past profit growth rates, or to GDP growth, but there is a 40% correlation to lower PEs. I don't know but It is entirely possible that both DMs and EMs will outperform US equities over the next 5 - 10 years based on their better valuations, so I don't see a slight allocation shift in that direction as anything to worry about.

Garland Whizzer

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