Emerging markets tilt

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randomizer
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Emerging markets tilt

Post by randomizer » Wed Apr 11, 2018 11:55 am

I'm curious to hear from people who are tilting towards EM in the current enviroment:
  • How big is your tilt?
  • What's your rationale?
  • What's your prognosis for the future?
I know questions like these have been asked before, but people's opinions on this stuff changes depending on which way the wind is blowing, so I'd like to get some current perspectives.
75:25 — HODL the course!

hilink73
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Re: Emerging markets tilt

Post by hilink73 » Wed Apr 11, 2018 12:10 pm

randomizer wrote:
Wed Apr 11, 2018 11:55 am
I'm curious to hear from people who are tilting towards EM in the current enviroment:
  • How big is your tilt?
  • What's your rationale?
  • What's your prognosis for the future?
I know questions like these have been asked before, but people's opinions on this stuff changes depending on which way the wind is blowing, so I'd like to get some current perspectives.
As I'm weighting my portfolio according to GDP, my EM "tilt" is 37% (equities).
No EM bonds.

Rationale: kind of a macro-economic value tilt.
Prognosis: well..... I don't know
Last edited by hilink73 on Wed Apr 11, 2018 12:56 pm, edited 1 time in total.

livesoft
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Re: Emerging markets tilt

Post by livesoft » Wed Apr 11, 2018 12:21 pm

No tilt to EM per se. I have the market weight. But within EM, I am tilted to small caps.
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bgf
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Re: Emerging markets tilt

Post by bgf » Wed Apr 11, 2018 12:42 pm

i just split my international exposure equally between developed markets and emerging markets. at this time, that means i am overweighting or tilting towards emerging markets. over the years, this 50-50 split will either get more or less out of whack with market weighting. not sure which will happen. im also not so much 'placing a bet' that emerging markets will outperform so much as declaring im not sure which will outperform, and so i weight them equally.
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alpine_boglehead
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Re: Emerging markets tilt

Post by alpine_boglehead » Wed Apr 11, 2018 1:22 pm

My current EM tilt (roughly 25% of equities) is caused by having loaded up on EM in early 2016, when it seemed like a "be greedy when others are fearful" opportunity. As the EM valuations still seem to be ok, I'm currently keeping it this way.

No one knows what the future holds, but my best guess is that EM might mature just as the now-developed markets did over the 20th century.

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Re: Emerging markets tilt

Post by ray.james » Wed Apr 11, 2018 1:37 pm

My tilt is similar to alphine_boglehead - 25% and it started a bit around when Grap started the EM value thread. Before that it was VSS - vanguard international small cap. My tilt is also entirely in Roth which makes it more valuable.

My reason was value compared to others, market valuation in home currency was cheap, strong dollar + low inflation made it way cheaper in dollar terms. The tilt held at 25% despite strong growth as my 401k and other major contributions are going towards target retirement/US markets.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

asif408
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Re: Emerging markets tilt

Post by asif408 » Wed Apr 11, 2018 1:45 pm

I've been about 60% EM since late 2016. My rationale is primarily low valuations relatively to history and currencies. You can see how they got to low valuations in the recent 10 year underperformance compared to the S&P. It also doesn't hurt that EM country currencies on average trade at a discount to the dollar similar to the early 2000s. I haven't made any adjustment since then, other than normal rebalancing. But I see valuations and currencies as tailwinds for EM.

Obviously with the degree of my tilt my prognosis is positive. I guess it is about 60%, since that is how much EM I have! Whether or not it pans out, I don't know, but I do think odds are much better than 50/50 that it will outperform the US market over the next 5-10 years, though I'm less confident it will do significantly better than other developed markets, so I own a decent chunk of developed ex-US.

If it pans out, I can probably invest more conservatively the rest of my life. If it doesn't pan out, I'll probably have to work longer and save more.
Last edited by asif408 on Wed Apr 11, 2018 1:48 pm, edited 1 time in total.

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iceport
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Re: Emerging markets tilt

Post by iceport » Wed Apr 11, 2018 1:47 pm

randomizer wrote:
Wed Apr 11, 2018 11:55 am
I'm curious to hear from people who are tilting towards EM in the current enviroment:
  • How big is your tilt?
  • What's your rationale?
  • What's your prognosis for the future?
I know questions like these have been asked before, but people's opinions on this stuff changes depending on which way the wind is blowing, so I'd like to get some current perspectives.
I'm using the same EM allocation in the current environment that I use in every other environment; I don't *intentionally* change my portfolio EM weight based on which way the wind is blowing. On the other hand, the magnitude of the portfolio EM overweight does change as the capitalization weighting of EM in the ex-US market drifts up and down. To some extent, my EM weighting also drifts with the EM capitalization, as a portion of my EM allocation comes from an international small cap index fund and an international real estate index fund. The main EM exposure, however, comes from an all-cap dedicated EM index fund.

Within international equities, here's the rough breakdown, which remains fixed:

22% EM All-cap
22% International Small Cap (includes market weight EM)
19% International Real Estate (includes significant EM)
37% Developed All-cap

Currently, according to Vanguard, the resulting EM overweight looks like this:

Image

I came to overweight EM based on recommendations from several respected authors, including Swensen and Malkiel. It was also fairly easy to do, because my workplace retirement plan had no passive exposure to EM at all, so I needed to used a dedicated EM fund elsewhere anyway.

At this current point in time, I am pleased to have an EM overweight, given the relatively low current valuations. But I would maintain the fixed allocations regardless of valuations.
"Discipline matters more than allocation.” ─William Bernstein

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siamond
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Re: Emerging markets tilt

Post by siamond » Wed Apr 11, 2018 2:06 pm

My equities are split 50/50 between US and International. My international equities include a 25% position in Emerging Markets. Hence a bit of a tilt, at least for now. It was a more aggressive tilt when I started, actually. It is getting less aggressive as I get older, which isn't a bad thing.

This is essentially a risk/reward bet. Which matches well my perception that emerging markets might, well, emerge, while developed countries might level off. I don't claim to have a crystal ball, it's just a perception, a belief which helps me stay the course. This is a strategic move, I don't mind waiting a couple of decades for the bet to (hopefully) pay off. And if it does not, oh well, life goes on.

For full disclosure, my international equities are: one half developed markets, one quarter emerging markets, one quarter international small. A fixed split for life, basically a risk/reward decision, matching my beliefs.

PS. I just checked VGTSX (Vanguard Total International Stock), and it includes 21% emerging as of 02/28/18.

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Re: Emerging markets tilt

Post by Day9 » Wed Apr 11, 2018 2:13 pm

A few years ago Mr Swedroe recommended on this board for someone who wanted to tilt more toward international and emerging markets due to higher expected returns due to valuations:
So with global market cap at 50% international (1/4 of that being EM) might go to say 60% and 1/3 of that EM. But be sure you can live with that TE.
TE=Tracking Error. This means the equity allocation would be 40% US, 40% Developed international, 20% Emerging Markets
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WhiteMaxima
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Re: Emerging markets tilt

Post by WhiteMaxima » Wed Apr 11, 2018 2:27 pm

Vanguard EM index or Vanguard EM Select fund?

3funder
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Re: Emerging markets tilt

Post by 3funder » Wed Apr 11, 2018 2:44 pm

alpine_boglehead wrote:
Wed Apr 11, 2018 1:22 pm
My current EM tilt (roughly 25% of equities) is caused by having loaded up on EM in early 2016, when it seemed like a "be greedy when others are fearful" opportunity. As the EM valuations still seem to be ok, I'm currently keeping it this way.

No one knows what the future holds, but my best guess is that EM might mature just as the now-developed markets did over the 20th century.
I also thought about initiating an EM tilt at that time; however, on principle, I stuck with my "no-tilt" portfolio. While I don't regret this decision, I knew that EM valuations were safe enough to tilt. I'd definitely be a little wealthier had I done so.

dcabler
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Re: Emerging markets tilt

Post by dcabler » Wed Apr 11, 2018 3:49 pm

Small tilt at 10% of equities, but increasing as I make new deposits. Similar tilt with international small and also increasing with new deposits. Will probably stop somewhere between 15 and 20%...

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SimpleGift
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Re: Emerging markets tilt

Post by SimpleGift » Wed Apr 11, 2018 4:23 pm

Equities are split 60% U.S. and 40% international. International equities are one-half developed markets and one-half emerging markets, both with a modest small-cap tilt.

I've had about the same international allocation for two decades, ever since Vanguard started their Emerging Markets Index Fund in 1994. My rationale is that emerging markets have been the major source of world GDP growth for years, with the most favorable future demographics, and with rapidly-growing middle classes.

Though developed market companies (including many U.S. firms) have been increasing their sales to emerging market countries, my sense is that domestic emerging market companies may be best positioned to profit from their own increasingly wealthy, middle class consumers in the future. Just my perspective.
Cordially, Todd

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jhfenton
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Re: Emerging markets tilt

Post by jhfenton » Wed Apr 11, 2018 6:02 pm

Our allocation is similar a few of the previous posters. We're 50% US, 50% ex-US. And of the ex-US, it is roughly half developed, half emerging.

To be more specific, 30% of equities are in VSS+VFSVX/Vanguard FTSE All-World ex-US Small Cap and 20% are in emerging markets funds: VWO+VEMAX/Vanguard Emerging Markets (at Vanguard) and EMGF/iShares Edge MSCI Multifactor Emerging Markets (in my HSA at TD Ameritrade). Since VSS+VFSVX is about 20% emerging markets small cap, our emerging markets ends up at about 26% of equities with a slight small cap tilt.

(Our developed is currently all small and mid cap, but when my wife becomes eligible for her 401(k) on May 1, we will start putting 50% of her 401(k) money in VTIAX/Vanguard Total International Stock Admiral. That will slowly start to crowd out some of our 30% stake in VSS at roughly 1% per year, but since VTIAX is also about 20% EM, our EM allocation won't change.)

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Re: Emerging markets tilt

Post by whodidntante » Wed Apr 11, 2018 6:27 pm

According to Personal Capital, EM equities are 15% of my total portfolio. It would be 20-30% more relative to the 15% if you summed up the total amount in funds that have "emerging markets" in the title because Morgan Stanley and friends do not agree with Personal Capital about what constitutes an emerging market. About half of that is in factor tilted funds like EMGF iShares Edge MSCI Multifactor Emerging Markets, FNDE Schwab Fundamental Emerg Mkts and whatever else I got capital gain locked into. The rest is in beta funds, mostly IEMG iShares Core MSCI Emerging Markets.

I don't own EM bonds.

I am overweighting EM as a tactical allocation based on low valuations and good growth prospects. Share dilution somewhat softens that for EM, and of course political risk is a fact of life for the EM investor. Like other tactical allocators here, my entry point for overweighting EM was when China got cut in half and it looked like the world was coming to an end for them. I decided it might be worth something someday and bought quite a bit. I still think EM is relatively cheap, just not as cheap as it was.

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Re: Emerging markets tilt

Post by garlandwhizzer » Wed Apr 11, 2018 6:34 pm

Equity allocation:

50% US: TSM 75% PRFZ 25%
25% EM: DGS 50%, VWO %25, VMMSX 25%
25% DM: FNDC 50% FNDF 25% VEA 25%

Garland Whizzer

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Noobvestor
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Re: Emerging markets tilt

Post by Noobvestor » Wed Apr 11, 2018 8:22 pm

50/50 US/international + 50/50 developed/emerging (within international) - it's static, not tactical. Reasoning: emerging markets should be riskier and thus offer more return. Also, they have historically been less correlated with developed markets like the US (so: better diversification) .

Image

On a bigger, more philosophical note, emerging markets are diverse and represent a huge portion of the world's geography and population. I like the idea that I'm diversifying across more than what would otherwise be mostly North America and Europe (75%+ in a total-world portfolio).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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SimpleGift
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Re: Emerging markets tilt

Post by SimpleGift » Wed Apr 11, 2018 11:29 pm

In a PM this evening, a Forum member asked what portion of U.S. companies' revenues today are from emerging markets — and I thought I'd also post the information that I have in this thread.

As of the end of 2016, it looks like about 18% of MSCI USA Index companies' revenues came from emerging markets, with about a third of that (6%) from sales to China (at left below).
  • Image
    Source: Hartford, revenue data as of 12/31/16.
My suggestion, though, is if one really wants revenue exposure to emerging markets, it's best to just invest directly in a diversified emerging markets index — since nearly 75% of index revenues are domestic or from other emerging markets, with 29% from China (at right above).
Last edited by SimpleGift on Thu Apr 12, 2018 12:22 am, edited 1 time in total.
Cordially, Todd

Ari
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Re: Emerging markets tilt

Post by Ari » Thu Apr 12, 2018 12:21 am

20% EM
Rationale: They are riskier and I expect to be rewarded for that in the long term.
Prognosis: I don't do prognosis.
All in, all the time.

hilink73
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Re: Emerging markets tilt

Post by hilink73 » Thu Apr 12, 2018 12:33 am

SimpleGift wrote:
Wed Apr 11, 2018 11:29 pm
In a PM this evening, a Forum member asked what portion of U.S. companies' revenues today are from emerging markets — and I thought I'd also post the information that I have in this thread.

As of the end of 2016, it looks like about 18% of MSCI USA Index companies' revenues came from emerging markets, with about a third of that (6%) from sales to China (at left below).
  • Image
    Source: Hartford, revenue data as of 12/31/16.
My suggestion, though, is if one really wants revenue exposure to emerging markets, it's best to just invest directly in a diversified emerging markets index — since nearly 75% of index revenues are domestic or from other emerging markets, with 29% from China (at right above).
Yes, nice diagrams.
One of the take aways is that if you want to participate in the Emerging Markets economies, you should invest in Emerging Market economies.
The argument that US companies also easn money there/abroad seems off to me.

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randomizer
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Re: Emerging markets tilt

Post by randomizer » Thu Apr 12, 2018 1:19 am

I did a very weak and crude backtest (only a few years) to compare:
  • 100% Vanguard Total World Stock ETF (VT) — this is supposed to represent an untilted global portfolio.
  • 90% iShares MSCI World ETF (URTH) + 10% Vanguard FTSE Emerging Markets ETF (VWO) — this is an attempt to replicate VT by blending a non-EM + an EM fund in the appropriate proportions.
  • 83.9% iShares MSCI World ETF (URTH) + 16.1% Vanguard FTSE Emerging Markets ETF (VWO) — this one is a somewhat arbitrary tilt to EM.
Like I said, the test is weak (super short, and even if it wasn't, past performance doesn't predict future performance), so the differences are basically meaningless:

Code: Select all

Portfolio       Initial Final     CAGR    Stdev     Best Year   Worst Year    Max. Drawdown   Sharpe Ratio
Portfolio 1     $10,000 $16,814   10.40%  10.33%    24.49%      -1.86%        -13.76%         0.99
Portfolio 2     $10,000 $16,635   10.18%  10.45%    23.81%      -2.16%        -12.89%         0.96
Portfolio 3     $10,000 $16,328   9.79%   10.54%    24.33%      -3.08%        -13.95%         0.92
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Ethelred
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Re: Emerging markets tilt

Post by Ethelred » Thu Apr 12, 2018 8:30 am

randomizer wrote:
Thu Apr 12, 2018 1:19 am
I did a very weak and crude backtest (only a few years) to compare:
  • 100% Vanguard Total World Stock ETF (VT) — this is supposed to represent an untilted global portfolio.
  • 90% iShares MSCI World ETF (URTH) + 10% Vanguard FTSE Emerging Markets ETF (VWO) — this is an attempt to replicate VT by blending a non-EM + an EM fund in the appropriate proportions.
  • 83.9% iShares MSCI World ETF (URTH) + 16.1% Vanguard FTSE Emerging Markets ETF (VWO) — this one is a somewhat arbitrary tilt to EM.
Like I said, the test is weak (super short, and even if it wasn't, past performance doesn't predict future performance), so the differences are basically meaningless:

Code: Select all

Portfolio       Initial Final     CAGR    Stdev     Best Year   Worst Year    Max. Drawdown   Sharpe Ratio
Portfolio 1     $10,000 $16,814   10.40%  10.33%    24.49%      -1.86%        -13.76%         0.99
Portfolio 2     $10,000 $16,635   10.18%  10.45%    23.81%      -2.16%        -12.89%         0.96
Portfolio 3     $10,000 $16,328   9.79%   10.54%    24.33%      -3.08%        -13.95%         0.92
I played with some of your tickers, and the asset allocation a little, to extend the test back to 2000. The main differences are 1. adding bonds into the portfolio (20%) and 2. Making the tilt vary against intl. developed instead of total world (US domestic kept constant at 40%).

Link

Or, taking the EM tilt from US and developed equally:
Link

The EM-heavy portfolio outperforms overall, but most of that is concentrated in the period 2001 to 2007 (or to 2009). EM outperformance in 2017 is smaller than most of those years.

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Re: Emerging markets tilt

Post by Crisium » Thu Apr 12, 2018 8:52 am

I have a moderate tilt within my international allocation. But since I tilt to the US, my overall EM is just slightly more than market weight. I'm 2:1 US:Int, and 40% of that Int is EM, so my equities are 13.3% EM. I guess really I am tilting away from Int Developed because I do not have confidence in businesses based in declining population nations. Most EM nations are on the up in population (except for indexes that put South Korea in EM).

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Re: Emerging markets tilt

Post by privatefarmer » Thu Apr 12, 2018 9:12 am

[quote=randomizer post_id=3875619 time=1523465743 user_id=54916]
I'm curious to hear from people who are tilting towards EM in the current enviroment:

[list][*]How big is your tilt?
[*]What's your rationale?
[*]What's your prognosis for the future?
[/list]

I know questions like these have been asked before, but people's opinions on this stuff changes depending on which way the wind is blowing, so I'd like to get some current perspectives.
[/quote]

I’m young. Hopefully have several decades to invest. I believe that in order to get higher return you must take on more risk/volatility. as such my equities are allocated 50% US small value and 50% emerging markets small value, using DFA. Very volatile I know, would’ve lost >60% in Great Recession. But, over the last 20 years, these two asset classes have only had a 0.6 correlation to each other, So im hoping for some diversification benefit.

I think emerging markets are an excellent way to get a good risk-asjust return just make sure you are not too aggressive for your risk tolerance.

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Re: Emerging markets tilt

Post by Valuethinker » Thu Apr 12, 2018 9:28 am

privatefarmer wrote:
Thu Apr 12, 2018 9:12 am
randomizer wrote:
Wed Apr 11, 2018 11:55 am
I'm curious to hear from people who are tilting towards EM in the current enviroment:
  • How big is your tilt?
  • What's your rationale?
  • What's your prognosis for the future?
I know questions like these have been asked before, but people's opinions on this stuff changes depending on which way the wind is blowing, so I'd like to get some current perspectives.
I’m young. Hopefully have several decades to invest. I believe that in order to get higher return you must take on more risk/volatility. as such my equities are allocated 50% US small value and 50% emerging markets small value, using DFA. Very volatile I know, would’ve lost >60% in Great Recession. But, over the last 20 years, these two asset classes have only had a 0.6 correlation to each other, So im hoping for some diversification benefit.

I think emerging markets are an excellent way to get a good risk-asjust return just make sure you are not too aggressive for your risk tolerance.
Depending on how much money you have invested, beware your exposure to a handful of Chinese companies-- in particular Tencent and Alibaba.

These are a decent chunk of EM indices. China + Taiwan are nearly 50% I believe.

If what you have now is only a small fraction of your future wealth (and, if you are investing with DFA, you must already have a fair sized portfolio?) then it does not matter so much.

But you are taking a considerable bet. In owning the global market, I know I am putting roughly 2% into each of Apple Amazon Google Microsoft, but they are some of the world's most successful companies with predominant products.

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privatefarmer
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Re: Emerging markets tilt

Post by privatefarmer » Thu Apr 12, 2018 9:30 am

Valuethinker wrote:
Thu Apr 12, 2018 9:28 am
privatefarmer wrote:
Thu Apr 12, 2018 9:12 am
randomizer wrote:
Wed Apr 11, 2018 11:55 am
I'm curious to hear from people who are tilting towards EM in the current enviroment:
  • How big is your tilt?
  • What's your rationale?
  • What's your prognosis for the future?
I know questions like these have been asked before, but people's opinions on this stuff changes depending on which way the wind is blowing, so I'd like to get some current perspectives.
I’m young. Hopefully have several decades to invest. I believe that in order to get higher return you must take on more risk/volatility. as such my equities are allocated 50% US small value and 50% emerging markets small value, using DFA. Very volatile I know, would’ve lost >60% in Great Recession. But, over the last 20 years, these two asset classes have only had a 0.6 correlation to each other, So im hoping for some diversification benefit.

I think emerging markets are an excellent way to get a good risk-asjust return just make sure you are not too aggressive for your risk tolerance.
Depending on how much money you have invested, beware your exposure to a handful of Chinese companies-- in particular Tencent and Alibaba.

These are a decent chunk of EM indices. China + Taiwan are nearly 50% I believe.

If what you have now is only a small fraction of your future wealth (and, if you are investing with DFA, you must already have a fair sized portfolio?) then it does not matter so much.

But you are taking a considerable bet. In owning the global market, I know I am putting roughly 2% into each of Apple Amazon Google Microsoft, but they are some of the world's most successful companies with predominant products.
Yeah. The DFA fund I use DEMSX has ~3000 holdings and 15% of it is actually in developed markets. It is half of my equity and I am almost 100% equity, so it is a very significant part of my net worth. But again I expect extensive volatility and plan to not touch it for 30 years

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randomizer
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Re: Emerging markets tilt

Post by randomizer » Thu Apr 12, 2018 10:13 am

Ethelred wrote:
Thu Apr 12, 2018 8:30 am
I played with some of your tickers, and the asset allocation a little, to extend the test back to 2000. The main differences are 1. adding bonds into the portfolio (20%) and 2. Making the tilt vary against intl. developed instead of total world (US domestic kept constant at 40%).

Link

Or, taking the EM tilt from US and developed equally:
Link

The EM-heavy portfolio outperforms overall, but most of that is concentrated in the period 2001 to 2007 (or to 2009). EM outperformance in 2017 is smaller than most of those years.
Interesting results. Adding bonds is a good idea for making the portfolios more realistic (in practice, I have bonds, and if I add them to the backtest that I did the gap between the portfolios shrinks). I was surprised to see just how big the effect of keeping US exposure constant was (in terms of making EM look like a winner), muted only somewhat when you "fund" the EM tilt by leaning equally away from US and other developed. I guess obviously this is because of the longer time range including the years that you highlighted.

All of which is to say that this backtesting is all an interesting intellectual exercise, but I personally don't have a strong conviction about what EM will do in the future, so I can't see myself placing any bets on this tilt (or any other) in the future.
75:25 — HODL the course!

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Lauretta
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Re: Emerging markets tilt

Post by Lauretta » Thu Apr 12, 2018 11:15 am

livesoft wrote:
Wed Apr 11, 2018 12:21 pm
No tilt to EM per se. I have the market weight. But within EM, I am tilted to small caps.
I also thought of buying EM small caps but according to Research Affiliates they are more expensive than EM large caps (the same is true according to RA for Europe, but not for US where SC seem slightly cheaper at present). So in the end I did not tilt to small caps in EM, because my reason for holding more EM than other geographical areas was due to valuations. Have you considered the question of valuations for EM small caps?
When everyone is thinking the same, no one is thinking at all

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unclescrooge
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Re: Emerging markets tilt

Post by unclescrooge » Thu Apr 12, 2018 12:16 pm

alpine_boglehead wrote:
Wed Apr 11, 2018 1:22 pm
My current EM tilt (roughly 25% of equities) is caused by having loaded up on EM in early 2016, when it seemed like a "be greedy when others are fearful" opportunity. As the EM valuations still seem to be ok, I'm currently keeping it this way.

No one knows what the future holds, but my best guess is that EM might mature just as the now-developed markets did over the 20th century.
This. Plus I have a small tilt towards EM bonds, but not DM bonds.

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Re: Emerging markets tilt

Post by alpine_boglehead » Thu Apr 12, 2018 12:44 pm

unclescrooge wrote:
Thu Apr 12, 2018 12:16 pm
alpine_boglehead wrote:
Wed Apr 11, 2018 1:22 pm
My current EM tilt (roughly 25% of equities) is caused by having loaded up on EM in early 2016, when it seemed like a "be greedy when others are fearful" opportunity. As the EM valuations still seem to be ok, I'm currently keeping it this way.

No one knows what the future holds, but my best guess is that EM might mature just as the now-developed markets did over the 20th century.
This. Plus I have a small tilt towards EM bonds, but not DM bonds.
Quite understandable ... Japanese and European bonds (which are the greater part of ex-US DM bonds) yield close to nothing.
Especially European bonds they seem to be a yield-less but yet somewhat risky investment. In EM bonds you get at least some compensation for the risk you're taking (if it's enough is another question). Nevertheless I'm sticking to the "take risk with (EM) stocks, keep bonds very safe" philosophy.

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Re: Emerging markets tilt

Post by livesoft » Thu Apr 12, 2018 12:46 pm

Lauretta wrote:
Thu Apr 12, 2018 11:15 am
Have you considered the question of valuations for EM small caps?
No, I have not. I like their volatility and that is their appeal. They [actually DGS] can drop 3% or more in a single day which is absolutely wonderful.
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jhfenton
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Re: Emerging markets tilt

Post by jhfenton » Thu Apr 12, 2018 1:19 pm

Valuethinker wrote:
Thu Apr 12, 2018 9:28 am
Depending on how much money you have invested, beware your exposure to a handful of Chinese companies-- in particular Tencent and Alibaba.

These are a decent chunk of EM indices. China + Taiwan are nearly 50% I believe.

If what you have now is only a small fraction of your future wealth (and, if you are investing with DFA, you must already have a fair sized portfolio?) then it does not matter so much.

But you are taking a considerable bet. In owning the global market, I know I am putting roughly 2% into each of Apple Amazon Google Microsoft, but they are some of the world's most successful companies with predominant products.
Indeed, Tencent and Alibaba are two of my top three holdings. But even with 25% of our equities (20% of portfolio) the amounts invested in these companies are small:

Our Top 12 portfolio holdings according to M* x-ray stock intersection tool:

Tencent Holdings 0.68% of portfolio
Taiwan Semiconductor Manufacturing 0.43% (0.29% local listing + 0.14% ADR)
Alibaba 0.25%
Naspers 0.19%
Itausa Investimentos .18%
China Construction Bank 0.16%
Tatneft 0.14%
New Oriental Education & Technology Group 0.14%
CSPC Pharmaceutical Group 0.14%
Geely Automobile Holdings 0.14%
Samsung Electronics 0.14%
HP Inc. 0.14%

I went down to #12 so I could get to our first U.S. stock holding. Tencent is a large chunk of VEMAX/VWO (about 5%), but once it gets diluted by other holdings, for most people, the amount invested in Tencent won't be unreasonable.

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unclescrooge
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Re: Emerging markets tilt

Post by unclescrooge » Thu Apr 12, 2018 5:05 pm

alpine_boglehead wrote:
Thu Apr 12, 2018 12:44 pm
unclescrooge wrote:
Thu Apr 12, 2018 12:16 pm
alpine_boglehead wrote:
Wed Apr 11, 2018 1:22 pm
My current EM tilt (roughly 25% of equities) is caused by having loaded up on EM in early 2016, when it seemed like a "be greedy when others are fearful" opportunity. As the EM valuations still seem to be ok, I'm currently keeping it this way.

No one knows what the future holds, but my best guess is that EM might mature just as the now-developed markets did over the 20th century.
This. Plus I have a small tilt towards EM bonds, but not DM bonds.
Quite understandable ... Japanese and European bonds (which are the greater part of ex-US DM bonds) yield close to nothing.
Especially European bonds they seem to be a yield-less but yet somewhat risky investment. In EM bonds you get at least some compensation for the risk you're taking (if it's enough is another question). Nevertheless I'm sticking to the "take risk with (EM) stocks, keep bonds very safe" philosophy.
I agree, it's not necessary to invest in EM bonds.

I bought a close-end fund for EM bond exposure and bought when it was trading at an 18% discount to NAV. The discount has narrowed to 13%, but the yield is still 8%. That's a risk I'm willing to take for a small % of my portfolio.

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Re: Emerging markets tilt

Post by Valuethinker » Fri Apr 13, 2018 3:11 am

jhfenton wrote:
Thu Apr 12, 2018 1:19 pm
Valuethinker wrote:
Thu Apr 12, 2018 9:28 am
Depending on how much money you have invested, beware your exposure to a handful of Chinese companies-- in particular Tencent and Alibaba.

These are a decent chunk of EM indices. China + Taiwan are nearly 50% I believe.

If what you have now is only a small fraction of your future wealth (and, if you are investing with DFA, you must already have a fair sized portfolio?) then it does not matter so much.

But you are taking a considerable bet. In owning the global market, I know I am putting roughly 2% into each of Apple Amazon Google Microsoft, but they are some of the world's most successful companies with predominant products.
Indeed, Tencent and Alibaba are two of my top three holdings. But even with 25% of our equities (20% of portfolio) the amounts invested in these companies are small:

Our Top 12 portfolio holdings according to M* x-ray stock intersection tool:

Tencent Holdings 0.68% of portfolio
Taiwan Semiconductor Manufacturing 0.43% (0.29% local listing + 0.14% ADR)
Alibaba 0.25%
Naspers 0.19%
Itausa Investimentos .18%
China Construction Bank 0.16%
Tatneft 0.14%
New Oriental Education & Technology Group 0.14%
CSPC Pharmaceutical Group 0.14%
Geely Automobile Holdings 0.14%
Samsung Electronics 0.14%
HP Inc. 0.14%

I went down to #12 so I could get to our first U.S. stock holding. Tencent is a large chunk of VEMAX/VWO (about 5%), but once it gets diluted by other holdings, for most people, the amount invested in Tencent won't be unreasonable.
OK

OP has EM equities as main equity portfolio.

Recency bias. But having just seen "The China Hussle" I am reminded of the valuations of Chinese stocks. These are real companies (some of them) but the profits are very uncertain.

I know with Apple and Google that they are making real money-- almost obscene amounts of real money. I am not so convinced with the mainland Chinese stocks. TSMC is a special case-- I don't worry about the accounting so much, it's kind of another Intel-- the world's largest semiconductor manufacturer. Sort of a US Steel (1950 edition) of silicon.

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jhfenton
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Re: Emerging markets tilt

Post by jhfenton » Fri Apr 13, 2018 7:36 am

Valuethinker wrote:
Fri Apr 13, 2018 3:11 am
I know with Apple and Google that they are making real money-- almost obscene amounts of real money. I am not so convinced with the mainland Chinese stocks. TSMC is a special case-- I don't worry about the accounting so much, it's kind of another Intel-- the world's largest semiconductor manufacturer. Sort of a US Steel (1950 edition) of silicon.
:beer I agree that TSMC is in a different category than Tencent and Alibaba, both because it is based in Taiwan and because it is an industry-leading manufacturing company.

I share your concerns with Tencent and Alibaba and the like. Tencent is hugely important, but I do have less confidence in their revenue and their valuation. I am glad they are not multiple percentages of my portfolio. If they get to be too large a portion of VEMAX/VWO, I will probably dilute them further with a small cap EM fund.

comeinvest
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Re: Emerging markets tilt

Post by comeinvest » Mon Apr 16, 2018 11:16 pm

Lauretta wrote:
Thu Apr 12, 2018 11:15 am
livesoft wrote:
Wed Apr 11, 2018 12:21 pm
No tilt to EM per se. I have the market weight. But within EM, I am tilted to small caps.
I also thought of buying EM small caps but according to Research Affiliates they are more expensive than EM large caps (the same is true according to RA for Europe, but not for US where SC seem slightly cheaper at present). So in the end I did not tilt to small caps in EM, because my reason for holding more EM than other geographical areas was due to valuations. Have you considered the question of valuations for EM small caps?
... I discovered the same; however, have you looked at "EM Value" in the RA tool? Last time I checked, EM Value had higher expected return than EM large and EM small (although EM small was less than EM large).

zwzhang
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Re: Emerging markets tilt

Post by zwzhang » Tue Apr 17, 2018 8:32 am

Here is our equity allocation:
50% - VTI - US Total Market
30% - VIU - Developed ex-North America All-Cap
10% - VEE - EM (It hold VWO in Canadian dollar)
10% - VCN - Canadian Total Market

No International bond.

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