Larry Swedroe: Don’t Exclude Emerging Markets

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Random Walker
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Larry Swedroe: Don’t Exclude Emerging Markets

Post by Random Walker » Mon Apr 16, 2018 9:41 am

http://www.etf.com/sections/index-inves ... nopaging=1

EM comprises about 1/8 of the world market cap. A 50% US / 50% Int investor might consider putting 25% of his international allocation in EM. Larry reviews some destructive investor behaviors in the process of making his recommendation: home country bias, recency bias, convex v. concave investing. There is a LOT MORE to this article than just the recommendation to invest in EM: reminder that passive is the winning game, investing is about the long run, and a reference or two to Warren Buffett. Strongly recommend.
Over time EM has become more investable, more liquid, more correlated to rest of world,costs have come down, so consequently expected return has declined. But, especially given current valuations, very worthwhile to consider. The various equity factors behave as expected in EM as well. I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
I find it very interesting that the value effect is present at the level of individual stocks and whole countries. People tend to overpay for growth. If anything, the relationship between a country’s economic growth and its stock market returns is slightly negative.

Dave

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by Doc » Mon Apr 16, 2018 10:13 am

Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
Agreed but how can you buy it?

Morningstar Premium fund Screener criteria:

(Fund Category = Foreign Small/Mid Value)
and (Morningstar Rating >= Three Stars) (Dog killer criteria)
and (Minimum Initial Purchase <= 50000) (Eliminate stuff I can't buy)
and (No-Load Funds = Yes) (I will not pay an upfront fee)

This screen yields 12 funds but only 4 have an e/r less than 1% and 3 of those 4 are DFA funds which I understand is only available through an advisor. (The other 1 of the 4 has an e/r of 0.95 and is not very small or valuey. It also has very, very limited broker availability.)
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by Lauretta » Mon Apr 16, 2018 10:27 am

Random Walker wrote:
Mon Apr 16, 2018 9:41 am
http://www.etf.com/sections/index-inves ... nopaging=1

EM comprises about 1/8 of the world market cap. A 50% US / 50% Int investor might consider putting 25% of his international allocation in EM. Larry reviews some destructive investor behaviors in the process of making his recommendation: home country bias, recency bias, convex v. concave investing. There is a LOT MORE to this article than just the recommendation to invest in EM: reminder that passive is the winning game, investing is about the long run, and a reference or two to Warren Buffett. Strongly recommend.
Over time EM has become more investable, more liquid, more correlated to rest of world,costs have come down, so consequently expected return has declined. But, especially given current valuations, very worthwhile to consider. The various equity factors behave as expected in EM as well. I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
I find it very interesting that the value effect is present at the level of individual stocks and whole countries. People tend to overpay for growth. If anything, the relationship between a country’s economic growth and its stock market returns is slightly negative.

Dave
Thanks for sharing. I'm also interested in the value effect being present both at the level of countries and individual stocks, I follow the data published by StarCapital on valuations of countries and I overweight EM and other areas with lower valuations. Also; I think there's a RAFI ETF that invests in value stocks in EM (so the cheapest stocks in the cheapest markets...) though I don't have it.
I also like what is said about active management in the piece. I started investing last year and I thought that whilst indexing was better for the US market which is very efficient, active management should have a good chance in more inefficient markets like EM. So although most of my EM exposure is in a low cost index fund, I confess that I have about 15% of my exposure in EM in an active fund, Magellan by Comgest (domiciled in Europe) which is noted Gold by Morningstar. This year Magellan is trailing the index by 5.6% :oops:
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by markcoop » Mon Apr 16, 2018 10:32 am

Doc wrote:
Mon Apr 16, 2018 10:13 am
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
Agreed but how can you buy it?

Morningstar Premium fund Screener criteria:

(Fund Category = Foreign Small/Mid Value)
and (Morningstar Rating >= Three Stars) (Dog killer criteria)
and (Minimum Initial Purchase <= 50000) (Eliminate stuff I can't buy)
and (No-Load Funds = Yes) (I will not pay an upfront fee)

This screen yields 12 funds but only 4 have an e/r less than 1% and 3 of those 4 are DFA funds which I understand is only available through an advisor. (The other 1 of the 4 has an e/r of 0.95 and is not very small or valuey. It also has very, very limited broker availability.)
Although not too valuey, I use Vanguard Int'l small (ETF).
Mark

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by dcabler » Mon Apr 16, 2018 10:34 am

Doc wrote:
Mon Apr 16, 2018 10:13 am
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
Agreed but how can you buy it?

Morningstar Premium fund Screener criteria:

(Fund Category = Foreign Small/Mid Value)
and (Morningstar Rating >= Three Stars) (Dog killer criteria)
and (Minimum Initial Purchase <= 50000) (Eliminate stuff I can't buy)
and (No-Load Funds = Yes) (I will not pay an upfront fee)

This screen yields 12 funds but only 4 have an e/r less than 1% and 3 of those 4 are DFA funds which I understand is only available through an advisor. (The other 1 of the 4 has an e/r of 0.95 and is not very small or valuey. It also has very, very limited broker availability.)
If you do the same thing, but use their ETF screener - you'll get a few more results to look at.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by Random Walker » Mon Apr 16, 2018 10:43 am

Hi Lauretta,
You wrote “I also like what is said about active management in the piece. I started investing last year and I thought that whilst indexing was better for the US market which is very efficient, active management should have a good chance in more inefficient markets like EM.” I think it is generally true that the more illiqid and opaque corners of markets such as Emerging Markets, small/micro cap are the places where active management has the potential advantage. Unfortunately it is in those corners of the markets where the cost hurdles are also the greatest. I believe the reasons for potential active advantage are the same reasons for the increased cost hurdles. Passive investing appears to be the winning strategy in all corners of the markets.

Dave

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by garlandwhizzer » Mon Apr 16, 2018 1:03 pm

Excellent article. Thanks for posting, Random Walker.

Garland Whizzer

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by GreatOdinsRaven » Mon Apr 16, 2018 2:01 pm

Doc wrote:
Mon Apr 16, 2018 10:13 am
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
Agreed but how can you buy it?

Morningstar Premium fund Screener criteria:

(Fund Category = Foreign Small/Mid Value)
and (Morningstar Rating >= Three Stars) (Dog killer criteria)
and (Minimum Initial Purchase <= 50000) (Eliminate stuff I can't buy)
and (No-Load Funds = Yes) (I will not pay an upfront fee)

This screen yields 12 funds but only 4 have an e/r less than 1% and 3 of those 4 are DFA funds which I understand is only available through an advisor. (The other 1 of the 4 has an e/r of 0.95 and is not very small or valuey. It also has very, very limited broker availability.)
Doc,
What are the tickers for those four funds?
Thanks,
GOR
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by nisiprius » Mon Apr 16, 2018 8:05 pm

Added: Selters, below, figured it out, I think. MSCI's index and category definitions include South Korea as an emerging market, and South Korea is about 2% of world global market cap, and that's just about enough to account for the difference.

It's not a big deal, but does anyone have a source for "Emerging markets represent about 13% of global equity capitalization?" It just seems high.

Morningstar is only showing 9.15% emerging markets in their benchmark for the Vanguard Total World Stock Index fund.
Image

Vanguard, using a wider definition of emerging markets, says that Total World is 10.3% emerging markets.
Last edited by nisiprius on Tue Apr 17, 2018 8:16 am, edited 2 times in total.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by whodidntante » Mon Apr 16, 2018 8:30 pm

Doc wrote:
Mon Apr 16, 2018 10:13 am
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
Agreed but how can you buy it?

Morningstar Premium fund Screener criteria:

(Fund Category = Foreign Small/Mid Value)
and (Morningstar Rating >= Three Stars) (Dog killer criteria)
and (Minimum Initial Purchase <= 50000) (Eliminate stuff I can't buy)
and (No-Load Funds = Yes) (I will not pay an upfront fee)

This screen yields 12 funds but only 4 have an e/r less than 1% and 3 of those 4 are DFA funds which I understand is only available through an advisor. (The other 1 of the 4 has an e/r of 0.95 and is not very small or valuey. It also has very, very limited broker availability.)
You would buy FNDC Schwab Fundamental International Small Company Index ETF and complement with DGS WisdomTree Emerging Markets SmCp Div ETF for EM.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by Random Walker » Mon Apr 16, 2018 8:44 pm

Also, of course ISV is also diversified more across size and value in addition to the local economy effects

Dave

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by lack_ey » Mon Apr 16, 2018 9:36 pm

nisiprius wrote:
Mon Apr 16, 2018 8:05 pm
It's not a big deal, but does anyone have a source for "Emerging markets represent about 13% of global equity capitalization?" It just seems high.

Morningstar is only showing 9.15% emerging markets in their benchmark for the Vanguard Total World Stock Index fund.
https://imgur.com/jQ1pfTI.png

Vanguard, using a wider definition of emerging markets, says that Total World is 10.3% emerging markets.
If you go by the index providers and look at the global indexes, it's about 10%, I suppose. Depends where you put Taiwan and South Korea and what you do about small caps, which index you're looking at, etc. That's of the global investable market, free float.

I think 13% is what you get if you throw in China A shares. EM percentage is also I think notably higher if you don't free float adjust, as there's a relatively high amount of government ownership of publicly traded stock in EM.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by nedsaid » Mon Apr 16, 2018 10:01 pm

Emerging Markets have long been a favored investment of mine, one of the "Tiger in the Tank" volatile asset classes that I invest in. These include US Small-Cap Value, US Mid/Small-Cap Growth, International Small-Cap, Emerging Markets, and REITs. EM tends to be volatile and has stretches where it both underperforms and outperforms the US Market. Patience is a virtue here.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by NYCwriter » Tue Apr 17, 2018 12:24 am

Isn't there risk of gilding the lily too much? I TLH'd/exchanged from Total into VEA/VWO a few years ago, and have kept these for my int'l allocation ever since. I also hold a small portion of an India fund (INDA), but it has a higher er, so it's a 5-10 year holding and adjunct to VWO. I also hold VWOB (EM debt).

I have 20% of portfolio for ex-US equity.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by SimpleGift » Tue Apr 17, 2018 1:10 am

nisiprius wrote:
Mon Apr 16, 2018 8:05 pm
Vanguard, using a wider definition of emerging markets, says that Total World is 10.3% emerging markets.
Country-of-domicile may increasingly be a misleading measure of emerging market exposure in an All-World Stock Index, especially in a era of expanding globalization. A more accurate gauge, in my view, is revenue exposure — the percentage of sales that companies worldwide are making in emerging markets today (table below):
  • Image
    Sources: Market cap from MSCI; EM revenue % from Hartford, as of 12/31/16.
Viewed from this perspective, an All-World Stock Index has about a 25% exposure to emerging markets today.
Cordially, Todd

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by CurlyDave » Tue Apr 17, 2018 3:17 am

SimpleGift wrote:
Tue Apr 17, 2018 1:10 am
...Viewed from this perspective, an All-World Stock Index has about a 25% exposure to emerging markets today.
It is not obvious to me that adding up column (c) is a legitimate exercise.

I am interpreting this table as showing that US markets have 52% of world market cap and that 18% of their revenue comes from EM. And the numbers in column (a) add to 100%. But column (b) is just the % of total revenue for each area that comes from EM, and clearly does not add to 100%.

So exactly what is the meaning of the numbers in column (c)?

And, it looks like if I stick to US stocks 18% of their revenue comes from EM, which , if I concede that the 25% total is somehow meaningful, is close enough to the 25% to seem pretty satisfactory. I can get revenue exposure sticking to a market I understand without having to venture into volatile areas of high risk and little transparency.

Never investing in something I do not understand has served me well over the years.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by nisiprius » Tue Apr 17, 2018 6:56 am

I don't think the difference between EM = 9% vs 13% of global market cap is important. It's just a puzzle. I can't seem to account for it by including China A shares or taking account of the recent US stock market fluctuations.

ADDED: I think Selters, below, got it. It's probably MSCI's categorization, which includes South Korea as an emerging market.

Larry Swedroe wrote "Emerging markets represent about 13% of global equity capitalization..." He's not talking about anything else, he's not saying it's effectively 13%, it's not "we should think of it as being like 13%," he's not saying it's 13% of something else that should matter to us more than market cap.

The last annual report for VTWSX says that the FTSE Global All-Cap index held 9.7% emerging markets.

With regard to China A shares, VTWSX (and VGTSX) do not include them, but VEIEX (Emerging Markets stock index fund) does. It was a big deal when they added them, Vanguard was a pioneer.

In VTWSX, and again looking at the numbers in the annual report for the index itself, I see that China represents 2.8% / 9.7% = 28.9% of emerging markets, while the report for VEIEX shows China as 31.4% of the FTSE All-Cap China A Inclusion Index. So it's pretty negligible. I don't really think we need to do math, but I will. People who might be clearer-headed than me are invited to check my math. (Seriously. Please.)

If we say that China A shares represent an additional 2.5% / 97.5% = 2.57% that must be added to Emerging Markets, then in the FTSE Global All-Cap index, if we added China A shares, we would need to add 9.7% x 2.57% = 0.25% on to both the Emerging Markets percentage and the grand total. So instead of being 9.7% of the index, if A shares were included, emerging markets would be (9.7% + 0.25%) / (100% + 0.25%) = 9.92%.

Including A shares, it's still "about ten per cent."

It's not the recent decline in the US stock market, either. In order to boost the share of EM from 10% to 13%, the ex-US share of world stock market cap would have to go from 48.3%, which is what it was back at the time of the annual reports, to 62.9%, meaning the US would need to go from 51.7% to 37.1%, implying a -28% drop in the US stock market. (Or, of course, a stunning +30% boom in China stocks, which might have made enough news for me to notice).
Last edited by nisiprius on Tue Apr 17, 2018 8:17 am, edited 2 times in total.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by scone » Tue Apr 17, 2018 7:54 am

Doc wrote:
Mon Apr 16, 2018 10:13 am
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
Agreed but how can you buy it?

Morningstar Premium fund Screener criteria:

(Fund Category = Foreign Small/Mid Value)
and (Morningstar Rating >= Three Stars) (Dog killer criteria)
and (Minimum Initial Purchase <= 50000) (Eliminate stuff I can't buy)
and (No-Load Funds = Yes) (I will not pay an upfront fee)

This screen yields 12 funds but only 4 have an e/r less than 1% and 3 of those 4 are DFA funds which I understand is only available through an advisor. (The other 1 of the 4 has an e/r of 0.95 and is not very small or valuey. It also has very, very limited broker availability.)
The three star screen eliminates VSS, which is mid to small blend. It's pretty cheap, though. And obviously Total International has a chunk of emerging markets. That's the way I allocate it, anyhow.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by selters » Tue Apr 17, 2018 7:58 am

He's probably using numbers from MSCI.

MSCI World IMI total market cap is 45.92 trillion. MSCI Emerging Markets IMI total market is 6.33 trillion. MSCI's EM indexes include South Korea as an emerging market.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by nisiprius » Tue Apr 17, 2018 8:07 am

selters wrote:
Tue Apr 17, 2018 7:58 am
He's probably using numbers from MSCI.

MSCI World IMI total market cap is 45.92 trillion. MSCI Emerging Markets IMI total market is 6.33 trillion. MSCI's EM indexes include South Korea as an emerging market.
I think that's it. That would do it. I see that Fidelity's FSGUX, which uses MSCI ACWI Ex-Us (but not IMI!) is stated by Fidelity to be 23.42% emerging markets. South Korea is about 2% of global market cap. Shame on me, since I posted just the other day about the arbitrariness of stock asset class definitions.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by Mickstick » Tue Apr 17, 2018 8:35 am

I'd like to include emerging markets but with vanguard I'm not a huge fan of VWO and VXUS sharing Tencent Holdings and Taiwan Semiconductor as among their top holdings. I'm unsure if from a diversification stand point that is a problem or not.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by Doc » Tue Apr 17, 2018 8:48 am

scone wrote:
Tue Apr 17, 2018 7:54 am
The three star screen eliminates VSS, which is mid to small blend. It's pretty cheap, though. And obviously Total International has a chunk of emerging markets. That's the way I allocate it, anyhow.
Exactly, I wouldn't buy a fund that has been in the bottom 40% of its category on a risk adjusted return basis for its entire existence.

In addition the screen is for intl small/mid cap value not intl small/cap blend.

The whole point of the screen was to reply to the OP's original alternative to EM.
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by SimpleGift » Tue Apr 17, 2018 9:17 am

CurlyDave wrote:
Tue Apr 17, 2018 3:17 am
SimpleGift wrote:
Tue Apr 17, 2018 1:10 am
...Viewed from this perspective, an All-World Stock Index has about a 25% exposure to emerging markets today.
It is not obvious to me that adding up column (c) is a legitimate exercise.
The purpose of the exercise is to determine the total emerging market revenue exposure of an All-World Stock Market Index, by using a weighted-average of all the regional indexes for which we have revenue data. There's nothing tricky about the math.

The point is: Does a company's country-of-domicile really matter that much anymore? Or does their source of global revenues better determine their relative risk in today's world economy?

Investors are certainly free to stick with a U.S.-only portfolio — but they shouldn't think that they don't have any exposure to the risks (currency and otherwise) of international and emerging markets. Last time I checked, U.S. companies in aggregate derive about 37% of their revenues from foreign markets.
Cordially, Todd

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by nisiprius » Tue Apr 17, 2018 9:34 am

SimpleGift wrote:
Tue Apr 17, 2018 9:17 am
...Investors are certainly free to stick with a U.S.-only portfolio — but they shouldn't think that they don't have any exposure to the risks (currency and otherwise) of international and emerging markets. Last time I checked, U.S. companies in aggregate derive about 37% of their revenues overseas...
That cuts both ways, of course. (For the record I personally am not U.S.-only). A sane person could say "A U.S.-only investor gets the benefit of being 37% international--while getting the benefits (or at least the familiar risks) of US market regulation, and avoiding the risks of fluctuating currency conversion.

The justification for indexing depends on a theorem in financial economics about the characteristics of the market portfolio (the set of all assets owned within a market), and it points to indexing by cap-weight within the market. It of course depends on all kinds of assumptions, but arguments for other kinds of weighting seem to involve even more. If you want to allocate by revenue, or by risk parity, or by GDP, or economic share (overweight small-caps to make up for all the small companies that don't issue stock), OK, but it needs a well-articulated rationale behind it.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by SimpleGift » Tue Apr 17, 2018 10:21 am

nisiprius wrote:
Tue Apr 17, 2018 9:34 am
The justification for indexing depends on a theorem in financial economics about the characteristics of the market portfolio (the set of all assets owned within a market), and it points to indexing by cap-weight within the market. It of course depends on all kinds of assumptions, but arguments for other kinds of weighting seem to involve even more.
Not to derail this thread into a discussion of index construction — but I agree with you, it's very hard to theoretically and practically construct an index superior to a cap-weighted one. And global cap-weighted indexes, by convention and their history have been country-of-domicile based. That's not going to change anytime soon.

However, since companies worldwide are now deriving more and more of their revenues beyond their home borders — and their risk profiles are changing accordingly — it makes sense for investors to at least check on the revenue exposure of their cap-weighted allocations, to see if they're still suitable. This is the expedient I've adopted personally and posted on the Forum about.
Cordially, Todd

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by lack_ey » Tue Apr 17, 2018 10:52 am

nisiprius wrote:
Tue Apr 17, 2018 6:56 am
I don't think the difference between EM = 9% vs 13% of global market cap is important. It's just a puzzle. I can't seem to account for it by including China A shares or taking account of the recent US stock market fluctuations.

ADDED: I think Selters, below, got it. It's probably MSCI's categorization, which includes South Korea as an emerging market.

Larry Swedroe wrote "Emerging markets represent about 13% of global equity capitalization..." He's not talking about anything else, he's not saying it's effectively 13%, it's not "we should think of it as being like 13%," he's not saying it's 13% of something else that should matter to us more than market cap.

The last annual report for VTWSX says that the FTSE Global All-Cap index held 9.7% emerging markets.

With regard to China A shares, VTWSX (and VGTSX) do not include them, but VEIEX (Emerging Markets stock index fund) does. It was a big deal when they added them, Vanguard was a pioneer.

In VTWSX, and again looking at the numbers in the annual report for the index itself, I see that China represents 2.8% / 9.7% = 28.9% of emerging markets, while the report for VEIEX shows China as 31.4% of the FTSE All-Cap China A Inclusion Index. So it's pretty negligible. I don't really think we need to do math, but I will. People who might be clearer-headed than me are invited to check my math. (Seriously. Please.)

If we say that China A shares represent an additional 2.5% / 97.5% = 2.57% that must be added to Emerging Markets, then in the FTSE Global All-Cap index, if we added China A shares, we would need to add 9.7% x 2.57% = 0.25% on to both the Emerging Markets percentage and the grand total. So instead of being 9.7% of the index, if A shares were included, emerging markets would be (9.7% + 0.25%) / (100% + 0.25%) = 9.92%.

Including A shares, it's still "about ten per cent."

It's not the recent decline in the US stock market, either. In order to boost the share of EM from 10% to 13%, the ex-US share of world stock market cap would have to go from 48.3%, which is what it was back at the time of the annual reports, to 62.9%, meaning the US would need to go from 51.7% to 37.1%, implying a -28% drop in the US stock market. (Or, of course, a stunning +30% boom in China stocks, which might have made enough news for me to notice).
You didn't account for China A shares, or at least the bulk of that. FTSE All-Cap China A Inclusion Index includes China A shares at far below market weight. It's adjusted for QFII and RQFII quota limits.

(though I think the correct answer is obtained by including South Korea, not including China A shares)
Last edited by lack_ey on Tue Apr 17, 2018 1:57 pm, edited 1 time in total.

CurlyDave
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by CurlyDave » Tue Apr 17, 2018 10:57 am

SimpleGift wrote:
Tue Apr 17, 2018 9:17 am
CurlyDave wrote:
Tue Apr 17, 2018 3:17 am
SimpleGift wrote:
Tue Apr 17, 2018 1:10 am
...Viewed from this perspective, an All-World Stock Index has about a 25% exposure to emerging markets today.
It is not obvious to me that adding up column (c) is a legitimate exercise.
The purpose of the exercise is to determine the total emerging market revenue exposure of an All-World Stock Market Index, by using a weighted-average of all the regional indexes for which we have revenue data. There's nothing tricky about the math...
I didn't say I thought the math was tricky. I understand that. And I wouldn't even object to averaging the column (b) numbers.

But suppose, as an extreme example, I do a different experiment, where I select 20 men on the street in Manhattan. I weigh then and list those numbers in column (1) of a table. Then I count the value of the currency they have in their pockets and put that in column (2). Now I understand that column (1) might be of interest to some people and column (2) might be of interest to others, but when I multiply column (1) by column (2) and get a column (3) that is mathematically easy to do, but the numbers in column (3) are nothing but gibberish.

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by SimpleGift » Tue Apr 17, 2018 12:56 pm

CurlyDave wrote:
Tue Apr 17, 2018 10:57 am
SimpleGift wrote:
Tue Apr 17, 2018 9:17 am
The purpose of the exercise is to determine the total emerging market revenue exposure of an All-World Stock Market Index, by using a weighted-average of all the regional indexes for which we have revenue data. There's nothing tricky about the math...
I didn't say I thought the math was tricky. I understand that. And I wouldn't even object to averaging the column (b) numbers.
Not to be argumentative, but I believe you're missing the forest for the trees on this. Folks in this thread were discussing whether emerging markets in an All-World Stock Index make up 10% or 13% of the total, based on country-of-domicile. My point is that an investor in an All-World Stock Index actually has two to three times as much revenue exposure to emerging markets. This is a big part of where one's stock market risk actually comes from today, beyond the historical convention of country-of-domicile.

A company based in the U.K. with 90% of it's revenue from emerging markets is riskier than that same company with 90% of its revenues from the U.S. — and with increasing globalization, stock index investors are not immune from these risks anymore.
Cordially, Todd

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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by sunnywindy » Tue Apr 17, 2018 1:51 pm

I think Swedroe got the 13% EM from MSCI: "The MSCI Emerging Markets Indexes represent large-, mid-small- cap across Emerging Markets (EM) countries. From just 10 countries in 1988 representing less than 1% of world market capitalization to 24 countries representing 13% of world market capitalization, today the MSCI Emerging Markets Index can be segmented by regions and market segments/sizes."
https://www.msci.com/msci-emerging-and- ... ts-indexes

MSCI also uses a 10% figure on its website (can't find it but saw it yesterday), but my guess is the 13% figure is the most up to date computation as EM's performance has been outpacing every other region in the last few years.
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by sunnywindy » Tue Apr 17, 2018 2:13 pm

Lauretta wrote:
Mon Apr 16, 2018 10:27 am
Random Walker wrote:
Mon Apr 16, 2018 9:41 am
http://www.etf.com/sections/index-inves ... nopaging=1

EM comprises about 1/8 of the world market cap. A 50% US / 50% Int investor might consider putting 25% of his international allocation in EM. Larry reviews some destructive investor behaviors in the process of making his recommendation: home country bias, recency bias, convex v. concave investing. There is a LOT MORE to this article than just the recommendation to invest in EM: reminder that passive is the winning game, investing is about the long run, and a reference or two to Warren Buffett. Strongly recommend.
Over time EM has become more investable, more liquid, more correlated to rest of world,costs have come down, so consequently expected return has declined. But, especially given current valuations, very worthwhile to consider. The various equity factors behave as expected in EM as well. I believe I have read in the past that International Small Value May be an even better diversifier than EM because ISV is more dependent on each local economy.
I find it very interesting that the value effect is present at the level of individual stocks and whole countries. People tend to overpay for growth. If anything, the relationship between a country’s economic growth and its stock market returns is slightly negative.

Dave
Thanks for sharing. I'm also interested in the value effect being present both at the level of countries and individual stocks, I follow the data published by StarCapital on valuations of countries and I overweight EM and other areas with lower valuations. Also; I think there's a RAFI ETF that invests in value stocks in EM (so the cheapest stocks in the cheapest markets...) though I don't have it.
I also like what is said about active management in the piece. I started investing last year and I thought that whilst indexing was better for the US market which is very efficient, active management should have a good chance in more inefficient markets like EM. So although most of my EM exposure is in a low cost index fund, I confess that I have about 15% of my exposure in EM in an active fund, Magellan by Comgest (domiciled in Europe) which is noted Gold by Morningstar. This year Magellan is trailing the index by 5.6% :oops:
There's lots of conflicting information about how well passive EM ranks versus active EM. If you use Morningstar's ranking (which includes survivorship bias), the iShares MSCI Emerging Markets ETF (EEM) ranks in the 58% percentile for its 15-year performance (which to me represents terrible performance). The Vanguard ETF (VWO), which has followed a few different indexes (plus or minus South Korea), didn't fare any better at its 10-year ranking compared to EEM. So, Magellan might not turn out badly, despite is performance this year.

Link to EEM: http://performance.morningstar.com/fund ... ture=en_US

The conclusions I've reached are that there are good active EM funds out there, but I prefer indexing. But, I also think that the EM space is so diverse, that a low-cost strategic-beta index is a good option. Most of my EM money is in Vanguard FTSE All-World ex-US ETF (VEU) and it's small-cap brother (VSS). I also have a position in iShares MSCI EM Minimum Volatility (EEMV), which represents my cautious EM overweight. Lastly, my 'fun' money account has a tiny position in iShares MSCI EM Diversified Multi-Factor (EMGF).
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Re: Larry Swedroe: Don’t Exclude Emerging Markets

Post by JoMoney » Tue Apr 17, 2018 2:30 pm

I corrected the illustration to demonstrate another strategy.
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