Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

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jalbert
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Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 1:22 am

I don’t know the answer to the question in the subject, but the following (no doubt biased) backtest is interesting. It compares:

70% US equity
30% developed markets equity

70% US equity
24% developed markets equity
6% emerging markets equity

70% US equity
24% developed markets equity
6% precious metals equity

https://www.portfoliovisualizer.com/bac ... ation5_2=6
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BeBH65
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by BeBH65 » Thu May 24, 2018 1:53 am

You already have precious metal equity in your 2 other funds, and this as market weight. You do not have Emerging Markets.
If you buy more of the precious metal fund you will concentrate more of your money in a very narrow sub-sector, with a multiple of the market weig, and hence be less diversified.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by vineviz » Thu May 24, 2018 6:27 am

BeBH65 wrote:
Thu May 24, 2018 1:53 am
You already have precious metal equity in your 2 other funds, and this as market weight. You do not have Emerging Markets.
If you buy more of the precious metal fund you will concentrate more of your money in a very narrow sub-sector, with a multiple of the market weig, and hence be less diversified.
Although I think that adding Precious Metal Equity is a bad idea, I feel compelled to clarify that a market-weight portfolio is not (in theory or in practice) the most diversified portfolio.

And while a maximally diversified portfolio isn't always the optimal portfolio, adding more emerging markets or PME to a market weighted portfolio would undoubtedly make it more diversified not less.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nisiprius » Thu May 24, 2018 6:59 am

vineviz wrote:
Thu May 24, 2018 6:27 am
BeBH65 wrote:
Thu May 24, 2018 1:53 am
You already have precious metal equity in your 2 other funds, and this as market weight. You do not have Emerging Markets.
If you buy more of the precious metal fund you will concentrate more of your money in a very narrow sub-sector, with a multiple of the market weig, and hence be less diversified.
Although I think that adding Precious Metal Equity is a bad idea, I feel compelled to clarify that a market-weight portfolio is not (in theory or in practice) the most diversified portfolio.

And while a maximally diversified portfolio isn't always the optimal portfolio, adding more emerging markets or PME to a market weighted portfolio would undoubtedly make it more diversified not less.
This is a sincere question: what definition and measure of "diversification" are you using when you say "a market-weight portfolio is not in theory the most diversified portfolio" and "a maximally diversified portfolio isn't always the optimal portfolio?" I've actually looked in textbooks (Financial Economics, Bodie, Merton and Cleeton) in hope of finding a recognized quantitative definition of diversification and a standard way to measure the amount of diversification in a portfolio, without success.
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by asif408 » Thu May 24, 2018 7:54 am

Interestingly, when I change the start date to 2007, the porfolio with PME becomes the worst and the EM portfolio becomes the best. The big benefit from PME was 2001 and 2002, when it had positive returns when most everything else was down the toilet. So I will say that at times, PME could be a better diversifier than EM. And the reverse could also be true at times.

Actually, looking back at it, if you would have owned a 50/50 EM/PME split, you would have outperformed dramatically since 2000, even with the last decade of awful performance from PME and EM: https://www.portfoliovisualizer.com/bac ... ation5_2=6

So maybe that speaks more to the valuation differential between PME/EM and the other areas of stocks at the time. In the 6 years before 2000, PME and EM had horrible returns relative to the rest of the market: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D. So the lesson I take away is that something could be a good diversifier in the future if it has had poor relative performance to the overall market for several years. Since both PME and EM have performed more poorly than the US since 2011: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D, I'll say they could both be potential diversifiers down the road.
Last edited by asif408 on Thu May 24, 2018 8:23 am, edited 1 time in total.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by vineviz » Thu May 24, 2018 8:10 am

nisiprius wrote:
Thu May 24, 2018 6:59 am
This is a sincere question: what definition and measure of "diversification" are you using when you say "a market-weight portfolio is not in theory the most diversified portfolio" and "a maximally diversified portfolio isn't always the optimal portfolio?" I've actually looked in textbooks (Financial Economics, Bodie, Merton and Cleeton) in hope of finding a recognized quantitative definition of diversification and a standard way to measure the amount of diversification in a portfolio, without success.
I think it's a good question.

In my mind, a maximally diversified portfolio is one in which what the diversification ratio (DR) is maximized. The diversification ratio is a relatively new concept, and basically is the portfolio's weighted average asset volatility divided by its actual volatility. It appears to have been introduced in the literature by Choueifaty and Coignard (2008) https://www.tobam.fr/wp-content/uploads ... v-2008.pdf.

See also for a very brief overview Mackenzie Investments https://www.mackenzieinvestments.com/en ... tion-ratio.

Essentially, if you maximize the DR you end up with a portfolio whose individual holdings have the lowest correlation to the overall portfolio itself, while simultaneously excluding the assets with which the portfolio is most highly correlated.

From Seeking Alpha's blog post (https://seekingalpha.com/article/103360 ... -portfolio) on the ratio:
. . . for a given set of underlying assets, there is only one portfolio combination that has the highest diversification ratio and thus represents the most diversified portfolio. In other words, it is possible to put the maximum weight into each asset class whereas the overall portfolio volatility is not being increased at all.


The diversification ratio has the benefit (and drawback) of not considering historical or expected returns. In this way, it is unaffected by personal or market biases about the future risk or reward of the constituent assets.

This also means that that maximally diversified portfolio may not be (and often is not) on the efficient frontier constructed from those risk/reward expectations.

Under some fairly strict assumptions, the CAPM predicts that the market portfolio is the most efficient portfolio of risky assets but we have some good evidence that the CAPM doesn't strictly hold true so the DR offers (IMHO) a useful alternative method of portfolio construction.
Last edited by vineviz on Thu May 24, 2018 8:12 am, edited 1 time in total.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nedsaid » Thu May 24, 2018 8:33 am

If all I was concerned about was non-correlation with the US Stock Market, I would just stuff my mattress with cash. Problem is non-correlation is also non-return. Precious metals funds over long periods of time just don't return much. It makes me inspired to start a "Nedsaid Stuff Your Money in My Mattress" fund and charge a 1% Assets Under Management Fee. Short term Treasuries would fill the bill, unlike a mattress, you get interest payments.

Precious Metals Equities are an interesting idea but their low long term returns has always given me pause. I have looked at this for years and never bitten.
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nisiprius » Thu May 24, 2018 9:09 am

vineviz wrote:
Thu May 24, 2018 8:10 am
In my mind, a maximally diversified portfolio is one in which what the diversification ratio (DR) is maximized. The diversification ratio is a relatively new concept, and basically is the portfolio's weighted average asset volatility divided by its actual volatility. It appears to have been introduced in the literature by Choueifaty and Coignard (2008) https://www.tobam.fr/wp-content/uploads ... v-2008.pdf.

See also for a very brief overview Mackenzie Investments https://www.mackenzieinvestments.com/en ... tion-ratio.
That's interesting, thank you. My first impression is that this sounds like a reasonable and useful definition, I like it.

I am very put off, however, by the web page claiming "Diversification Ratio®" as a registered trademark, apparently of TOBAM.

Image

I'm nervous about downloading the Choueifaty and Coignard paper at the tobam.fr site, because both Safari and Firefox are issuing fairly serious-sounding warnings about security issues with the site--it has the wrong security certificate or its misconfigured and Firefox is warning that some might be impersonating the site. I don't believe it's really a problem, but... do you have another source for it? Meanwhile I can read the abstract of their paper, Toward Maximum Diversification, and I see that it says "the authors ... introduce a measure of the diversification of a portfolio that they term the diversification ratio."

I don't yet know if the "diversification ratio" is the same as the "Diversification Ratio®." (Yes, I'm mostly joking. But shame on TOBAM).
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by not4me » Thu May 24, 2018 9:11 am

asif408 wrote:
Thu May 24, 2018 7:54 am
Interestingly, when I change the start date to 2007, the porfolio with PME becomes the worst and the EM portfolio becomes the best. The big benefit from PME was 2001 and 2002, when it had positive returns when most everything else was down the toilet. So I will say that at times, PME could be a better diversifier than EM. And the reverse could also be true at times.

Actually, looking back at it, if you would have owned a 50/50 EM/PME split, you would have outperformed dramatically since 2000, even with the last decade of awful performance from PME and EM: https://www.portfoliovisualizer.com/bac ... ation5_2=6

So maybe that speaks more to the valuation differential between PME/EM and the other areas of stocks at the time. In the 6 years before 2000, PME and EM had horrible returns relative to the rest of the market: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D. So the lesson I take away is that something could be a good diversifier in the future if it has had poor relative performance to the overall market for several years. Since both PME and EM have performed more poorly than the US since 2011: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D, I'll say they could both be potential diversifiers down the road.
I'm not able to cite specific numbers or dates, but thought I'd point out that several of the posts are not seemingly based on what is really being compared. I'm not sure if this holds true here; perhaps a long term holder of the VGPMX will chime in. This is not a "precious metals" fund in the sense some are taking it. I don't recall when there was a change, but the fund changed at some point. I believe the addition of "& Mining" was one of the key changes. There is a big difference between holding the metal & the stock of the company mining the metal. Since I don't recall when, I can't say if that is a contributor to distortion of back testing for certain years. I saw one note that said it didn't have emerging markets, but Vanguard's latest shows it does....my point is that it might help to understand better what is being compared before too many conclusions are drawn.

By the way, I am not a holder of VGPMX

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by vineviz » Thu May 24, 2018 9:12 am

nedsaid wrote:
Thu May 24, 2018 8:33 am
If all I was concerned about was non-correlation with the US Stock Market, I would just stuff my mattress with cash. Problem is non-correlation is also non-return.
Thankfully, that's not true. Lots of assets have low, even negative, correlations with the U.S. stock market (for instance) and significantly positive long-term returns.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by vineviz » Thu May 24, 2018 9:18 am

nisiprius wrote:
Thu May 24, 2018 9:09 am
I'm nervous about downloading the Choueifaty and Coignard paper at the tobam.fr site, because both Safari and Firefox are issuing fairly serious-sounding warnings about security issues with the site--it has the wrong security certificate or its misconfigured and Firefox is warning that some might be impersonating the site. I don't believe it's really a problem, but... do you have another source for it?
I sent you a private message.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nisiprius » Thu May 24, 2018 9:42 am

vineviz wrote:
Thu May 24, 2018 9:18 am
nisiprius wrote:
Thu May 24, 2018 9:09 am
I'm nervous about downloading the Choueifaty and Coignard paper at the tobam.fr site, because both Safari and Firefox are issuing fairly serious-sounding warnings about security issues with the site--it has the wrong security certificate or its misconfigured and Firefox is warning that some might be impersonating the site. I don't believe it's really a problem, but... do you have another source for it?
I sent you a private message.
Thank you very much. Meanwhile, I've also found this, available at no cost from SSRN: Choueifaty, Froidure, and Reynier (2013),
Properties of the Most Diversified Portfolio, Journal of Investment Strategies, Vol.2(2), Spring 2013, pp.49-70, "Date Written: July 6, 2011"
This article expands upon “Toward Maximum Diversification” by Choueifaty and Coignard [2008]. We present new mathematical properties of the Diversification Ratio and Most Diversified Portfolio (MDP), and investigate the optimality of the MDP in a mean-variance framework. We also introduce a set of “Portfolio Invariance Properties,” providing the basic rules an unbiased portfolio construction process should respect. The MDP is then compared in light of these rules to popular methodologies (equal weights, equal risk contribution, minimum variance), and their performance is investigated over the past decade, using the MSCI World as reference universe. We believe that the results obtained in this article show that the MDP is a strong candidate for being the un-diversifiable portfolio, and as such delivers investors with the full benefit of the equity premium.
I haven't read it yet.

They are all associated with TOBAM and they do not use the ® symbol after "Diversification Ratio," so I don't feel that I need to.
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nisiprius » Thu May 24, 2018 10:30 am

Quick, quick experiment.
80% large cap, 20% small cap value, 1972-present, whatever PortfolioVisualizer uses for those asset classes.

Standard deviations:
80% x 10.23% (US large cap)
20% x 14.23% (US small cap value)
Weighted average: 11.03%
Actual portfolio standard deviation: 11.16%
Diversification ratio = 11.03/11.16 = 0.988, i.e. the portfolio is microscopically slightly less diversified than 100% US large cap.

For 90%/10%, I get 10.69% for the weighted average, 10.71% for the actual portfolio, so, again, small cap value still microscopically reduced the diversification ratio.


50% US stock market, 50% Global ex-US stock market
50% x 14.98% (US)
50% x 17.84% (ex-US)
Weighted average 16.41%
Actual portfolio 14.97%
Diversification ratio 1.096, an increase in diversification.

Interesting.
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 10:59 am

nedsaid wrote:
Thu May 24, 2018 8:33 am
If all I was concerned about was non-correlation with the US Stock Market, I would just stuff my mattress with cash. Problem is non-correlation is also non-return. Precious metals funds over long periods of time just don't return much. It makes me inspired to start a "Nedsaid Stuff Your Money in My Mattress" fund and charge a 1% Assets Under Management Fee. Short term Treasuries would fill the bill, unlike a mattress, you get interest payments.

Precious Metals Equities are an interesting idea but their low long term returns has always given me pause. I have looked at this for years and never bitten.
Precious metal equity is different from holding precious metals. The former is a stock of a commodity producer which generates revenue.
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 11:03 am

The big benefit from PME was 2001 and 2002, when it had positive returns when most everything else was down the toilet
That’s why it could be a better diversifier. I don’t know of a time when EM was doing well while all other growth assets were down the toilet.
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 11:54 am

perhaps a long term holder of the VGPMX will chime in. This is not a "precious metals" fund in the sense some are taking it. I don't recall when there was a change, but the fund changed at some point.
Precious metals = the metals themselves
Precious metal equity = stocks in producers of precious metals (PME).

VGPMX has been a precious metals equity (as opposed to precious metals) fund for as long as I’ve been familiar with it. It has a long history and I don’t know if it once primarily held precious metals as opposed to precious metals equity. PME companies can and will sometimes hedge their mines by shorting the metals so correlation to the metal can be positive or negative.

There was a portfolio manager before the current one who diversified the fund a bit to miners of non-precious metals such as the Canadian miner Potash Corp. I think Vanguard appointed a different manager a while back to convert the fund back to a pure play on PME.

PME is not just miners. The fund at one time held a Belgian company that reclaims platinum from recycled electronics.

I don’t invest in this fund. It should only be used as a diversifier, not a core holding as volatility is breathtaking if held in small amounts but will become bone-crushing if held in larger amounts. It is an undiversified sector fund that only holds about 75 stocks. It has about 60% exposure to Canadian miners.

The robust performance in 2001/2002 came on the heals of a period in the late 1990s when some countries were selling off some of their gold reserves and gold was at a multi-century low corrected for inflation.

This also points to some possible limitations of the diversification: if a tail-risk event involved a country with a reserve currency not being able to meet their obligations, they likely would be selling off their gold reserves to raise capital, and holding PME might worsen the outcome for an investor.
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by asif408 » Thu May 24, 2018 12:03 pm

jalbert wrote:
Thu May 24, 2018 11:03 am
The big benefit from PME was 2001 and 2002, when it had positive returns when most everything else was down the toilet
That’s why it could be a better diversifier. I don’t know of a time when EM was doing well while all other growth assets were down the toilet.
Could be. Other areas of the market were decent diversifiers as well during that 2000-2002, such as energy, REITs, and small value stocks: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D. All of those areas had underperformed the S&P and EAFE leading up to the peak. Admittedly, though, PME went up the most during 2002, which was the worst year.

Although EM was not as great a diversifier over that time period, it did fall a lot less than the US market in 2001 and 2002: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D, so it did help a little during that time to own some EM. Basically the farther you diversified away from global tech stocks (which were the majority of the holding in the S&P and EAFE) and/or the tech sector in general the better you did during the last decade. This decade so far has been the opposite.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by asif408 » Thu May 24, 2018 12:37 pm

jalbert wrote:
Thu May 24, 2018 11:54 am
perhaps a long term holder of the VGPMX will chime in. This is not a "precious metals" fund in the sense some are taking it. I don't recall when there was a change, but the fund changed at some point.
There was a portfolio manager before the current one who diversified the fund a bit to miners of non-precious metals such as the Canadian miner Potash Corp. I think Vanguard appointed a different manager a while back to convert the fund back to a pure play on PME.
I believe that happened in the mid-2000s (IIRC Larry Swedore mentioned that in his book on alternative investments), and my understanding is similar and the current manager started in 2014. Interestingly, when comparing to GDX (the gold miners ETF), VGPMX's correlation with GDX has gone up substantially since 2014 and stayed high for the last several years (see rolling correlations chart): https://www.portfoliovisualizer.com/ass ... ingDays=60. So the fund does appear to have changed to track the miners fund more closely. Of course, being an active fund, that could change down the line.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 12:53 pm

It is interesting that rerunning the backtest with American Century Global Gold instead of VGPMX to sidestep the management strategy changes of VGPMX lowers portfolio volatility even more:

https://www.portfoliovisualizer.com/bac ... ation5_2=6
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by not4me » Thu May 24, 2018 1:07 pm

jalbert wrote:
Thu May 24, 2018 11:54 am
perhaps a long term holder of the VGPMX will chime in. This is not a "precious metals" fund in the sense some are taking it. I don't recall when there was a change, but the fund changed at some point.
Precious metals = the metals themselves
Precious metal equity = stocks in producers of precious metals (PME).

VGPMX has been a precious metals equity (as opposed to precious metals) fund for as long as I’ve been familiar with it. It has a long history and I don’t know if it once primarily held precious metals as opposed to precious metals equity. PME companies can and will sometimes hedge their mines by shorting the metals so correlation to the metal can be positive or negative.

There was a portfolio manager before the current one who diversified the fund a bit to miners of non-precious metals such as the Canadian miner Potash Corp. I think Vanguard appointed a different manager a while back to convert the fund back to a pure play on PME.

PME is not just miners. The fund at one time held a Belgian company that reclaims platinum from recycled electronics.

I don’t invest in this fund. It should only be used as a diversifier, not a core holding as volatility is breathtaking if held in small amounts but will become bone-crushing if held in larger amounts. It is an undiversified sector fund that only holds about 75 stocks. It has about 60% exposure to Canadian miners.

The robust performance in 2001/2002 came on the heals of a period in the late 1990s when some countries were selling off some of their gold reserves and gold was at a multi-century low corrected for inflation.

This also points to some possible limitations of the diversification: if a tail-risk event involved a country with a reserve currency not being able to meet their obligations, they likely would be selling off their gold reserves to raise capital, and holding PME might worsen the outcome for an investor.
I couldn't tell if you were agreeing or disagreeing with what I said, but thought I'd clarify. I certainly understand the distinction between the precious metal & the equity -- not sure your underlying meaning in saying companies that "produce" the pm. I'll add to that soon. As you brought up hedging by shorting, I'll add their unsold "inventory" (both mined & yet to be mined). Sometimes that is the basis for much of the equity price. As you said, that can help or hurt' but the commodity price swing has an effect. All of that is why I said "in a sense" (see original post).

But, here's a section from their prospectus:

Principal Investment Strategies
Under normal circumstances, the Fund invests at least 80% of its assets in the stocks
of foreign and U.S. companies principally engaged in the exploration, mining,
development, fabrication, processing, marketing, or distribution of (or other activities
related to) metals or minerals. The majority of these companies will be principally
engaged in activities related to gold, silver, platinum, diamonds, or other precious and
rare metals or minerals. The remaining companies will be principally engaged in
activities related to nickel, copper, zinc, or other base and common metals or minerals.
Up to 100% of the Fund’s assets may be invested in foreign securities. The Fund may
also invest up to 20% of its assets directly in gold, silver, or other precious metal
bullion and coins.

-- also --

Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and strategies
when the advisor believes that doing so is in the Fund‘s best interest, so long as the
alternative is consistent with the Fund‘s investment objective.

Point being that it is not limited to precious metal equity, but includes the commodity itself, minerals, base metals, etc.

I think you might find also that if you substitute GLD or IAU in this case you might get similar results

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by not4me » Thu May 24, 2018 1:30 pm

jalbert wrote:
Thu May 24, 2018 12:53 pm
It is interesting that rerunning the backtest with American Century Global Gold instead of VGPMX to sidestep the management strategy changes of VGPMX lowers portfolio volatility even more:

https://www.portfoliovisualizer.com/bac ... ation5_2=6
I was keying up a message while you posted this...at the end I suggested using GLD or IAU, but basically the same thought. Which to me isn't surprising

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nedsaid » Thu May 24, 2018 2:03 pm

vineviz wrote:
Thu May 24, 2018 9:12 am
nedsaid wrote:
Thu May 24, 2018 8:33 am
If all I was concerned about was non-correlation with the US Stock Market, I would just stuff my mattress with cash. Problem is non-correlation is also non-return.
Thankfully, that's not true. Lots of assets have low, even negative, correlations with the U.S. stock market (for instance) and significantly positive long-term returns.
Well, I want both non-correlation and returns. Precious metals equity funds have pretty disappointing long term performance records.

REITs are supposed to be non-correlating to stocks but with similar returns. Bonds are non-correlating to stocks but with lower returns. Problem is that non-correlation can turn into correlation at the worst possible time in a crisis, correlation on the way down. I own REITs and I own bonds and believe in them, I just realize that diversification doesn't always works as hoped. During the 2008-2009 financial crisis, even TIPS and Corporates were down 10-12% though down less than the 50% down for stocks. Nominal treasuries were up during that time, which is what you hope for.

Precious metal equity funds worked great during the 2000-2002 bear market, giving an investor the desired diversification benefit. During the 2008-2009 bear market, they fell right along with everything else. This is what I mean that hoped for diversification benefits don't always happen.
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nedsaid » Thu May 24, 2018 2:05 pm

jalbert wrote:
Thu May 24, 2018 10:59 am
nedsaid wrote:
Thu May 24, 2018 8:33 am
If all I was concerned about was non-correlation with the US Stock Market, I would just stuff my mattress with cash. Problem is non-correlation is also non-return. Precious metals funds over long periods of time just don't return much. It makes me inspired to start a "Nedsaid Stuff Your Money in My Mattress" fund and charge a 1% Assets Under Management Fee. Short term Treasuries would fill the bill, unlike a mattress, you get interest payments.

Precious Metals Equities are an interesting idea but their low long term returns has always given me pause. I have looked at this for years and never bitten.
Precious metal equity is different from holding precious metals. The former is a stock of a commodity producer which generates revenue.
Yes, they are different. The diversification benefit from the precious metals themselves is also uneven but perhaps at different times than precious metals equities.
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jalbert
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 2:46 pm

Long-term return is a concern. It is difficult to measure because PME is so volatile that even very long-term return is sensitive to start date. I suppose that is a defect of the strategy in and of itself.

Interestingly, the effect of the diversification on portfolio volatility does not seem to be dependent on including the high PME return years of 2001-2002:

https://www.portfoliovisualizer.com/bac ... ation5_3=7
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by asif408 » Thu May 24, 2018 3:28 pm

nedsaid wrote:
Thu May 24, 2018 2:03 pm
Well, I want both non-correlation and returns. Precious metals equity funds have pretty disappointing long term performance records.
I agree, nedsaid. Just curious what you think about the last 10 years of PME performance vs. the S&P: https://www.portfoliovisualizer.com/bac ... ion3_3=100. Over the long term I believe PME has underperformed stocks by at least several percentage points per year on average. But over the last decade it has underperformed by over 17% per year, whether you look at the Vanguard fund or the VanEck gold miners fund. I know PME is a poor investment on its own, but that's truly awful relative performance, and I sometimes wonder if going forward it can continue to be that bad. Not to say that it will outperform going forward, but maybe less relative poor performance.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 4:41 pm

Thanks for all the replies. I don’t plan to invest in PME, nor do I recommend it to others. My requirement for a diversifier is that an asset class should have a track record of risk and volatility being rewarded standalone. Otherwise you are depending on the diversification to fix a defect with the asset class. PME historically has returned more than bonds, so if the diversification were reliable, I would strongly consider it, but I don’t trust that scenario enough.

Still I find is not easy to refute the idea that PME adds diversification benefit to US investors. Since the mid-1950’s PME has returned about 8.6% per year (computed as the CAGR of the first 62 years of returns of INIVX). I wonder if developed markets non-US equity matches that.
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by AlmstRtrd » Thu May 24, 2018 4:43 pm

It doesn't say anything about emerging markets but I think this article about gold as a diversifier from portfoliocharts.com is excellent:

https://portfoliocharts.com/2016/01/25/ ... at-a-time/

In general, though it has a low long-term return, gold tends to do well when stocks are struggling. And, yes, I know that the 1972-1974 period is likely unrepeatable, but there are start-date sensitive tools on that website so that one can ignore certain periods of outperformance.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by nedsaid » Thu May 24, 2018 4:45 pm

asif408 wrote:
Thu May 24, 2018 3:28 pm
nedsaid wrote:
Thu May 24, 2018 2:03 pm
Well, I want both non-correlation and returns. Precious metals equity funds have pretty disappointing long term performance records.
I agree, nedsaid. Just curious what you think about the last 10 years of PME performance vs. the S&P: https://www.portfoliovisualizer.com/bac ... ion3_3=100. Over the long term I believe PME has underperformed stocks by at least several percentage points per year on average. But over the last decade it has underperformed by over 17% per year, whether you look at the Vanguard fund or the VanEck gold miners fund. I know PME is a poor investment on its own, but that's truly awful relative performance, and I sometimes wonder if going forward it can continue to be that bad. Not to say that it will outperform going forward, but maybe less relative poor performance.
Quoting Nisiprius, "Icky Poo."

I do think Precious Metals Equities deserve consideration as portfolio insurance but after having looked over such funds for years, I never got excited enough to pull the trigger. A family member bought the American Century Global Gold Fund and for a while it was a pretty good investment. I couldn't help but notice that no matter how well that fund did, my US Stock funds did better. Then it had a cold streak while the US Stock Market continued to do well. Long term, that fund has returned 1.77% since inception on August 17, 1988. Could has done as well or better with short term US Treasuries with much less volatility. The rational side of me just didn't see the point.

I have thrown a lot of asset classes at the market volatility problem and darn it, my portfolio is still volatile. Let's see, I have thrown such things at my portfolio such as REITs, TIPS, Small-Cap Value, International Small-Cap, Emerging Markets, International Value. All of that stuff crashed in 2008-2009. I don't think throwing Precious Metals Equities at my portfolio will magically give my portfolio the steady 8% yearly return with low volatility that we all want. I am resigned that my portfolio value will wiggle and squiggle, hopefully on an upward path. I feel like Ponce de Leon looking for that fountain of youth. Haven't found either the magic diversifier or the fountain of youth yet.
A fool and his money are good for business.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by TomCat96 » Thu May 24, 2018 5:11 pm

jalbert wrote:
Thu May 24, 2018 1:22 am
I don’t know the answer to the question in the subject, but the following (no doubt biased) backtest is interesting. It compares:

70% US equity
30% developed markets equity

70% US equity
24% developed markets equity
6% emerging markets equity

70% US equity
24% developed markets equity
6% precious metals equity

https://www.portfoliovisualizer.com/bac ... ation5_2=6
I checked your results, and honestly I think the difference is so small I would attribute it to noise.
The difference in standard deviation is .06% over a 33 year period.

That really tells me very little.
The goal of diversification is to mitigate some kind of risk. However the way we measure risk reduces down to standard deviation as a number. We can hem and haw about theory about the philosophical accuracy of that, but that's the way we do it for now.

And the consequence of reducing risk via diversification to be measured against the distilled quantity that is standard deviation is that we are going to get varying degrees of correlation from other asset classes against VTSMX by virtue of random chance.

I'm not saying I know any better concerning the deeper rationale of the interplay between a pruned vanguard index of mining companies vs the us market index.

But from my first glance, I would call your results thin evidence in favor of, or spurious correlation.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by Lauretta » Thu May 24, 2018 5:49 pm

vineviz wrote:
Thu May 24, 2018 8:10 am
nisiprius wrote:
Thu May 24, 2018 6:59 am
This is a sincere question: what definition and measure of "diversification" are you using when you say "a market-weight portfolio is not in theory the most diversified portfolio" and "a maximally diversified portfolio isn't always the optimal portfolio?" I've actually looked in textbooks (Financial Economics, Bodie, Merton and Cleeton) in hope of finding a recognized quantitative definition of diversification and a standard way to measure the amount of diversification in a portfolio, without success.
I think it's a good question.

In my mind, a maximally diversified portfolio is one in which what the diversification ratio (DR) is maximized. The diversification ratio is a relatively new concept, and basically is the portfolio's weighted average asset volatility divided by its actual volatility. It appears to have been introduced in the literature by Choueifaty and Coignard (2008) https://www.tobam.fr/wp-content/uploads ... v-2008.pdf.

I can't access the paper but I had briefly got interested in Tobam some time ago (they also opened a bitcoin fund in France recently) and had looked at some of the work by Choueifaty. I remember he argues against market cap weighting because you overweight the winners that have gotten expensive, so he developed a different kind of weighting, but the trouble is that all Tobam's funds I've seen have underperformed the benchmark (I guess one reason must be the momentum effect since Choueifaty's method doesn't seem to let the winners run). Anyway, in spite of this underperformance I've seen that Choueifaty has done quite well for himself since he is one of the wealthiest men in France. Good for him. :moneybag
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jalbert
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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Thu May 24, 2018 8:15 pm

I checked your results, and honestly I think the difference is so small I would attribute it to noise. The difference in standard deviation is .06% over a 33 year period.
Unlike EM equity, PME is considered a significant diversifier of tail risk. That a market cap allocation to EM may be replaced with PME with minimal effects on return and volatility over an extended period was surprising to me. In the test with the American Century fund that did not have a period of exposure to non-precious metals, the volatility was reduced a little more as well.
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by heyyou » Fri May 25, 2018 3:51 pm

Is time ever considered, instead of looking for buffers for periods of poor returns? If the investor waits long enough, sometimes a sub-asset class will recover, as seen on a Callan Periodic Table. Perhaps patience is fullness?

Also with a slice and dice portfolio instead of a total market fund, I can use my behavioral finance traits to anchor on whichever slice is doing well, instead of lamenting about the performance of the rest of my portfolio.

Neither is a mathematical solution, but for less sophisticated investors, one of those might work for awhile, sometimes.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by FireProof » Fri May 25, 2018 4:43 pm

Definitely more diversified - then again, so is real estate in the Islamic State or bitcoin - doesn't mean it's a good investment.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Sun May 27, 2018 10:34 pm

Is time ever considered, instead of looking for buffers for periods of poor returns? If the investor waits long enough, sometimes a sub-asset class will recover, as seen on a Callan Periodic Table. Perhaps patience is fullness?
You can look at the variance of short-term returns or long-term returns and assess the benefit of diversification accordingly. A retire making withdrawals cares more about short-term variance than a young retirement saver.
Risk is not a guarantor of return.

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Re: Is Precious Metal Equity a better diversifier than emerging market equity for US investors?

Post by jalbert » Sun May 27, 2018 10:50 pm

April 2003 is the starting month of the backtest most favorable for EM equities in the comparison, and excludes the very favorable years 2000-2002 for PME. The following shows performance from April 2003 to present. For grins I included replacing EM with both PME and just more US equity:

https://www.portfoliovisualizer.com/bac ... ation4_2=6

In the end, I think this whole exercise does not so much increase my interest in PME as decrease my interest in EM.
Risk is not a guarantor of return.

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