If International, what specifically?

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nedsaid
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Re: If International, what specifically?

Post by nedsaid »

Broken Man 1999 wrote: Mon Aug 24, 2020 1:33 pm
nedsaid wrote: Sun Aug 23, 2020 3:04 pm
Robert T wrote: Sun Aug 23, 2020 7:52 am .
I am becoming increasingly appreciative/aware of potential impacts of state-owned enterprises (SOEs) on EM and Non-US Developed Market stock returns.

The theory is that state owned enterprises (SOEs) distort market incentives (firm efficiency, allocation of capital, and labor productivity) resulting in lower returns on capital invested in these firms than in private firms.

How extensive are SOEs and what impact have they had on the valuation, composition, and performance of Emerging Market Stock Indexes?

Wisdomtree has an Emerging Markets ex-State Owned Enterprise Fund (XSOE) which excluded SOEs (defined as firms that have more than 20% of their shares owned by government entities).

What effects does this have (compared to the iShares MSCI Emerging Markets Index given that the MSCI Emerging Markets stock universe is the starting point for the Wisdomtree fund)?

1. The number of companies is reduced by more than half. More than half the companies in MSCI Emerging Markets Index seem to be SOEs (i.e. have more than 20% of shares owned by government entities). Removing SOEs reduces number of companies in the Index from 1202 to 506.
  • Number of companies in fund:
    1202 = iShares MSCI Emerging Market Index (EEM)
    506 = Wisdomtree Emerging Markets ex-SOE Fund (XSOE)

2. Valuation goes up. This raises the question then about whether EM stocks are cheap or not. i.e. Are the relatively lower price multiples of EM market indexes just a reflection of ‘political risk’ in SOEs rather than a reflection of cheaper private companies than elsewhere in the world. Historically, has ‘political risk’ been rewarded? And is an emerging market holding just a ‘bet’ on the future pace of SOE reforms in these countries? Will get back to this at end.
  • Price-to-earnings/Price-to-book /Price-to-sales/Price-to-cash flow
    15.7/1.4/1.1/5.6 = iShares MSCI Emerging Market Index (EEM)
    19.2/1.9/1.4/7.9 = Wisdomtree Emerging Markets ex-SOE Fund (XSOE)

3. Average company size goes up – although not dramatically.
  • Average Market Cap
    45.0bn = iShares MSCI Emerging Market Index (EEM)
    48.3bn = Wisdomtree Emerging Markets ex-SOE Fund (XSOE)

4. Recent performance has been better ex-SOEs.

5. Most (the biggest) SOEs are in the financial sector and energy, and the least in communication services, information technology, and consumer discretionary.
  • Financials / Energy portfolio share (%)
    18.2/5.7 = iShares MSCI Emerging Market Index (EEM)
    12.6/4.1 = Wisdomtree Emerging Markets ex-SOE Fund (XSOE)
    23.9/19.3 = Schwab Fundamental Emerging Markets (FNDE)
The Wisdomtree article indicates a larger underweight in energy and financials, and a larger overweight in communication services, information technology, and consumer discretionary (table on page 3 of following link). https://www.wisdomtree.com/-/media/us-m ... (xsoe).pdf


Thoughts: An extension of the above is that if SOEs drive lower valuations in emerging markets, then EM value indices will implicitly overweight SOEs. And as SOEs are distortive of market incentives then EM value indices should have lower returns than the overall EM market. The problem with this theory/causality is that EM value has had higher returns than the overall EM market over the long-term (see comparison of FTSE RAFI EM with FTSE EM below, and live returns of DFA EM Value). The relatively poor returns of value in 2020 are not a reflection of SOEs per say, but relatively poor performance of sectors such as energy with COVID lockdowns (earlier this year energy prices fell below the cost of production), and outperformance of communication services/technology with surge in online purchases during COVID. It may be true that EM may also be experiencing the recent tech boom (e.g. Alibaba, Tencent) but since inception of the Wisdomtree XSOE fund to the end 2019, the returns of the Schwab Fundamental EM (EM Value) were slightly higher 7.6% vs. 7.0%
  • Annualized return: 1/1994 – 8/2014
    13.1% = FTSE RAFI Emerging Market Index
    6.4% = FTSE Emerging Market Index
    Why end in 8/2014 - that is when I received these data from Research Affiliates (after requesting it).

    Annualized return: 4/1998 – 6/2020
    8.6% = DFA EM Value
    7.3% = Vanguard EM
    https://www.portfoliovisualizer.com/bac ... ion2_2=100

In short: Widsomtree Emerging Market ex-SOEs [XSOE] is another interesting fund to consider. I currently plan to stick with RAFI EM value but will be open to future research on this topic. Would be interested to see what an ex-SOE EM value fund would look like.

Robert
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Robert, this is very interesting. I hold the Fidelity Emerging Markets Index, I was aghast when I saw that it was 40% China. I will just say that investor rights, protection, and rule of law are stronger in some parts of the world than others. I may sell 1/2 of my Fidelity Emerging Markets Index and buy the Wisdom Tree product. Recent geo-political events have raised concerns about having so much of my Emerging Markets investments in one country. That is all I will say here.

Edit: XSOE, the Wisdom Tree product is still 40% China. Tencent is 8.91% of the portfolio and Alibaba is 8.60%. In the Fidelity Emerging Markets Index, Alibaba is 6.77% and Tencent is 6.14% of the portfolio. So it doesn't really do what I wanted. We have to live with, I suppose, I higher allocation to China in Emerging Markets funds. I just think 40% is too much. Perhaps I will just switch some funds from Emerging to Developed Markets. This isn't so easy, everything has drawbacks.
I agree with your thought process, and that is all I will say here! :thumbsup

Broken Man 1999
Sigh! I was going to take some of my Emerging Markets money and flee to Avantis Emerging Markets Equity ETF (AVEM) and found that it was "only" 36.52% China. Then I checked Templeton Developing Markets A, which I have owned for many years, it has 28.28% China, that is a little more like it.
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Robert T
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Re: If International, what specifically?

Post by Robert T »

.
Wisdomtree Emerging Markets ex-State Owned Enterprises = MSCI Emerging Markets Growth Index. Well not exactly but has had similar performance.

P1 = MSCI Emerging Markets Growth Index (Net)
P2 = Wisdomtree Emerging Markets ex-State-Owned Enterprises Index 2015-2017. XSOE ETF from 2018 to date. The Index inception was in August 2014

.....................P1/..P2
2015:.....-11.3 / -10.2
2016: ........7.6 /....8.6
2017: .......46.8 / 47.6
2018: ...-18.3 / -18.6
2019: .......25.1 / 24.8
2020 YTD.13.7 /.. 9.3

Annualized return over full period: 9.0 / 8.7
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garlandwhizzer
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Re: If International, what specifically?

Post by garlandwhizzer »

Robert T wrote:

Annualized return: 1/1994 – 8/2014
13.1% = FTSE RAFI Emerging Market Index
6.4% = FTSE Emerging Market Index
Why end in 8/2014 - that is when I received these data from Research Affiliates (after requesting it).
This comparison if for cost-free, trading friction free indexes with trading parameters optimized in the rear view mirror. These are not real funds and importantly the period is cherry-picked: the inflation of the tech bubble and its collapse which in retrospect is what killed LCG and drove SCV outperformance. But then it also neglects the last 6 years when SCV and fundamental indexing has totally sucked. In sum I don't think the comparison makes a valid point.

The following is a comparison of real funds, SFENX, Schwab's FTSE Fundamental Index Emerging Market Index Fund, and SCHE, Schwab's FTSE Emerging Market Equity ETF, a cap weight index. I use SFENX instead of FNDC because SFENX has been around longer than the ETF since Jan. 2010. Both FNDE and SFENX use the same fundamental index.

It turns out that SCHE, the EM cap weight approach outperformed the EM fundamental index approach YTD, 1yr, 3yr, 5yr, 10 yr, and the longest comparison available 10 yr. 7 months. There was not a single point in the 10 year period when an investor who purchase 10K of SFENX in Jan 2010 would be ahead of the investor who invested 10K on the same day in the basic SCHE index. Over the full 10 years time period, the cap weighted fund outperformed the fundament index fund by more than 25%. That amounts to a significant opportunity cost. In addition to outperformance, the simple EM index fund had lower volatility, much lower maximal loss, lower loss in worst year, and consequently a much better Sharpe ratio (.26 versus .15). So the fundamental index fund with the heavy value tilt had no trouble finding risk and volatility, it succeeded admirably in finding both. What it did not find was increased return, in fact it found its opposite, robust underperformance.

Numbers from portfolio visualizer:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

I agree that fundamental indexes and also value indexes have strong theoretical appeal. I have taken the bait on both of them before and been disappointed. The market is the ultimate arbiter of investing success and for whatever reason it has refused in the last 10 or 15 years to follow the script laid out by fundamental/SCV models. It is certainly possible that things will reverse in the future. I expect it to do so to some extent and at least partially and perhaps fully reverse the value blood bath since Feb. 2020. Whether these "sophisticated" approaches will produce long term outperformance beyond that going forward in the modern information/tech driven economy, with near zero interest rates and absent inflation, stagnant economic growth prospects, and considerable unemployment, is a very different question. I lack basic faith in these "sophisticated" investing approaches and models will achieve their goals. I suspect that the net movement of money they generate is from investors' pockets to the financial industry not from the financial industry into investors pockets.

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Re: If International, what specifically?

Post by 000 »

garlandwhizzer wrote: Tue Aug 25, 2020 8:52 pm This comparison if for cost-free, trading friction free indexes with trading parameters optimized in the rear view mirror. These are not real funds and importantly the period is cherry-picked: the inflation of the tech bubble and its collapse which in retrospect is what killed LCG and drove SCV outperformance. But then it also neglects the last 6 years when SCV and fundamental indexing has totally sucked. In sum I don't think the comparison makes a valid point.

[...]

I lack basic faith in these "sophisticated" investing approaches and models will achieve their goals. I suspect that the net movement of money they generate is from investors' pockets to the financial industry not from the financial industry into investors pockets.
Great post!
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Re: If International, what specifically?

Post by unclescrooge »

brad.clarkston wrote: Fri Aug 21, 2020 11:21 am
burritoLover wrote: Fri Aug 21, 2020 10:25 am I've been wanting to add international small-cap value but I can't find any decent fund to do this.
Good luck. I've been looking for years and there all medium/large-cap masquerading as small-cap except for the DFA funds.

DFA International Small Cap Value I DISVX would be the one I'd take if I could get it without giving them my entire port.
What about the wisdom tree funds?
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Robert T
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Re: If International, what specifically?

Post by Robert T »

garlandwhizzer wrote: Tue Aug 25, 2020 8:52 pm This comparison if for cost-free, trading friction free indexes with trading parameters optimized in the rear view mirror. These are not real funds and importantly the period is cherry-picked: the inflation of the tech bubble and its collapse which in retrospect is what killed LCG and drove SCV outperformance. But then it also neglects the last 6 years when SCV and fundamental indexing has totally sucked. In sum I don't think the comparison makes a valid point.
Here's the other part of my earlier post that you left out, with real costs. The period is not cherry picked it is the only one we have and the live returns include the past 15 years that you frequently refer to as the period when (small) value sucked. I agreed the live returns of DFA EM Value fund is more relevant.
  • Annualized return: 4/1998 – 6/2020
    8.6% = DFA EM Value
    7.3% = Vanguard EM
The context from my earlier post:
"An extension of the above is that if SOEs drive lower valuations in emerging markets, then EM value indices will implicitly overweight SOEs. And as SOEs are distortive of market incentives then EM value indices should have lower returns than the overall EM market. The problem with this theory/causality is that EM value has had higher returns than the overall EM market over the long-term (see comparison of FTSE RAFI EM with FTSE EM below, and live returns of DFA EM Value). The relatively poor returns of value in 2020 are not a reflection of SOEs per say, but relatively poor performance of sectors such as energy with COVID lockdowns (earlier this year energy prices fell below the cost of production), and outperformance of communication services/technology with surge in online purchases during COVID. It may be true that EM may also be experiencing the recent tech boom (e.g. Alibaba, Tencent) but since inception of the Wisdomtree XSOE fund to the end 2019, the returns of the Schwab Fundamental EM (EM Value) were slightly higher.
Time will tell if EM value will permanently underperform in emerging markets because of SOEs or not.

On RAFI EM, I posted similar concerns - about 5 years ago viewtopic.php?p=2550536#p2550536
Is it implementation, or that - as you say - value has just 'sucked' for the past 10 to 15 years. The RAFI approach is a fairly simple way of tilting to value stocks. If investors expect value to outperform every year they will be disappointed. viewtopic.php?p=3700104#p3700104

Will new digital technologies and platforms forever result in large cap growth stocks outperforming everywhere? Seem unlikely.
Some related and interesting history from Bill Bernstein - http://www.efficientfrontier.com/ef/700/tech.htm

We each have to decide on our own path.

Robert
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Re: If International, what specifically?

Post by Valuethinker »

The tech super stocks are not outperforming because they are technology stocks. Technology has a habit of destroying profits. The product cycles are so fast, and the impact across industries so great, that profitability is eroded quite quickly. Tech generally is what Schumpeter was talking about when he described the creative & destructive forces of capitalism.

Consumers benefit from new technologies. But generally the technologies bleed profits out of the industry incumbents. Think the old line telephone companies. Or newspapers. Or any one of the PC manufacturers.

What distinguishes the super tech stocks is that they are de facto monopolies. And they buy up companies like youtube whose growth threatens them.

In Search. In social media. In desktop office software. A completely vertically integrated phone ecosystem.

Amazon is an outlier but it is dominant in a number of its product categories and it has AWS.

This is John D Rockefeller's Standard Oil all over again. Or the big 3 tv networks.
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Re: If International, what specifically?

Post by Day9 »

I switched from DLS to AVDV. My emerging markets allocation is all DFA Emerging Markets Value (DFEVX) which I have access to in a 401k. I also invest in DFA International Core, DFA International Value, and DFA International Small in various 401ks. I would prefer DFA International Small Value but I do not have access to that.
I'm just a fan of the person I got my user name from
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Re: If International, what specifically?

Post by Robert T »

.
Arnott et al's views on state-owned enterprises: From the article Bubble, Bubble, Toil and Trouble - https://www.researchaffiliates.com/en_u ... ouble.html
One particular area of emerging markets falls squarely into the anti-bubble camp: unloved and shunned emerging market state-owned enterprises (SOEs). Many investors choose not to own them at any price. Yet many of these entities are earning substantial profits and are trading at levels that require implausible projections to not meet the future cash flows priced into their shares. Yes, there is a real risk of the state expropriating some of those cash flows, but if these SOEs wish to maintain continued access to the global capital markets, they need to continue to return some of the profits to external shareholders. The SOEs and governments that most support growing shareholder rights and the rule of law will be best able to expand their access to global markets.
A representative index of SOEs is not available. Therefore, we made a list of the top 50 SOEs in the emerging markets and examined the valuations of the group. The top 50 are a concentrated portfolio, with over two-thirds of the portfolio’s weight by market cap in Chinese companies, over half in the financial sector, and nearly a quarter in energy. Even so, the value is compelling. These 50 SOEs pay a weighted-average dividend yield of 4.19%, offering a bit of a safety net along with a likely large risk premium. Compare those characteristics to the broad-based MSCI Emerging Markets Index (which includes all of the 50 SOEs as a subset) which has a dividend yield of 2.75%, a modest premium to the MSCI ACWI’s 2.49% yield. This group of SOEs trades at a weighted-average price-to-book (PB) ratio of 1.03, a 36% discount to the MSCI Emerging Markets Index’s PB of 1.61, and at a price-to-earnings (PE) ratio of 8.9, 34% lower than the 13.5 PE of the broader group.
What would it take for one or more of these 50 SOEs to not deliver a substantial risk premium over the next 10 years? The enterprise would have to slash its dividends and stagnate or become materially cheaper. These are large, productive enterprises sitting at the center of strongly growing economies and they currently represent real value. The risk is that the value stops flowing to overseas shareholders—certainly not out of the question, but in our view an implausible outcome.
Time will tell
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Re: If International, what specifically?

Post by burritoLover »

Massdriver wrote: Fri Aug 21, 2020 11:43 am
brad.clarkston wrote: Fri Aug 21, 2020 11:21 am
burritoLover wrote: Fri Aug 21, 2020 10:25 am I've been wanting to add international small-cap value but I can't find any decent fund to do this.
Good luck. I've been looking for years and there all medium/large-cap masquerading as small-cap except for the DFA funds.

DFA International Small Cap Value I DISVX would be the one I'd take if I could get it without giving them my entire port.
As mentioned earlier in this thread, look at AVDV. It is run by some former DFA people and the ETF is available to retail investors. The fund was started in 2019. Check it out:
https://www.avantisinvestors.com/conten ... e-etf.html
Is that actively managed?
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Re: If International, what specifically?

Post by Massdriver »

burritoLover wrote: Wed Aug 26, 2020 3:54 pm
Massdriver wrote: Fri Aug 21, 2020 11:43 am
brad.clarkston wrote: Fri Aug 21, 2020 11:21 am
burritoLover wrote: Fri Aug 21, 2020 10:25 am I've been wanting to add international small-cap value but I can't find any decent fund to do this.
Good luck. I've been looking for years and there all medium/large-cap masquerading as small-cap except for the DFA funds.

DFA International Small Cap Value I DISVX would be the one I'd take if I could get it without giving them my entire port.
As mentioned earlier in this thread, look at AVDV. It is run by some former DFA people and the ETF is available to retail investors. The fund was started in 2019. Check it out:
https://www.avantisinvestors.com/conten ... e-etf.html
Is that actively managed?
It doesn't follow a specific index and uses a specific methodology for adding companies to its holdings, so yes it's active in that sense, but it tries to retain some of the benefits of indexing. Copied from their website:
  • Invests in a broad set of non-U.S. developed small-cap companies and is designed to increase expected returns by focusing on firms believed to be trading at low valuations with higher profitability ratios.
  • Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.
  • Efficient portfolio management and trading process that is designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.
  • Built to fit seamlessly into an investor's asset allocation.
I would point out that many SCV indexes add and remove companies based on a specific methodology as well. I consider AVDV to be something like "semi active". I'm open to other interpretations.
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Re: If International, what specifically?

Post by burritoLover »

Massdriver wrote: Wed Aug 26, 2020 4:35 pm
burritoLover wrote: Wed Aug 26, 2020 3:54 pm
Massdriver wrote: Fri Aug 21, 2020 11:43 am
brad.clarkston wrote: Fri Aug 21, 2020 11:21 am
burritoLover wrote: Fri Aug 21, 2020 10:25 am I've been wanting to add international small-cap value but I can't find any decent fund to do this.
Good luck. I've been looking for years and there all medium/large-cap masquerading as small-cap except for the DFA funds.

DFA International Small Cap Value I DISVX would be the one I'd take if I could get it without giving them my entire port.
As mentioned earlier in this thread, look at AVDV. It is run by some former DFA people and the ETF is available to retail investors. The fund was started in 2019. Check it out:
https://www.avantisinvestors.com/conten ... e-etf.html
Is that actively managed?
It doesn't follow a specific index and uses a specific methodology for adding companies to its holdings, so yes it's active in that sense, but it tries to retain some of the benefits of indexing. Copied from their website:
  • Invests in a broad set of non-U.S. developed small-cap companies and is designed to increase expected returns by focusing on firms believed to be trading at low valuations with higher profitability ratios.
  • Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.
  • Efficient portfolio management and trading process that is designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.
  • Built to fit seamlessly into an investor's asset allocation.
I would point out that many SCV indexes add and remove companies based on a specific methodology as well. I consider AVDV to be something like "semi active". I'm open to other interpretations.
Thanks for the info!
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
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Re: If International, what specifically?

Post by sean.mcgrath »

grabiner wrote: Mon Aug 24, 2020 11:39 am Assuming the costs are consistent, it makes sense to bias your international stocks the same way you bias your US stocks. If you hold Total Stock Market, you should hold Total International. If you overweight small-cap in the US, you should overweight small-cap international. If you overweight either small-cap or value in the US (favoring riskier stocks), you might overweight emerging markets.

...

I have all these overweights. I prefer to increase the risk of my portfolio by holding riskier stocks rather than more stocks, as I get exposure to more different risks which may not be correlated. So I overweight small-cap, value, and emerging markets. My foreign overweights come from Vanguard FTSE All-World Ex-US Small-Cap (VSS), Vanguard Emerging Markets (VWO, although I hold the mutual fund class VEMAX), and IVLU. I am looking at AVDV but haven't bought it yet; in particular, I would like to see the tax efficiency this year, as I would have to hold it in a taxable account.
I follow that logic, and also use IVLU quite a bit. I was surprised to learn a few months ago that IVLU is weighted 41% Japan to get enough factor exposure. I didn't want factor at the cost of diversification, and had not realized I was making such a large bet on one country.

I'm starting to think about Robert's "factors are factors," and am considering putting more of my value in the US, where the opportunity space seems to be deeper. Any thoughts on the trade-offs? I would keep my factor and US exposure %s the same.
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Re: If International, what specifically?

Post by RomeoMustDie »

International bond market is very promising right now as a store of value while US is in an inverted yield curve environment.
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Re: If International, what specifically?

Post by grabiner »

sean.mcgrath wrote: Thu Aug 27, 2020 12:48 pm
grabiner wrote: Mon Aug 24, 2020 11:39 am Assuming the costs are consistent, it makes sense to bias your international stocks the same way you bias your US stocks. If you hold Total Stock Market, you should hold Total International. If you overweight small-cap in the US, you should overweight small-cap international. If you overweight either small-cap or value in the US (favoring riskier stocks), you might overweight emerging markets.

...

I have all these overweights. I prefer to increase the risk of my portfolio by holding riskier stocks rather than more stocks, as I get exposure to more different risks which may not be correlated. So I overweight small-cap, value, and emerging markets. My foreign overweights come from Vanguard FTSE All-World Ex-US Small-Cap (VSS), Vanguard Emerging Markets (VWO, although I hold the mutual fund class VEMAX), and IVLU. I am looking at AVDV but haven't bought it yet; in particular, I would like to see the tax efficiency this year, as I would have to hold it in a taxable account.
I follow that logic, and also use IVLU quite a bit. I was surprised to learn a few months ago that IVLU is weighted 41% Japan to get enough factor exposure. I didn't want factor at the cost of diversification, and had not realized I was making such a large bet on one country.
Given the number of factors involved, you may not have that much bias in the portfolio as a whole. I hold IVLU, which is 41% Japan, but I also hold Vanguard Developed Markets Index (VEA) which is 22% Japan, VSS which is 14% Japan, and Emerging Markets Index which is 0% Japan. AVDV, which I don't currently hold, is 26% Japan, so it wouldn't change my portfolio bias much if I add it.
I'm starting to think about Robert's "factors are factors," and am considering putting more of my value in the US, where the opportunity space seems to be deeper. Any thoughts on the trade-offs? I would keep my factor and US exposure %s the same.
I don't know whether this is the case for value, but at least for small-cap, there is a good case for overweighting both US and foreign. Small-cap stocks in any one country are less correlated than large-cap stocks to the stock markets in the rest of the world, so an international small-cap index is a good diversifier for a US-heavy portfolio. This is why I bought Vanguard International Explorer when the fund opened, even though it was significantly more expensive at the time than anything else in my portfolio; I switched to lower-cost ETFs when they became available.

Has anyone computed the correlation between small-cap factor returns in different countries? Value factor returns? The logic above suggests that small-cap factor returns should have a low correlation across countries, while value factor returns may have a high correlation because recessions and high interest rates tend to be worldwide phenomena.
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Re: If International, what specifically?

Post by Uncorrelated »

grabiner wrote: Thu Aug 27, 2020 4:39 pm Has anyone computed the correlation between small-cap factor returns in different countries? Value factor returns? The logic above suggests that small-cap factor returns should have a low correlation across countries, while value factor returns may have a high correlation because recessions and high interest rates tend to be worldwide phenomena.
https://papers.ssrn.com/sol3/papers.cfm ... id=2622782
Image

MKT correlation in different regions in the 0.42-0.8 range. SmB 0.08-0.47. HmL 0.12-0.61.

I wouldn't pay too much attention to these numbers. Lower correlation does not imply better choice. Correlations are usually not very statistically significant. Low correlations for long-short might not necessary indicate low correlations for long-only (can't find any data on long-only).
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Re: If International, what specifically?

Post by sean.mcgrath »

Uncorrelated wrote: Thu Aug 27, 2020 5:07 pm
grabiner wrote: Thu Aug 27, 2020 4:39 pm Has anyone computed the correlation between small-cap factor returns in different countries? Value factor returns? The logic above suggests that small-cap factor returns should have a low correlation across countries, while value factor returns may have a high correlation because recessions and high interest rates tend to be worldwide phenomena.
https://papers.ssrn.com/sol3/papers.cfm ... id=2622782
Image

MKT correlation in different regions in the 0.42-0.8 range. SmB 0.08-0.47. HmL 0.12-0.61.

I wouldn't pay too much attention to these numbers. Lower correlation does not imply better choice. Correlations are usually not very statistically significant. Low correlations for long-short might not necessary indicate low correlations for long-only (can't find any data on long-only).
Admittedly it is late and I have had some pretty outstanding wines. Not sure I get your conclusion, UC: is it that "factors are factors" regardless of geography, or that one needs to optimize for both?
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Re: If International, what specifically?

Post by Walkure »

Vegomatic wrote: Mon Aug 24, 2020 5:30 am iShares, fwiw, offers an EM ex (Peoples Republic of) China ETF, EMXC

https://www.ishares.com/us/products/288 ... a-etf-fund
Columbia also offers a similar fund, XCEM, with a lower expense ratio but a more concentrated basket of holdings.
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Re: If International, what specifically?

Post by Uncorrelated »

sean.mcgrath wrote: Thu Aug 27, 2020 5:52 pm
Admittedly it is late and I have had some pretty outstanding wines. Not sure I get your conclusion, UC: is it that "factors are factors" regardless of geography, or that one needs to optimize for both?
I don't think it makes sense to optimize the factor tilt for each region individually. If you want a factor tilt, tilt globally.
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Re: If International, what specifically?

Post by YRT70 »

Massdriver wrote: Wed Aug 26, 2020 4:35 pm
burritoLover wrote: Wed Aug 26, 2020 3:54 pm
Massdriver wrote: Fri Aug 21, 2020 11:43 am
brad.clarkston wrote: Fri Aug 21, 2020 11:21 am
burritoLover wrote: Fri Aug 21, 2020 10:25 am I've been wanting to add international small-cap value but I can't find any decent fund to do this.
Good luck. I've been looking for years and there all medium/large-cap masquerading as small-cap except for the DFA funds.

DFA International Small Cap Value I DISVX would be the one I'd take if I could get it without giving them my entire port.
As mentioned earlier in this thread, look at AVDV. It is run by some former DFA people and the ETF is available to retail investors. The fund was started in 2019. Check it out:
https://www.avantisinvestors.com/conten ... e-etf.html
Is that actively managed?
It doesn't follow a specific index and uses a specific methodology for adding companies to its holdings, so yes it's active in that sense, but it tries to retain some of the benefits of indexing. Copied from their website:
  • Invests in a broad set of non-U.S. developed small-cap companies and is designed to increase expected returns by focusing on firms believed to be trading at low valuations with higher profitability ratios.
  • Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.
  • Efficient portfolio management and trading process that is designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.
  • Built to fit seamlessly into an investor's asset allocation.
I would point out that many SCV indexes add and remove companies based on a specific methodology as well. I consider AVDV to be something like "semi active". I'm open to other interpretations.
I was interested in Larry Swedroe's take on this. Here's his reply: "NOT actively managed---systematic just like DFA and many others".
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Re: If International, what specifically?

Post by tibbitts »

YRT70 wrote: Fri Aug 28, 2020 7:14 am I was interested in Larry Swedroe's take on this. Here's his reply: "NOT actively managed---systematic just like DFA and many others".
I wonder how many active funds are left that aren't "systematic", regardless of what they claim. It seems like at this point the only human input to decisions would be tweaking algorithms, not choosing one security over another.
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Re: If International, what specifically?

Post by abuss368 »

rascott wrote: Mon Aug 24, 2020 11:03 am
Hence the problem one runs into when digging very deep on many international funds. It just becomes a fairly unattractive investment all around. My relatively small intl holdings (15%) are mostly in small cap funds (including some DGS).
What about if an investor simply owned Total International Stock Market index fund and did not have a need to "dig" around?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: If International, what specifically?

Post by Robot Monster »

abuss368 wrote: Fri Aug 28, 2020 7:34 am
rascott wrote: Mon Aug 24, 2020 11:03 am
Hence the problem one runs into when digging very deep on many international funds. It just becomes a fairly unattractive investment all around. My relatively small intl holdings (15%) are mostly in small cap funds (including some DGS).
What about if an investor simply owned Total International Stock Market index fund and did not have a need to "dig" around?
Why keep it simple when you can dig, meddle, fuss, and fidget? Why keep it simple when you can lose yourself in overthinking, complexity and a giant rolling hairball of confusion? Now, if you don't mind, I'm gonna slice and dice my portfolio until I slice my fingers off.
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Re: If International, what specifically?

Post by abuss368 »

Robot Monster wrote: Fri Aug 28, 2020 9:12 am
abuss368 wrote: Fri Aug 28, 2020 7:34 am
rascott wrote: Mon Aug 24, 2020 11:03 am
Hence the problem one runs into when digging very deep on many international funds. It just becomes a fairly unattractive investment all around. My relatively small intl holdings (15%) are mostly in small cap funds (including some DGS).
What about if an investor simply owned Total International Stock Market index fund and did not have a need to "dig" around?
Why keep it simple when you can dig, meddle, fuss, and fidget? Why keep it simple when you can lose yourself in overthinking, complexity and a giant rolling hairball of confusion? Now, if you don't mind, I'm gonna slice and dice my portfolio until I slice my fingers off.
Priceless. I went through that stage over the years and learned over time that "simplicity is the master key to financial success".

Thank you Jack Bogle.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: If International, what specifically?

Post by ColoRetiredGirl »

WildBill wrote: Fri Aug 21, 2020 1:56 pm Howdy

I use VSS and VWILX, in addition to a Zero international Index fund from Fidelity.

VWILX is the Vanguard managed international fund. It has an allocation to about 10% US growth stocks at the moment. It is my side bet on world growth, with a fairly concentrated portfolio. It is 50% of my international allocation.

VSS is international small cap. It is my side bet on intl small cap. It is about 15% of my international allocation.

Edited - Just noted the above poster is leery of VWILX. I would also bee somewhat leery at current valuations, but it has been a core holding for me for many years and I am sticking with it. It sure has been a rocket ship the last couple of years.

Good luck to all

W B
+1 on your choices. I have both as well. Since VWILX has been skyrocketing, have you sold any gains to dampen the risk? I just bought VWILX in May and it is the most profitable fund in my portfolio. VEA was a loser for me so I sold it and bought VWILX. I can’t be any happier. With this said, I have difficulty finding a site to monitor this fund‘s underlying holdings. Any suggestions?
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Re: If International, what specifically?

Post by asif408 »

ColoRetiredGirl wrote: Fri Aug 28, 2020 9:58 am +1 on your choices. I have both as well. Since VWILX has been skyrocketing, have you sold any gains to dampen the risk? I just bought VWILX in May and it is the most profitable fund in my portfolio. VEA was a loser for me so I sold it and bought VWILX. I can’t be any happier. With this said, I have difficulty finding a site to monitor this fund‘s underlying holdings. Any suggestions?
Morningstar is pretty good, though it's only updated every couple of months: https://www.morningstar.com/funds/xnas/vwilx/portfolio

The Vanguard website updates it about as often. Note this fund has about 8% combined in Tesla and Amazon and is heavily weighted to consumer cyclical stocks. 70% of the fund's assets are in 4 sector (consumer cyclical, tech, healthcare, and communication services) and it only holds 119 stocks. 40% of most diversified international funds have their assets in these sectors, and they typically hold several thousand stocks, so the sector concentration is notable. Understand that if you own this fund you are making big bets on the best recent performers, which are US and EM tech stocks (e.g., Tencent, Alibaba) and consumer cyclicals. Nothing wrong with that, necessarily, just helps to know what you own. Consumer cyclical stocks have almost doubled since March, so their bet has paid off so far.

If I owned it I would certainly be happily taking some profits now, not sure I'd be rushing to buy more. Of course it could keep outperforming, but probably good to have some rebalancing rules for yourself (if you don't already have them) so you sell high and buy low, and not vice versa. I recently sold some silver miners, which are up almost 200% since March. They are still marching higher, but I have my rules that prevent me from performance chasing.
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Re: If International, what specifically?

Post by ColoRetiredGirl »

asif408 wrote: Fri Aug 28, 2020 10:25 am
ColoRetiredGirl wrote: Fri Aug 28, 2020 9:58 am +1 on your choices. I have both as well. Since VWILX has been skyrocketing, have you sold any gains to dampen the risk? I just bought VWILX in May and it is the most profitable fund in my portfolio. VEA was a loser for me so I sold it and bought VWILX. I can’t be any happier. With this said, I have difficulty finding a site to monitor this fund‘s underlying holdings. Any suggestions?
Morningstar is pretty good, though it's only updated every couple of months: https://www.morningstar.com/funds/xnas/vwilx/portfolio

The Vanguard website updates it about as often. Note this fund has about 8% combined in Tesla and Amazon and is heavily weighted to consumer cyclical stocks. 70% of the fund's assets are in 4 sector (consumer cyclical, tech, healthcare, and communication services) and it only holds 119 stocks. 40% of most diversified international funds have their assets in these sectors, and they typically hold several thousand stocks, so the sector concentration is notable. Understand that if you own this fund you are making big bets on the best recent performers, which are US and EM tech stocks (e.g., Tencent, Alibaba) and consumer cyclicals. Nothing wrong with that, necessarily, just helps to know what you own. Consumer cyclical stocks have almost doubled since March, so their bet has paid off so far.

If I owned it I would certainly be happily taking some profits now, not sure I'd be rushing to buy more. Of course it could keep outperforming, but probably good to have some rebalancing rules for yourself (if you don't already have them) so you sell high and buy low, and not vice versa. I recently sold some silver miners, which are up almost 200% since March. They are still marching higher, but I have my rules that prevent me from performance chasing.
Thank you! I will keep tabs on both sources. I have rebalancing rules in place for the categories but not individual funds. I think I need to add this to my plan to shift some of the gains within the category to maintain my AA. Thank you again!
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Re: If International, what specifically?

Post by HawkeyePierce »

My international allocation is 15% ISCF (intl small cap multifactor), 8% XSOE (EM ex-state owned) and 8% VWOB (EM USD govt bonds).
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Re: If International, what specifically?

Post by dru808 »

I use the etf vigi ,vanguard intl dividend appreciation.

I use it because I like the quality screening methodology it uses, I don’t necessarily care about the dividend growth aspect. Will it beat out total international? Don’t know, not worried about it.
63% US equity | 27% INTL equity | 10% US long bond index
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Re: If International, what specifically?

Post by zebra21345 »

To address OP original question:

International Allocation is what: Vanguard Intermediate Bond index

RM


50% Vanguard Total Market Index/10% Vanguard International Growth/40% Vanguard Intermediate Bond Index
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Re: If International, what specifically?

Post by international001 »

grabiner wrote: Mon Aug 24, 2020 11:39 am For international value, Vanguard has no ETF;
Is VTRIX no good?
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Re: If International, what specifically?

Post by grabiner »

international001 wrote: Sat Aug 29, 2020 4:26 pm
grabiner wrote: Mon Aug 24, 2020 11:39 am For international value, Vanguard has no ETF;
Is VTRIX no good?
It doesn't have as much value exposure as the ETF options.

In addition, it isn't usable for me because I hold my international value in a taxable account, and thus need to use an ETF. IVLU (iShares MSCI Value Factor ETF) has been tax-efficient.
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Re: If International, what specifically?

Post by Doc »

I've been staying out of this thread because of my un-Boglehead position on international.

As someone mention upthread they avoid EM on a "sleep well" basis. (My term not the posters.) Adding EM at market rate would not make any significant overall difference even if it outperformed by say 10%. So no EM.

As far as a total developed ex-us index is concerned it is going to be dominated by the same type large companies that we have in the US so the only difference is basically exchange rates to the US dollar which often gets removed by currency exchange rate "futures". So no foreign LC blend either.

I'm currently using Schwab Fundamental Intl Sm Co ETF FNDC to get a non-US large blend correlation. No big deal.

For not small cap I am using Artisan International Value Investor ARTKX which is an active fund with a limited portfolio with a style that has varied all over the chart since I first bought it some ten years ago.

It's done very well over that time.

Image

Fund in blue. Category: Foreign Large Blend & | Index: MSCI ACWI Ex USA NR USD. (The two lower curves.)

For all you non-bogleheads out there please go ahead and buy in. The expense ratio is currently only 1.260%. :D
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Re: If International, what specifically?

Post by 000 »

Doc wrote: Sun Aug 30, 2020 3:27 pm I've been staying out of this thread because of my un-Boglehead position on international.

As someone mention upthread they avoid EM on a "sleep well" basis. (My term not the posters.) Adding EM at market rate would not make any significant overall difference even if it outperformed by say 10%. So no EM.

As far as a total developed ex-us index is concerned it is going to be dominated by the same type large companies that we have in the US so the only difference is basically exchange rates to the US dollar which often gets removed by currency exchange rate "futures". So no foreign LC blend either.

I'm currently using Schwab Fundamental Intl Sm Co ETF FNDC to get a non-US large blend correlation. No big deal.

For not small cap I am using Artisan International Value Investor ARTKX which is an active fund with a limited portfolio with a style that has varied all over the chart since I first bought it some ten years ago.

It's done very well over that time.

Image

Fund in blue. Category: Foreign Large Blend & | Index: MSCI ACWI Ex USA NR USD. (The two lower curves.)

For all you non-bogleheads out there please go ahead and buy in. The expense ratio is currently only 1.260%. :D
Eyeballing the chart it looks like the vast majority of outperformance happened between gridlines 3 and 4, and it has tracked the index since.
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Re: If International, what specifically?

Post by Doc »

000 wrote: Sun Aug 30, 2020 3:32 pm Eyeballing the chart it looks like the vast majority of outperformance happened between gridlines 3 and 4, and it has tracked the index since.
Good catch. (I did know that.) But I am not going to sell a long term position just because it has not outperformed the index over the last few years. It still is not underperforming.

12 month rolling return chart:
Image
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Re: If International, what specifically?

Post by international001 »

grabiner wrote: Sat Aug 29, 2020 4:50 pm
international001 wrote: Sat Aug 29, 2020 4:26 pm
grabiner wrote: Mon Aug 24, 2020 11:39 am For international value, Vanguard has no ETF;
Is VTRIX no good?
It doesn't have as much value exposure as the ETF options.

In addition, it isn't usable for me because I hold my international value in a taxable account, and thus need to use an ETF. IVLU (iShares MSCI Value Factor ETF) has been tax-efficient.
Ok.. IVLU has more holdings, and lower P/B ratio. But VTRIX has some small little cap distribution, and according to morningstar a lower tax cost. And better return on the last 5 years
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Re: If International, what specifically?

Post by grabiner »

international001 wrote: Sun Aug 30, 2020 4:14 pm
grabiner wrote: Sat Aug 29, 2020 4:50 pm
international001 wrote: Sat Aug 29, 2020 4:26 pm
grabiner wrote: Mon Aug 24, 2020 11:39 am For international value, Vanguard has no ETF;
Is VTRIX no good?
It doesn't have as much value exposure as the ETF options.

In addition, it isn't usable for me because I hold my international value in a taxable account, and thus need to use an ETF. IVLU (iShares MSCI Value Factor ETF) has been tax-efficient.
Ok.. IVLU has more holdings, and lower P/B ratio. But VTRIX has some small little cap distribution, and according to morningstar a lower tax cost. And better return on the last 5 years
The better return for the last five years is actually a negative; since growth outperformed value over those five years, funds with stronger value exposure are likely to have underperformed.

I don't trust Morningstar's tax cost ratios, as Morningstar often doesn't know about qualified dividends, particularly for ETFs. But the tax cost difference may also be the result of VTRIX having a slightly lower yield, again because it has less value exposure. (While price/dividend isn't usually part of the definition of value, stocks with low price/earnings and price/book ratios are also likely to have low price/X ratios for other quantities X.)
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Re: If International, what specifically?

Post by international001 »

Uncorrelated wrote: Thu Aug 27, 2020 5:07 pm
grabiner wrote: Thu Aug 27, 2020 4:39 pm Has anyone computed the correlation between small-cap factor returns in different countries? Value factor returns? The logic above suggests that small-cap factor returns should have a low correlation across countries, while value factor returns may have a high correlation because recessions and high interest rates tend to be worldwide phenomena.
https://papers.ssrn.com/sol3/papers.cfm ... id=2622782
Image

MKT correlation in different regions in the 0.42-0.8 range. SmB 0.08-0.47. HmL 0.12-0.61.

I wouldn't pay too much attention to these numbers. Lower correlation does not imply better choice. Correlations are usually not very statistically significant. Low correlations for long-short might not necessary indicate low correlations for long-only (can't find any data on long-only).
From PV, correlations (at least ex-US) seem much higher than this (> 0.7 for the last 25 years)

https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: If International, what specifically?

Post by Massdriver »

YRT70 wrote: Fri Aug 28, 2020 7:14 am
Massdriver wrote: Wed Aug 26, 2020 4:35 pm
burritoLover wrote: Wed Aug 26, 2020 3:54 pm
Massdriver wrote: Fri Aug 21, 2020 11:43 am
brad.clarkston wrote: Fri Aug 21, 2020 11:21 am

Good luck. I've been looking for years and there all medium/large-cap masquerading as small-cap except for the DFA funds.

DFA International Small Cap Value I DISVX would be the one I'd take if I could get it without giving them my entire port.
As mentioned earlier in this thread, look at AVDV. It is run by some former DFA people and the ETF is available to retail investors. The fund was started in 2019. Check it out:
https://www.avantisinvestors.com/conten ... e-etf.html
Is that actively managed?
It doesn't follow a specific index and uses a specific methodology for adding companies to its holdings, so yes it's active in that sense, but it tries to retain some of the benefits of indexing. Copied from their website:
  • Invests in a broad set of non-U.S. developed small-cap companies and is designed to increase expected returns by focusing on firms believed to be trading at low valuations with higher profitability ratios.
  • Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.
  • Efficient portfolio management and trading process that is designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.
  • Built to fit seamlessly into an investor's asset allocation.
I would point out that many SCV indexes add and remove companies based on a specific methodology as well. I consider AVDV to be something like "semi active". I'm open to other interpretations.
I was interested in Larry Swedroe's take on this. Here's his reply: "NOT actively managed---systematic just like DFA and many others".
Thank you for getting his feedback. Interesting.
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