International stock investing is industry diversification and style diversification

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Rick Ferri
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International stock investing is industry diversification and style diversification

Post by Rick Ferri »

International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

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Re: International stock investing is industry diversification and style diversification

Post by vencat »

More support for your thesis, perhaps....

https://seekingalpha.com/article/430245 ... ook-abroad
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Re: International stock investing is industry diversification and style diversification

Post by vitaflo »

I’ve certainly thought about it as industry diversification (and this seems obvious with the amount of tech sitting atop the US market), but hadn’t considered it from a value perspective.

In any case I’ve been pretty happy with my cap weight world stock allocation that I’ve had for about a decade. Even with international lagging, I’ve met all my goals and glad I don’t have to worry about what does well or not. Buy the haystack.
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Re: International stock investing is industry diversification and style diversification

Post by burritoLover »

then what's an international value ETF - super-duper value investing?
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Re: International stock investing is industry diversification and style diversification

Post by Rick Ferri »

burritoLover wrote: Tue Sep 08, 2020 6:45 pm then what's an international value ETF - super-duper value investing?
Sure, why not!
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Re: International stock investing is industry diversification and style diversification

Post by nisiprius »

Drawing no particular conclusions here, just trying to visualize "how much difference" we are talking about.

I have 1/5th of my stock allocation to international, because when I first started doing it, Vanguard's Portfolio Watch would issue a caution if you had more than 20% in international. I'm something of an international skeptic but don't want to go to extremes. 1/5th has served me well because it is low enough that I have just been able to shrug off... well, the last eight years or so. And because at one point Vanguard had a chart suggesting that 20% international gives you most of whatever diversification benefit there actually is.

So, here we have 22-year backtests of three 60/40 portfolios.

--one with 1/5th of the stocks international (Vanguard, once upon a time) internationa;
--one with 1/3rd of the stocks international (as suggested by Rick Ferri in this thread)
--one in which 40% is international (Vanguard's current practice in its Target Retirement and LifeStrategy funds).

In all cases, the stocks are Vanguard Total [US] Stock Market Index and Vanguard International Index, and the bonds are Vanguard Total Bond Market Index.

Source

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Re: International stock investing is industry diversification and style diversification

Post by JDonaghy »

Thanks Rick,

Intl stocks are a fascinating topic for me. Just curious if you could you weigh in on some aspects of international-
1) Today's WSJ investment and etf section "Which Sectors will lead the market next?" also mentioned international, something similar, and recommended to buy individual international tech companies to the portfolio because there are so few. Thoughts?
2) I've heard something to the effect that the Chinese government can control stocks from China/accounting rules/required financial disclosures are poor in China. Does this give you pause to intl investing in China (which are now some of biggest stocks in VTIAX)
3) Is there anything to the statement that "Well the US has the most dynamic economy and companies and therefore that's the best place to invest" A CFA said something similar to me, have heard Buffett or Bogle attributed to a similar quote


(I keep 25%-30% of my equities in VTIAX)
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Re: International stock investing is industry diversification and style diversification

Post by UpperNwGuy »

How much of that industry diversification and style diversification comes from emerging markets?
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Re: International stock investing is industry diversification and style diversification

Post by abuss368 »

Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

Rick Ferri

Hi Rick -

That is an interesting viewpoint! Certainly worth consideration and a different lens from which to view international stocks.

What are you thoughts on the Vanguard International High Dividend Fund? I saw that you had this fund and the US counterpart - High Dividend on the Core 4 website.

In addition, have you changed your thoughts at all over the years regarding international bonds? I logged into Vanguard today and looked at the Portfolio Analysis tool (have not done that in some time) and noticed they still tell me to allocate 30% of bonds to international! Could the same argument for international stocks also be made for international bonds?

Interested in your thoughts!
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Re: International stock investing is industry diversification and style diversification

Post by garlandwhizzer »

Both INTL and VAL stocks have suffered a decade or more of substantial underperformance relative to FAAMGT. Interestingly almost all of the US market outperformance during this time can be ascribed to a just a handful of mega-cap LCG darlings which has been the dominant driving force in US market gains. Will that continue going forward? No one knows with certainty.

Both INTL and VAL are concentrated in cyclical sectors and the last decade of stagnant economic growth has been unkind to cyclical stocks and very kind to high growth tech. This long trend has brought about huge differences in valuations between VAL/INTL and the tech darlings at present. After the Covid-19 crisis gets under control it is possible but perhaps unlikely that coordinated global growth will resume at brisk pace. If that does happen one would expect cyclical stocks to benefit greatly. Likewise brisk growth typically ignites some inflation which typically has greater negative impact on growth stocks than on value stocks. IMO we have to accurately predict the global macroeconomic future in order to accurately separate future winners from future losers. In the absence of such knowledge it seems reasonable to me to have very broad equity exposure and cover multiple bases.

Typically at the onset of a bull market like the one we had starting in 2009, all market sectors take off which is a very positive sign. As the bull market ages market leadership often narrows significantly but never in my memory have such massive gains come from so few stocks while the rest of market struggled for gains. That has been the case in the US for a decade. Without mega cap tech growth darlings the market would have struggled a lot like INTL. Many market participants have climbed aboard the only fast train running which has driven those great gains. Historically when market gets so dependent on such a small number of stocks for its gains, it is not a good sign for their future. Often the great news is behind them. I don't know if the current tech downdraft is over now but there is still a long way to go for some tech darling valuations to meet economic reality. It may never happen.They may just keep going. I have missed the boat on AMZN for 20 years because of its consistently absurd valuations. Perhaps TSLA will be another winning boat that I miss, but I'm willing to take that chance. I believe it to be wise at present to keep holding onto both past losers as well as past winners.

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Re: International stock investing is industry diversification and style diversification

Post by Ferdinand2014 »

Related article, basically describing the MSCI EAFE as value sector heavy (industrials, financial and materials) compared to the S&P 500.

https://citywireusa.com/professional-bu ... s/a1361458

Another take on a similar concept

https://www.cnbc.com/2017/11/28/msci-ea ... ut-it.html
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Re: International stock investing is industry diversification and style diversification

Post by flaccidsteele »

International stock investing is industry diversification, style diversification, and over diversification
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: International stock investing is industry diversification and style diversification

Post by 000 »

Sure, but if this alone is a valid reason to buy international, would it not also justify a sector and/or factor weighting approach that diverges from VTI (or VT)?
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Re: International stock investing is industry diversification and style diversification

Post by jason2459 »

000 wrote: Tue Sep 08, 2020 11:24 pm Sure, but if this alone is a valid reason to buy international, would it not also justify a sector and/or factor weighting approach that diverges from VTI (or VT)?
If you're going this route to tilt why not. Like the total economy core-4?
https://core-4.com/total-economy-core-4-portfolio/

I have looked at my ex-US holdings as a diversification. Which includes those mentioned in this thread along with more exposure to companies not already held by the total us market. I personally don't hold a factor specific fund like SCV.

So, to me using ex-US as a value "tilt" would be different then using a US SCV fund. Those companies in the SCV fund would be held by market cap already in the total US fund. Only diversification that the SCV fund gives is by factor and a limited 2 factor at that. Total ex-US gives a lot more diversification like killing 5 birds with 1 stone. Industry, style, value, securities, and currency.
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Re: International stock investing is industry diversification and style diversification

Post by dru808 »

That’s a nice way to look at my international allocation, “industry diversification”
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Re: International stock investing is industry diversification and style diversification

Post by Northern Flicker »

The sector diversification resulting from diversifying equities internationally has been discussed in BH in the past. It is one of at least four good reasons to diversify internationally:

1. Inflation protection

2. Protection from medium-term or long-term underperformance of one's home country

3. Sector diversification

4. Volatility reduction
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Re: International stock investing is industry diversification and style diversification

Post by Valuethinker »

I am afraid I thought this was obvious to all interested in international investing?

It has been said enough times here by myself and by others.

The superperformance of a small group of stocks is not new news? Nor is it that most of the S&P500 is lagging?

International equities are a mirror of that. Much of the difference in performance is sectoral (not all). One also has to figure in the fact that post 2008, US financials recovered much more strongly than the "zombie banks" which I would include Deutsche and RBS in that category (at least in their pre shrunken forms).
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Re: International stock investing is industry diversification and style diversification

Post by rossington »

Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.
Rick Ferri
I must respectfully disagree.
Ex-U.S. economies are much more fragile compared to the U.S. for a variety of reasons.
Look at Nisi's data above.*
Putting one third of stocks of one's portfolio into a global multitude of economic and political scenarios incurs a significant amount of risk and the resulting drag on the portfolio is greater than any diversification benefits.

*No international from the same time period:

Code: Select all

Portfolio Analysis Results (Jan 1997 - Aug 2020)  
Portfolio 1
Ticker	Name	Allocation
VTSMX	Vanguard Total Stock Mkt Idx Inv	60.00%
VBMFX	Vanguard Total Bond Market Index Inv	40.00%

Portfolio performance statistics
Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	
Portfolio 1	$10,000	     $58,852 	        7.78% 	9.34%	22.37%	      -20.20%	        -30.72% 
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Re: International stock investing is industry diversification and style diversification

Post by Forester »

rossington wrote: Wed Sep 09, 2020 4:18 am
Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.
Rick Ferri
I must respectfully disagree.
Ex-U.S. economies are much more fragile compared to the U.S. for a variety of reasons.
Look at Nisi's data above.*
Putting one third of stocks of one's portfolio into a global multitude of economic and political scenarios incurs a significant amount of risk and the resulting drag on the portfolio is greater than any diversification benefits.

*No international from the same time period:

Code: Select all

Portfolio Analysis Results (Jan 1997 - Aug 2020)  
Portfolio 1
Ticker	Name	Allocation
VTSMX	Vanguard Total Stock Mkt Idx Inv	60.00%
VBMFX	Vanguard Total Bond Market Index Inv	40.00%

Portfolio performance statistics
Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	
Portfolio 1	$10,000	     $58,852 	        7.78% 	9.34%	22.37%	      -20.20%	        -30.72% 
Is the US economy markedly more or less fragile than Switzerland, Germany, Australia, Japan? I find this hard to believe.
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Re: International stock investing is industry diversification and style diversification

Post by Forester »

Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

Rick Ferri
I don't have the numbers to hand any more, but I recall that China for example, reached nosebleed CAPE numbers in 2006/07 alongside other BRIC superstars of the 2000s. I do know that folk like Meb Faber and Laurence Hamtil are on opposite sides of that debate.

Japan is more value-y than the USA, even accounting for its smaller IT sector; https://www.msci.com/documents/10199/b ... 756607cf9f
https://www.msci.com/documents/10199/6 ... b53e8d0d9f

Also one should bear in mind there are sector-neutral value indices from the likes of MSCI. The value phenomenon exists/existed within every sector and it's possible to invest in value funds which do not make lopsided sector bets.
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Re: International stock investing is industry diversification and style diversification

Post by Alchemist »

This is an easy assertion to test. With respect to Mr Ferri, I do not think the data holds up.

From VGTSX (Vanguard Total International) inception in May 1996 until August 2020, it performed quite differently from a U.S. Value fund (Vanguard Value Index VIVAX).

Total Return:

VGTSX - 4.60% vs VIVAX - 7.83%

Standard Deviation:

VGTSX - 17.12% vs VIVAX - 15.48%

Largest Drawdown:

VGTSX - 58.5% vs VIVAX - 54.86%

Half the return, more risk. I do not see the parallel, at least in the past. Is the thesis that this is only a forward looking effect?

Portfolio Visualizer Data with Vanguard S&P 500 (VFINX) included for reference:
https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: International stock investing is industry diversification and style diversification

Post by Scooter57 »

Energy and financials look more like value traps to me. How do insurers make money in a longterm suppressed rate environment? How does energy perform with years long retreats to the home?

Layoffs are accelerating which can't be good for either.

To me the value label must describe a stock that is mispriced, not one that factors in future declines on the business. I have been doing a lot of screening of late and find very little true value in the market.
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Re: International stock investing is industry diversification and style diversification

Post by MotoTrojan »

Forester wrote: Wed Sep 09, 2020 5:19 am

Also one should bear in mind there are sector-neutral value indices from the likes of MSCI. The value phenomenon exists/existed within every sector and it's possible to invest in value funds which do not make lopsided sector bets.
Any good funds out there for these sector-neutral value indices?

EDIT: Should've just searched.. VLUE for US and IVLU for ex-US.
Last edited by MotoTrojan on Wed Sep 09, 2020 7:26 am, edited 1 time in total.
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Re: International stock investing is industry diversification and style diversification

Post by MotoTrojan »

Scooter57 wrote: Wed Sep 09, 2020 7:20 am Energy and financials look more like value traps to me. How do insurers make money in a longterm suppressed rate environment? How does energy perform with years long retreats to the home?

Layoffs are accelerating which can't be good for either.

To me the value label must describe a stock that is mispriced, not one that factors in future declines on the business. I have been doing a lot of screening of late and find very little true value in the market.
Do you think you are the only person out there that views energy and financials as value traps? Of course not. This is why the premium works; people push them down just a little more than they deserve, and thus push other sectors/stocks up just a little more than they deserve, and you eventually get the spread between those mispricings back as a premium.
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Re: International stock investing is industry diversification and style diversification

Post by whereskyle »

Alchemist wrote: Wed Sep 09, 2020 6:21 am This is an easy assertion to test. With respect to Mr Ferri, I do not think the data holds up.

From VGTSX (Vanguard Total International) inception in May 1996 until August 2020, it performed quite differently from a U.S. Value fund (Vanguard Value Index VIVAX).

Total Return:

VGTSX - 4.60% vs VIVAX - 7.83%

Standard Deviation:

VGTSX - 17.12% vs VIVAX - 15.48%

Largest Drawdown:

VGTSX - 58.5% vs VIVAX - 54.86%

Half the return, more risk. I do not see the parallel, at least in the past. Is the thesis that this is only a forward looking effect?

Portfolio Visualizer Data with Vanguard S&P 500 (VFINX) included for reference:
https://www.portfoliovisualizer.com/bac ... ion3_3=100
I disagree that this performance comparison disproves Rick's thesis. That thesis is based not on performance but sector composition and P/E ratios. All value stocks need not perform equally to all fit the criteria of being value stocks.
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Re: International stock investing is industry diversification and style diversification

Post by Seasonal »

Old saying: don't confuse strategy and outcome.
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Re: International stock investing is industry diversification and style diversification

Post by Wade Garrett »

Lawrence Hamtil has been blogging/tweeting about this topic for years making the same points that Rick made
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Re: International stock investing is industry diversification and style diversification

Post by Robert T »

.
International diversification has worked better with style concentration – specifically small cap value (more dependent on local conditions).

4/1998 – 8/2020: Annualized return (%) / SD [longest period available for DFEVX]
Compared to the ‘market’ (over same time period)
Indeed, Rex Sinquefield in his 1996 paper on “Where are the gains from international diversification” indicated the benefits of small value diversification, and showed the lower correlation of US and International small value relative to the correlations between US and International market portfolios. He even went as far as saying – “a sensible reason to diversify internationally is to "load up" on value stocks and small stocks without concentrating in one geographic region. If one does not wish to concentrate in such stocks, then international diversification for U.S. sponsors may be unnecessary.”

On ‘market’ returns (comparing gross returns)

Annualized return for close to 44 years: 1/1970 – 10/2013
  • MSCI EAFE = 10.01%
    MSCI USA = 10.01%
Annualized return for past 7 years: 11/2013 – 8/2020
  • MSCI EAFE = 3.9%
    MSCI USA = 13.6%
Is the past 7 years a permanent condition, or will there be some ‘revision to the mean”?

No guarantees.
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Re: International stock investing is industry diversification and style diversification

Post by nisiprius »

rossington wrote: Wed Sep 09, 2020 4:18 am...Look at Nisi's data above.* ...
Personally, when I look at that data I just see "eh, the kind of random result of making some personal intuitive choice." One of the reasons I personally stick with 20% is that it's low enough that I can just shrug off 2009-2020; win some, lose some.
Putting one third of stocks of one's portfolio into a global multitude of economic and political scenarios incurs a significant amount of risk and the resulting drag on the portfolio is greater than any diversification benefits.
Again, I personally think that some additional risk is undeniable. I think prospectus statements are to be taken seriously. I think Vanguard putting Total [US] Stock, VTSAX, into risk category 4 and Total International, VTIAX, into risk category 5 should be taken at face value. And I also think that currency fluctuations just add a moderate amount of unrewarded risk, and that unrewarded risk does not create a diversification benefit.

But I don't think it's a lot of risk, and--except for currency fluctuation--I don't assume that it's unrewarded, and I don't assume there's zero diversification benefit.

It just isn't an awful lot of extra risk. For a holder of US stocks, the extra risk of adding developed international markets is pretty well lost in the noise; and emerging markets are just 1/5th of international, so emerging markets are a fraction of a fraction of my holdings.

It also isn't an awful lot of extra diversification. correlation between US and international has been ρ = 0.86, versus ρ = -0.26 for US stocks versus US long-term Treasuries. I'm not a fan of US long-term Treasuries or a believer in persistence of low correlation, but even so the difference is stark.

At some point, as you get to riskier and sketchier investments, the "efficient market" hypothesis starts to be more and more questionable. Part of the nature of riskier investments is that it is harder and harder for the market to judge value correctly.

If the weights are truly tiny... is there some good to be had from a gazillion teeny holdings of very risky stocks? I dunno, but it's not something that appeals to me. No "frontier markets," please.

Unlike developed versus emerging markets, where inclusion depends on somebody's somewhat-subjective judgement; or in or out of the S&P 500, where inclusion depends on somebody's subjective judgement; for the most part, I think US versus ex-US is a fairly objective and durable property. Correct me if I'm wrong on that. I certainly don't remember the market holding its breath over some company's stock being delisted on the NYSE and relisted on some foreign exchange. So one argument for holding "an entire market" versus "some category within a market" does not carry over to US versus ex-US.
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

I've seen the assertion before that a large part of the reason Total International has a much different performance than Total US is because of sector-weight differences e.g. 26.70% technology weight for Total US vs 12.08 for Total International. I wondered, therefore, what would happen if we "reweighed" Total US's sectors to match Total International's. Would the performance of the "US sectors weighted to Total International" portfolio be very much like Total International's?

(For this experiment, I created a portfolio out of Vanguard's sector funds weighed according to Total International's sector composition.)

The results are surprising.

CAGR from Jan 2005 - Aug 2020
Total US -- 9.35%
Total International -- 4.69%
US sectors weighted to Total International -- 8.92%

Source

My conclusion: the majority of the performance difference between Total US and Total International is not attributable to sector-weight differences.

Note:
The sector composition of Total International, I got here.

The sector weights on that page add up to 99.99%. For the backtest, I added .01% allocation cash, because the website insists things add up to 100%. It's a bit of a fudge, but has a negligible impact on the findings.

Edit: I did just realize I forgot something...changes over time of the sector composition! Whoops.
Last edited by Robot Monster on Wed Sep 09, 2020 10:44 am, edited 1 time in total.
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Re: International stock investing is industry diversification and style diversification

Post by muffins14 »

Robot Monster wrote: Wed Sep 09, 2020 10:13 am I've seen the assertion before that a large part of the reason Total International has a much different performance than Total US is because of sector-weight differences e.g. 26.70% technology weight for Total US vs 12.08 for Total International. I wondered, therefore, what would happen if we "reweighed" Total US's sectors to match Total International's. Would the performance of the "US sectors weighted to Total International" portfolio be very much like Total International's?

(For this experiment, I created a portfolio out of Vanguard's sector funds weighed according to Total International's sector composition.)

The results are surprising.

CAGR from Jan 2005 - Aug 2020
Total US -- 9.35%
Total International -- 4.69%
US sectors weighted to Total International -- 8.92%

Source

My conclusion: the majority of the performance difference between Total US and Total International is not attributable to sector-weight differences.

Note:
The sector composition of Total International, I got here.

The sector weights on that page add up to 99.99%. For the backtest, I added .01% allocation cash, because the website insists things add up to 100%. It's a bit of a fudge, but has a negligible impact on the findings.
Is it possible that in your method, you've also tilted the portfolio to large stocks vs small stocks? I imagine it's possible the sector funds skew large, which will affect your comparison.
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Re: International stock investing is industry diversification and style diversification

Post by arcticpineapplecorp. »

Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

Rick Ferri
for those who aren't sure how to do this (it's not on the prospectus, it's on the annual reports) here's the comparisons between VTI and VXUS:

Image

Image
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stan1
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Re: International stock investing is industry diversification and style diversification

Post by stan1 »

Isn't this all time dependent given that current tech stocks are primarily a US and PRC phenomenon not Europe or Japan?

Granted we are in a long cycle perhaps -- so an individual investor's birth year and year of retirement come into play in addition to academic theory about reversion to mean.

I do agree with your conclusion: 2/3 US equity, 1/3 international equity and I've held that for 12 years.
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

muffins14 wrote: Wed Sep 09, 2020 10:27 am
Robot Monster wrote: Wed Sep 09, 2020 10:13 am I've seen the assertion before that a large part of the reason Total International has a much different performance than Total US is because of sector-weight differences e.g. 26.70% technology weight for Total US vs 12.08 for Total International. I wondered, therefore, what would happen if we "reweighed" Total US's sectors to match Total International's. Would the performance of the "US sectors weighted to Total International" portfolio be very much like Total International's?

(For this experiment, I created a portfolio out of Vanguard's sector funds weighed according to Total International's sector composition.)

The results are surprising.

CAGR from Jan 2005 - Aug 2020
Total US -- 9.35%
Total International -- 4.69%
US sectors weighted to Total International -- 8.92%

Source

My conclusion: the majority of the performance difference between Total US and Total International is not attributable to sector-weight differences.

Note:
The sector composition of Total International, I got here.

The sector weights on that page add up to 99.99%. For the backtest, I added .01% allocation cash, because the website insists things add up to 100%. It's a bit of a fudge, but has a negligible impact on the findings.
Is it possible that in your method, you've also tilted the portfolio to large stocks vs small stocks? I imagine it's possible the sector funds skew large, which will affect your comparison.
S&P skews large, but it doesn't have that much of a performance difference from Total Stock. (See below.).

However, I did just realize I forgot something...changes over time of the sector composition! Whoops.

Well, the CAGR from Jan 2005 - Aug 2020
Total Stock -- 9.35%
S&P 500 -- 9.11%

Source
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Re: International stock investing is industry diversification and style diversification

Post by Elysium »

Robot Monster wrote: Wed Sep 09, 2020 10:13 am I've seen the assertion before that a large part of the reason Total International has a much different performance than Total US is because of sector-weight differences e.g. 26.70% technology weight for Total US vs 12.08 for Total International. I wondered, therefore, what would happen if we "reweighed" Total US's sectors to match Total International's. Would the performance of the "US sectors weighted to Total International" portfolio be very much like Total International's?

(For this experiment, I created a portfolio out of Vanguard's sector funds weighed according to Total International's sector composition.)

The results are surprising.

CAGR from Jan 2005 - Aug 2020
Total US -- 9.35%
Total International -- 4.69%
US sectors weighted to Total International -- 8.92%

Source

My conclusion: the majority of the performance difference between Total US and Total International is not attributable to sector-weight differences.

Note:
The sector composition of Total International, I got here.

The sector weights on that page add up to 99.99%. For the backtest, I added .01% allocation cash, because the website insists things add up to 100%. It's a bit of a fudge, but has a negligible impact on the findings.

Edit: I did just realize I forgot something...changes over time of the sector composition! Whoops.
It is also possible to look at Sector performance individually between US and Ex-US to see whether sector weights are the problem, and we can find that it isn't. Returns overseas were lower regardless of the sector. MSCI maintains indexes for ex-US sectors (as do others). I pulled up some of the reports that you can see here below. Returns are lower for each of these sectors compared to their US counterparts. For instance, Utilities US vs ex-US: 10 year returns 10.33% vs 2.09%, so on..

MSCI ex-US Sector performance:

Financials


Technology


Energy


Healthcare


Consumer Staples


Utilities


Industrials


Conclusion: Sector weights differences are not the reason for US outperformance of late, as US stocks outperformed in sector by sector comparison between US and ex-US as well as broad index comparisons.
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Re: International stock investing is industry diversification and style diversification

Post by Stef »

Robot Monster wrote: Wed Sep 09, 2020 10:42 am However, I did just realize I forgot something...changes over time of the sector composition! Whoops.
How about comparing sectors isolated? Maybe this will show better results. Or just making up portfolio with all relevant sectors each weighted same.
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Re: International stock investing is industry diversification and style diversification

Post by Seasonal »

nisiprius wrote: Wed Sep 09, 2020 9:57 amAt some point, as you get to riskier and sketchier investments, the "efficient market" hypothesis starts to be more and more questionable. Part of the nature of riskier investments is that it is harder and harder for the market to judge value correctly.
The efficient market hypothesis is that the market incorporates information, not that it incorporates it correctly. The efficient markets answer to a lack of information is to discount prices to reflect the additional risk or uncertainty stemming from the lack of information. Consider the quality of information to itself be an item of information.

If you are better able than the market to value the effects of the inability to judge value correctly, then you should do so. Otherwise, accept the market's judgment.
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Re: International stock investing is industry diversification and style diversification

Post by whereskyle »

Seasonal wrote: Wed Sep 09, 2020 11:47 am
nisiprius wrote: Wed Sep 09, 2020 9:57 amAt some point, as you get to riskier and sketchier investments, the "efficient market" hypothesis starts to be more and more questionable. Part of the nature of riskier investments is that it is harder and harder for the market to judge value correctly.
The efficient market hypothesis is that the market incorporates information, not that it incorporates it correctly. The efficient markets answer to a lack of information is to discount prices to reflect the additional risk or uncertainty stemming from the lack of information. Consider the quality of information to itself be an item of information.

If you are better able than the market to value the effects of the inability to judge value correctly, then you should do so. Otherwise, accept the market's judgment.
Interesting. This seems to support Rick's value-play thesis if we accept that less publicly available information causes underpricing with respect to at least some ex-us stocks. (This doesn't necessarily have anything to do with sector compositions though).
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

Stef wrote: Wed Sep 09, 2020 11:28 am
Robot Monster wrote: Wed Sep 09, 2020 10:42 am However, I did just realize I forgot something...changes over time of the sector composition! Whoops.
How about comparing sectors isolated? Maybe this will show better results. Or just making up portfolio with all relevant sectors each weighted same.
What makes it hard is that International doesn't have sector ETFs in order for me to do the comparison I want to via PortfolioVisualizer, but luckily seems Elysium saved me the trouble, and convincingly drove the point home.
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Elysium
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Re: International stock investing is industry diversification and style diversification

Post by Elysium »

Robot Monster wrote: Wed Sep 09, 2020 12:21 pm
Stef wrote: Wed Sep 09, 2020 11:28 am
Robot Monster wrote: Wed Sep 09, 2020 10:42 am However, I did just realize I forgot something...changes over time of the sector composition! Whoops.
How about comparing sectors isolated? Maybe this will show better results. Or just making up portfolio with all relevant sectors each weighted same.
What makes it hard is that International doesn't have sector ETFs in order for me to do the comparison I want to via PortfolioVisualizer, but luckily seems Elysium saved me the trouble, and convincingly drove the point home.
Right. Index returns are good enough, they have good data on these fact sheets linked above from MSCI. I am sure someone like Vanguard or Blackrock have funds domiciled in Europe invested in these sectors, they should match the index more or less.
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Re: International stock investing is industry diversification and style diversification

Post by Scooter57 »

MotoTrojan wrote: Wed Sep 09, 2020 7:24 am
Scooter57 wrote: Wed Sep 09, 2020 7:20 am Energy and financials look more like value traps to me. How do insurers make money in a longterm suppressed rate environment? How does energy perform with years long retreats to the home?

Layoffs are accelerating which can't be good for either.

To me the value label must describe a stock that is mispriced, not one that factors in future declines on the business. I have been doing a lot of screening of late and find very little true value in the market.
Do you think you are the only person out there that views energy and financials as value traps? Of course not. This is why the premium works; people push them down just a little more than they deserve, and thus push other sectors/stocks up just a little more than they deserve, and you eventually get the spread between those mispricings back as a premium.
That's the theory. In practice the kind of value investors who buy indexes have been waiting a long time to see that premium and there is not much chance they will see it soon. Financials are strongly cyclical to start with, and the current rate environment is something that has never been seen before. Energy (which is dominated by oil) has been on a downward course for quite a while and, again, there is no reason to believe it is going to head up anytime soon. European banks are dealing with negative interest rates, fer crying out loud.

Probably all that keeps those sectors from being in worse shape is index investors who don't understand what is in the funds and ETFs they are buying who continue to buy them because they are told to by advisors applying cookie cutter portfolios at their employers' behest.
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

Scooter57 wrote: Wed Sep 09, 2020 1:05 pm Probably all that keeps those sectors [energy, financials] from being in worse shape is index investors who don't understand what is in the funds and ETFs they are buying who continue to buy them because they are told to by advisors applying cookie cutter portfolios at their employers' behest.
If what you're saying is true, would you not expect actively managed international funds to underweight these loser sectors? Yet, at least actively managed Vanguard International Core Stock Fund does not.

----------Total International-------Vanguard International Core
Energy-----------------4.56%------------------------------4.05%
Financials-------------17.05%-----------------------------18.94%

Sources:
https://money.usnews.com/funds/etfs/for ... torweights
https://money.usnews.com/funds/mutual-f ... x/holdings
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Re: International stock investing is industry diversification and style diversification

Post by garlandwhizzer »

Robert T wrote:

Is the past 7 years a permanent condition, or will there be some ‘revision to the mean”
1+

I believe this is the critical point. There is no doubt that US has massively outperformed INTL and that TSM has done likewise over SCV during the last 7 - 10 years. Is this a permanent change or merely the usual volatility between different asset classes? Sector differences have a lot to do with this difference but are not the whole answer. Some argue that there are fixed US economic and market advantages (world's reserve currency, deeper more liquid markets, greater economic dynamism, more risk taking/innovative culture relative to Europe or Japan, increased political stability, rule of law, property/investor rights and less corruption relative to EM). Do these advantages fully account for the wide valuation differences between US and INTL? Bogle and Buffett are on one side of this issue and most market analysts including Larry, Vanguard, Grantham, Arnott, and Bernstein favor some degree of international exposure not only for increased diversification but also for increased long term expected returns. So very knowledgeable and very smart people are divided on this issue as is the case with TSM versus SCV.

I know that I don't know the correct answer up front about the winner over my time frame, but I personally believe that at some point there will be reversion to the mean in both cases. I don't know how severe and how persistent that reversion will be and I don't have an infinite time horizon to wait for it. So I cover all bases--60 US/40 INTL, 75% TSM/25% SCV--rather than putting all my eggs in one basket. If reversion to the mean does not occur, I'll be fine. If it does occur, I'll be fine. I try to prepare for any outcome because I'm 73 and don't have forever to wait. I also believe that any of us who choose one or the other approach and stick with it over a long time frame will be rewarded. The real magic of investing is the effect of compounding return over long time frames. Einstein called this "the 8th wonder of the world." Money makes money, and that new money makes more money, and on an on it goes for decades. There is no reliable way to get rich quick. Most who try to do so, get poorer quickly. There is an entirely reliable way to get rich slowly. The key is to stay invested in quality assets (all of these are quality assets IMO) and to ignore present action as much as possible, keeping focus on the reward to come in the distant future.

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Re: International stock investing is industry diversification and style diversification

Post by MotoTrojan »

Scooter57 wrote: Wed Sep 09, 2020 1:05 pm
MotoTrojan wrote: Wed Sep 09, 2020 7:24 am
Scooter57 wrote: Wed Sep 09, 2020 7:20 am Energy and financials look more like value traps to me. How do insurers make money in a longterm suppressed rate environment? How does energy perform with years long retreats to the home?

Layoffs are accelerating which can't be good for either.

To me the value label must describe a stock that is mispriced, not one that factors in future declines on the business. I have been doing a lot of screening of late and find very little true value in the market.
Do you think you are the only person out there that views energy and financials as value traps? Of course not. This is why the premium works; people push them down just a little more than they deserve, and thus push other sectors/stocks up just a little more than they deserve, and you eventually get the spread between those mispricings back as a premium.
That's the theory. In practice the kind of value investors who buy indexes have been waiting a long time to see that premium and there is not much chance they will see it soon. Financials are strongly cyclical to start with, and the current rate environment is something that has never been seen before. Energy (which is dominated by oil) has been on a downward course for quite a while and, again, there is no reason to believe it is going to head up anytime soon. European banks are dealing with negative interest rates, fer crying out loud.

Probably all that keeps those sectors from being in worse shape is index investors who don't understand what is in the funds and ETFs they are buying who continue to buy them because they are told to by advisors applying cookie cutter portfolios at their employers' behest.
If it is so certain that the business are going to continue declining, would you not expect even a weakly efficient market to price that in today? Why wait until the certainty comes to fruition?
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Re: International stock investing is industry diversification and style diversification

Post by Northern Flicker »

rossington wrote: Wed Sep 09, 2020 4:18 am
Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.
Rick Ferri
I must respectfully disagree.
Ex-U.S. economies are much more fragile compared to the U.S. for a variety of reasons.
Look at Nisi's data above.*
Putting one third of stocks of one's portfolio into a global multitude of economic and political scenarios incurs a significant amount of risk and the resulting drag on the portfolio is greater than any diversification benefits.

*No international from the same time period:

Code: Select all

Portfolio Analysis Results (Jan 1997 - Aug 2020)  
Portfolio 1
Ticker	Name	Allocation
VTSMX	Vanguard Total Stock Mkt Idx Inv	60.00%
VBMFX	Vanguard Total Bond Market Index Inv	40.00%

Portfolio performance statistics
Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	
Portfolio 1	$10,000	     $58,852 	        7.78% 	9.34%	22.37%	      -20.20%	        -30.72% 
Unfortunately, portfoliovisualizer data has substantial time period bias. From 1970-2007 developed markets non-US indices outperformed US total market indices.
Risk is not a guarantor of return.
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Re: International stock investing is industry diversification and style diversification

Post by Scooter57 »

MotoTrojan wrote: Wed Sep 09, 2020 2:13 pm
Scooter57 wrote: Wed Sep 09, 2020 1:05 pm
MotoTrojan wrote: Wed Sep 09, 2020 7:24 am
Scooter57 wrote: Wed Sep 09, 2020 7:20 am Energy and financials look more like value traps to me. How do insurers make money in a longterm suppressed rate environment? How does energy perform with years long retreats to the home?

Layoffs are accelerating which can't be good for either.

To me the value label must describe a stock that is mispriced, not one that factors in future declines on the business. I have been doing a lot of screening of late and find very little true value in the market.
Do you think you are the only person out there that views energy and financials as value traps? Of course not. This is why the premium works; people push them down just a little more than they deserve, and thus push other sectors/stocks up just a little more than they deserve, and you eventually get the spread between those mispricings back as a premium.
That's the theory. In practice the kind of value investors who buy indexes have been waiting a long time to see that premium and there is not much chance they will see it soon. Financials are strongly cyclical to start with, and the current rate environment is something that has never been seen before. Energy (which is dominated by oil) has been on a downward course for quite a while and, again, there is no reason to believe it is going to head up anytime soon. European banks are dealing with negative interest rates, fer crying out loud.

Probably all that keeps those sectors from being in worse shape is index investors who don't understand what is in the funds and ETFs they are buying who continue to buy them because they are told to by advisors applying cookie cutter portfolios at their employers' behest.
If it is so certain that the business are going to continue declining, would you not expect evenas a a weakly efficient market to price that in today? Why wait until the certainty comes to fruition?
I don't believe that markets are efficient when large numbers of buy and hold retirement savers just buy index funds and free trades !are it so prices are set by day traders and algos. The market was very different 30-some years ago when that theory was hatched using back testing.
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Re: International stock investing is industry diversification and style diversification

Post by asif408 »

Forester wrote: Wed Sep 09, 2020 5:19 am I don't have the numbers to hand any more, but I recall that China for example, reached nosebleed CAPE numbers in 2006/07 alongside other BRIC superstars of the 2000s. I do know that folk like Meb Faber and Laurence Hamtil are on opposite sides of that debate.
Here were the maximum CAPE ratios of several EM countries in 2007 (Source: https://indices.barclays/IM/21/en/indic ... c-cape.app):
China: 55
India: 49
Mexico: 37
Taiwan: 31
South Africa: 28
Russia: 25

During this time the US CAPE ratio peaked at about 27. For a brief period of time Russia's CAPE ratio exceeded the US, and China and India's were more than twice the US. Can anyone who today says these countries deserve lower valuations because they are riskier and less opaque explain to me why these emerging market countries had valuations equal or higher than the US in 2007? Were they less corrupt and more transparent 13 years ago?

I don't know what these countries sector compositions were at the time, but I would guess (with the exception of Taiwan and China) that they were heavy on the cyclical sectors that are so out of favor today (e.g., financials, energy, materials, industrials). Maybe Rick or someone else has the sector composition of those countries in 2007 available, I'm not sure where to find that type of information.
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Re: International stock investing is industry diversification and style diversification

Post by Forester »

asif408 wrote: Wed Sep 09, 2020 2:50 pm
Forester wrote: Wed Sep 09, 2020 5:19 am I don't have the numbers to hand any more, but I recall that China for example, reached nosebleed CAPE numbers in 2006/07 alongside other BRIC superstars of the 2000s. I do know that folk like Meb Faber and Laurence Hamtil are on opposite sides of that debate.
Here were the maximum CAPE ratios of several EM countries in 2007 (Source: https://indices.barclays/IM/21/en/indic ... c-cape.app):
China: 55
India: 49
Mexico: 37
Taiwan: 31
South Africa: 28
Russia: 25

During this time the US CAPE ratio peaked at about 27. For a brief period of time Russia's CAPE ratio exceeded the US, and China and India's were more than twice the US. Can anyone who today says these countries deserve lower valuations because they are riskier and less opaque explain to me why these emerging market countries had valuations equal or higher than the US in 2007? Were they less corrupt and more transparent 13 years ago?

I don't know what these countries sector compositions were at the time, but I would guess (with the exception of Taiwan and China) that they were heavy on the cyclical sectors that are so out of favor today (e.g., financials, energy, materials, industrials). Maybe Rick or someone else has the sector composition of those countries in 2007 available, I'm not sure where to find that type of information.
Thanks, out of interest how did you come across that Barclays CAPE link? I wasn't aware of that resource.

This is a great counterpoint to the US deserving uniquely high valuations. I believe the US should do so to an extent due to a mix of USD status, size of the economy, sector diversity and so on. However buying Russia at the 2007 valuation would be almost unthinkable today, yet that was the market consensus just a decade ago!
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Re: International stock investing is industry diversification and style diversification

Post by Northern Flicker »

Scooter57 wrote: I don't believe that markets are efficient when large numbers of buy and hold retirement savers just buy index funds and free trades !are it so prices are set by day traders and algos. The market was very different 30-some years ago when that theory was hatched using back testing.
The empirical evidence is that the market is more efficient today than it was 30+ years ago. Trading costs being miniscule removed barriers to arbitrage, and major market participants have their high performance computers co-located on the internal networks (LANs) of the exchanges so that they can use high frequency trading needed to exploit inefficiences that do not persist long enough to exploit without these measures.
Risk is not a guarantor of return.
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Re: International stock investing is industry diversification and style diversification

Post by UpsetRaptor »

Forester wrote: Wed Sep 09, 2020 4:08 pm
Thanks, out of interest how did you come across that Barclays CAPE link? I wasn't aware of that resource.
+1, those CAPE links are interesting. I knew Japan's CAPE hit 90 in 1989 but didn't know it went back up into that stratosphere for the 2000-aughts. That Japan historical chart can almost give you an inkling to shrug at current valuations, markets can often just do market things.
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