Emerging markets have failed to live up (says M* article)

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Elysium
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Emerging markets have failed to live up (says M* article)

Post by Elysium »

This is a reprint of an article published in 2019, by John Reckenthaler at M*. Clearly not a fan of Emerging. Some excerpts followed by link below:

One five-year stretch does not a quarter century make, though. A $10,000 investment in Vanguard's emerging-markets stock fund at its 1994 launch would now be worth $47,000. Buying an S&P 500 index fund instead would have yielded just over $100,000. Emerging-markets funds were intended to bring greater rewards, over the long haul, and they have not done that.
...
However, national growth does not neatly translate into corporate profitability. Emerging-markets countries are making more things, delivering more services, consuming more wares. Monies are being spent. But much of that cash does not make it to shareholders. It is squandered on profitless corporate expansions (empire building); or placed into government officials' pockets; or siphoned off to a CEO's friends and family.
...
Their diversification benefits appear to be dwindling, as the emerging countries become larger and ever-more entwined with the global economy, and their expected returns are suspect. It is not clear that buying a package of stocks from countries labeled as "emerging" makes more sense than, say, buying one from countries whose names begin with the letter B.

link to article

Are EM stocks something that just zags when others are zigging and then zags even more along with developed as the author says.
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Re: Emerging markets have failed to live up (says M* article)

Post by MadHungarian »

Elysium wrote: Fri Feb 11, 2022 6:06 pm . . . But much of that cash does not make it to shareholders. It is squandered on profitless corporate expansions (empire building); or placed into government officials' pockets; or siphoned off to a CEO's friends and family.
. . .
I believe i've said much the same thing in my own posts in the past. It's not exactly rocket science to figure it out.
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Re: Emerging markets have failed to live up (says M* article)

Post by Nathan Drake »

Recency bias

EM Value has the strongest 20 year returns despite a lousy decade
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

Nathan Drake wrote: Fri Feb 11, 2022 7:16 pm Recency bias

EM Value has the strongest 20 year returns despite a lousy decade
Not risk-adjusted, it hasn't. The return hasn't been commensurate with the extra risk. They aren't anything special, they're just yet another category of stocks with a risk-adjusted return in the same ballpark as other categories. And they wouldn't have helped in any of the three big downturns in that time period: 2000-2003, 2008-2009, or 2020.

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Re: Emerging markets have failed to live up (says M* article)

Post by Nathan Drake »

nisiprius wrote: Fri Feb 11, 2022 7:30 pm
Nathan Drake wrote: Fri Feb 11, 2022 7:16 pm Recency bias

EM Value has the strongest 20 year returns despite a lousy decade
Not risk-adjusted, it hasn't. The return hasn't been commensurate with the extra risk. They aren't anything special, they're just yet another category of stocks with a risk-adjusted return in the same ballpark as other categories. And they didn't do anything to help out in any of the three big downturns in that time period: 2000-2003, 2008-2009, or 2020.

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That depends on your personal IPS. Sharpe ratios are highly sensitive to start/end dates. Haggling over minor differences in risk adjusted returns, when what happened previously isn't knowable for the future.

00-09 for US TSM has a terrible Sharpe ratio. Was that a reason to not invest? If you look at the diversification benefits of EM Value, they are clearly quite powerful over this period in the graph you have shown.

So, my belief is that EM stocks are worth investing in, and I don't see a compelling reason to avoid - which I imagine might be the intent of posting this.
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Re: Emerging markets have failed to live up (says M* article)

Post by Triple digit golfer »

Why should I care about Sharpe ratios, especially after the fact?

Who cares about risk-adjusted returns? Bonds have higher historical risk-adjusted returns than TSM and nobody says to avoid TSM.

Why would someone avoid emerging markets because of lower risk-adjusted return than TSM but not avoid TSM because of lower risk-adjusted returns than bonds?

I can't fund a retirement with Sharpe ratios and standard deviations.
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Re: Emerging markets have failed to live up (says M* article)

Post by klaus14 »

Triple digit golfer wrote: Fri Feb 11, 2022 7:53 pm Why should I care about Sharpe ratios, especially after the fact?

Who cares about risk-adjusted returns? Bonds have higher historical risk-adjusted returns than TSM and nobody says to avoid TSM.

Why would someone avoid emerging markets because of lower risk-adjusted return than TSM but not avoid TSM because of lower risk-adjusted returns than bonds?

I can't fund a retirement with Sharpe ratios and standard deviations.
because it means instead of small amount of risky stuff (Emerging) you can achieve a better result with more amount of less risky stuff (Developed). You could simply own less bonds or lever up to have more amount of less risky stuff.

What matters is total portfolio risk/return though. Not individual pieces.
So here is a better benchmark. You can see EM Value also improved portfolio's Sharpe.
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: Emerging markets have failed to live up (says M* article)

Post by Nathan Drake »

klaus14 wrote: Fri Feb 11, 2022 10:33 pm
Triple digit golfer wrote: Fri Feb 11, 2022 7:53 pm Why should I care about Sharpe ratios, especially after the fact?

Who cares about risk-adjusted returns? Bonds have higher historical risk-adjusted returns than TSM and nobody says to avoid TSM.

Why would someone avoid emerging markets because of lower risk-adjusted return than TSM but not avoid TSM because of lower risk-adjusted returns than bonds?

I can't fund a retirement with Sharpe ratios and standard deviations.
because it means instead of small amount of risky stuff (Emerging) you can achieve a better result with more amount of less risky stuff (Developed). You could simply own less bonds or lever up to have more amount of less risky stuff.

What matters is total portfolio risk/return though. Not individual pieces.
So here is a better benchmark. You can see EM Value also improved portfolio's Sharpe.
Whether or not you can achieve a "better" long-term result with Developed or EM is unknowable. The long term history suggests that risk is correlated with return, and if EM is deemed and priced as more risky it will have a better performance long-term. We have seen that.

However, you certainly CANNOT achieve a SEQUENCE of return for EM stocks with Developed stocks. And the SEQUENCE can matter significantly. Perhaps the long-term returns are similar (but also, perhaps not), but you can go broke on a bad sequence before you can be made whole again.

Although after your edit I think you are in agreement but I may be confusing your first paragraph.
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Re: Emerging markets have failed to live up (says M* article)

Post by 000 »

Yeah, having 0% exposure to where all the manufacturing is going sounds like a wise idea.....
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Re: Emerging markets have failed to live up (says M* article)

Post by Ocean77 »

000 wrote: Fri Feb 11, 2022 10:56 pm Yeah, having 0% exposure to where all the manufacturing is going sounds like a wise idea.....
Especially since manufacturing is just the beginning. Look at software (India), semiconductors (Taiwan), Internet (China, Korea), ...
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Re: Emerging markets have failed to live up (says M* article)

Post by AlphaLess »

And how much of the economic expansion in the emerging markets goes to feed the US listed companies.
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Re: Emerging markets have failed to live up (says M* article)

Post by Bluemnatra »

And now the pivot to US vs Int'l
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Re: Emerging markets have failed to live up (says M* article)

Post by Alpha4 »

Elysium wrote: Fri Feb 11, 2022 6:06 pm This is a reprint of an article published in 2019, by John Reckenthaler at M*. Clearly not a fan of Emerging. Some excerpts followed by link below:

One five-year stretch does not a quarter century make, though. A $10,000 investment in Vanguard's emerging-markets stock fund at its 1994 launch would now be worth $47,000. Buying an S&P 500 index fund instead would have yielded just over $100,000. Emerging-markets funds were intended to bring greater rewards, over the long haul, and they have not done that.
...
However, national growth does not neatly translate into corporate profitability. Emerging-markets countries are making more things, delivering more services, consuming more wares. Monies are being spent. But much of that cash does not make it to shareholders. It is squandered on profitless corporate expansions (empire building); or placed into government officials' pockets; or siphoned off to a CEO's friends and family.
...
Their diversification benefits appear to be dwindling, as the emerging countries become larger and ever-more entwined with the global economy, and their expected returns are suspect. It is not clear that buying a package of stocks from countries labeled as "emerging" makes more sense than, say, buying one from countries whose names begin with the letter B.

link to article

Are EM stocks something that just zags when others are zigging and then zags even more along with developed as the author says.
The problem here is that the author of this article (presumably unintentionally) picked a start date (early to mid-1994) that seems designed to make EM look bad compared to US stocks. In the first half of 1994 EM was coming off of a roughly eight year run of outperformance against US stocks in which it beat US so badly that $10000 invested in EM on 1-1-1986 was worth over $115,000 on 12-31-1993 while the same amount invested in the US TSM was worth just under $27,500. Of course, this meant that EM was very richly priced (i.e. very expensive) by that point compared to US stocks and over the next seven years US stocks clobbered emerging markets...then EM outperformed again from 2001 to 2010...then US from 2011 to 2021 and so far in 2022 EM seems to be doing better.

My point is, picking early or mid-1994 as the start date is sort of "loading the dice" in favor of US stocks vs EM stocks. Any asset can look kind of "meh" or bad compared to another asset if you pick a bad starting date for it; US equities underperformed plain old long Treasuries for almost 21 years if you start in 1929! Starting on 1-1-1969 an investment in US stocks (S&P 500 TR) was basically only dead even with 3-month CDs by the end of 1985....or just look at US stocks vs gold for 1970 to early 1991, or intl developed ex-US beating US from 1957 to early 2000, etc.
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Re: Emerging markets have failed to live up (says M* article)

Post by freyj6 »

As a thought experiment, how easy would it be to make the case that virtually ANY asset class was a poor choice after a long streak of poor performance?

"It was obvious that US stocks wouldn't deliver after virtually every price indicator demonstrated they were overvalued"

"Bonds failed to live up to expectations because after 40 years of declining yields, there was clearly nowhere else to go"
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Re: Emerging markets have failed to live up (says M* article)

Post by dcabler »

I always like looking at this plot from the Credit Suisse Yearbook.
- Looks like WWII wasn't especially kind to emerging markets, unsurprisingly.
- Since WWII ended, visually, it does appear that the slope of EM has been slightly steeper than developed markets sometimes

Future unknowable, etc. etc...

Page 38, Figure 20
https://www.credit-suisse.com/media/ass ... dition.pdf

Cheers
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Re: Emerging markets have failed to live up (says M* article)

Post by William Million »

Every investing category fails within certain time frames. Is this really news to any serious investor?

No obligation for anyone to invest in emerging markets. Companies from developed markets also benefit from economic growth in the developing world, with much less corruption. However, developing markets do offer the opportunity for willing investors to benefit from higher risk investments - personally, I prefer investing in specific countries when their markets are way, way down. However, not for the faint of heart.
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Re: Emerging markets have failed to live up (says M* article)

Post by burritoLover »

If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?

I think having a 5-10% allocation to EM is reasonable given the uncertainty in the developed world with rapidly aging populations and declining birth rates. The problem is, everyone thinks the last 100 years is just going to repeat and they are going to get their 10% US returns. Guess what, the US and the world are a lot different now than then - the future sequence of returns is not going to be the same.
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Re: Emerging markets have failed to live up (says M* article)

Post by Elysium »

Alpha4 wrote: Sat Feb 12, 2022 12:37 am In the first half of 1994 EM was coming off of a roughly eight year run of outperformance against US stocks in which it beat US so badly that $10000 invested in EM on 1-1-1986 was worth over $115,000 on 12-31-1993 while the same amount invested in the US TSM was worth just under $27,500. Of course, this meant that EM was very richly priced (i.e. very expensive) by that point compared to US stocks.
Do you have a source for this data that you can share. Where did you find the returns for EM from 1986?
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

Elysium wrote: Sat Feb 12, 2022 9:27 am
Alpha4 wrote: Sat Feb 12, 2022 12:37 am In the first half of 1994 EM was coming off of a roughly eight year run of outperformance against US stocks in which it beat US so badly that $10000 invested in EM on 1-1-1986 was worth over $115,000 on 12-31-1993 while the same amount invested in the US TSM was worth just under $27,500. Of course, this meant that EM was very richly priced (i.e. very expensive) by that point compared to US stocks.
Do you have a source for this data that you can share. Where did you find the returns for EM from 1986?
I note that The MSCI Emerging Markets(EM) Index was launched in 1988 and that Morningstar's category averages for "Diversified Emerging Markets" only goes back to 1989.
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Re: Emerging markets have failed to live up (says M* article)

Post by Alpha4 »

Elysium wrote: Sat Feb 12, 2022 9:27 am
Alpha4 wrote: Sat Feb 12, 2022 12:37 am In the first half of 1994 EM was coming off of a roughly eight year run of outperformance against US stocks in which it beat US so badly that $10000 invested in EM on 1-1-1986 was worth over $115,000 on 12-31-1993 while the same amount invested in the US TSM was worth just under $27,500. Of course, this meant that EM was very richly priced (i.e. very expensive) by that point compared to US stocks.
Do you have a source for this data that you can share. Where did you find the returns for EM from 1986?
The EM data I have (monthly and annual TR data) for 12-31-1975 to 12-31-1987 and that I used in my post in this thread is from the S&P IFC Emerging Markets index; the data for 12-31-1987 to 12-31-1993 was from the regular good ol' MSCI EM Index TR.

The S&P IFC data for 1976 to 1987 is (I believe) still available at https://www.cfainstitute.org/en/researc ... ograph-pdf (direct link is IIRC https://www.cfainstitute.org/-/media/do ... 60-pdf.pdf or https://www.cfainstitute.org/-/media/do ... 0-pdf.ashx ); the PDF is free for anyone to download.

If you want to use "funds that actually existed" instead of just an index then you are limited to starting on 6-1-1986 as that is when the first EM mutual fund (Capital Group's EMRGX.....Capital Group is the company that runs the American Funds series of active mutual funds) was introduced; after early 1987 you can average in the returns for EMF (Templeton's emerging markets closed end fund) and then in late 1989 you can add in the returns of Blackrock's MADCX and/or the returns from the Morningstar EM category average but by that point the MSCI EM index existed anyways so you could just use said index (with the ER from VEIEX added in) for the period from 1-1-1988 to mid-1994 (which was when VEIEX the actual fund itself came into existence).

For anything before 12-31-1975 I have no annual or monthly data; you would have to go to GFD or CS-DMS/Morningstar Corporate for that kind of info. From what I can tell of the limited amount of info on these two EM return series for 1900 to 1975 that is freely publicly available, however, I can pretty confidently say that EM would've--when added in place of some of the US stock in a 65/35 or 60/40 or 55/45--helped one's SWR in the "4% SWR failed" starting years of 1907, 1929, 1965, and 1966 (as well as the "4% came close to failing" years of 1906, 1912, 1969, 1972, and 1973); in the 30-year SWR series starting in 1937 it wouldn't have helped much but it wouldn't really have hurt either.
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

Alpha4 wrote: Sat Feb 12, 2022 7:32 pm...If you want to use "funds that actually existed" instead of just an index then you are limited to starting on 6-1-1986 as that is when the first EM mutual fund (Capital Group's EMRGX.....Capital Group is the company that runs the American Funds series of active mutual funds) was introduced...
Wow!

What else is there to say?

12X growth in 9 years or about an average of 32%/year sustained for nine years.

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Re: Emerging markets have failed to live up (says M* article)

Post by Northern Flicker »

dcabler wrote: Sat Feb 12, 2022 6:44 am I always like looking at this plot from the Credit Suisse Yearbook.
- Looks like WWII wasn't especially kind to emerging markets, unsurprisingly.
- Since WWII ended, visually, it does appear that the slope of EM has been slightly steeper than developed markets sometimes

Future unknowable, etc. etc...

Page 38, Figure 20
https://www.credit-suisse.com/media/ass ... dition.pdf

Cheers
What do they define as emerging markets during WW2? The current emerging markets asset class originated in the mid-to-late 1980's, and has been broadly investable since the mid-1990's.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Emerging markets have failed to live up (says M* article)

Post by Alpha4 »

Northern Flicker wrote: Sun Feb 13, 2022 12:54 am
dcabler wrote: Sat Feb 12, 2022 6:44 am I always like looking at this plot from the Credit Suisse Yearbook.
- Looks like WWII wasn't especially kind to emerging markets, unsurprisingly.
- Since WWII ended, visually, it does appear that the slope of EM has been slightly steeper than developed markets sometimes

Future unknowable, etc. etc...

Page 38, Figure 20
https://www.credit-suisse.com/media/ass ... dition.pdf

Cheers
What do they define as emerging markets during WW2? The current emerging markets asset class originated in the mid-to-late 1980's, and has been broadly investable since the mid-1990's.
They (Credit Suisse) started out their EM index in 1900 with the countries of China, Finland, Japan, Portugal, Russia, South Africa, and Spain. Russia was removed after basically losing 100% in the Russian Revolution/civil war/Communist takeover; Finland was moved to developed market status in 1932; I presume China was removed sometime in late 1949 or 1-1-1950; as such, their EM index in 1945 or 1946 would've included Japan (probably as the largest constituent, I might add), China, Portugal, South Africa, and Spain.

In 1955, they added Brazil and India; in 1963, Korea and Hong Kong (until they moved Hong Kong to developed in 1977); in 1966, Singapore (until it was moved by them to developed in 1980); in 1970, Malaysia; and in 1976, Argentina, Chile, Greece, Mexico, Thailand, and Zimbabwe; I believe they may've added Venezuela, Philippines, Jordan, Turkey, and Taiwan at some point in the late 70s or early 80s as well. They then linked their index into the MSCI Emerging Markets index from its inception on 1-1-1988 in order to have a complete index from 1900 to the present.

The largest difference in the Credit Suisse (aka DMS) EM index and the other EM index that goes back that far (the one from GFD) is that GFD for some inexplicable reason considers Japan to be a "developed market" country as early as 1915 and also that (IIRC) GFD doesn't include China at all after year-end 1940 (thus missing the 100% loss of value when the Nationalists lost the Chinese Civil War and the Communists took over in 1949); this is why GFD's EM index doesn't show quite the huge plunge in the latter half of the 1940s that the Credit Suisse/DMS EM index shows.

The main differences between the MSCI EM and the Credit Suisse EM is that MSCI moved both Hong Kong and Singapore to developed (the MSCI EAFE) in December 1972; that MSCI had Spain in developed on 12-31-1969 (the date the MSCI EAFE data started on), and that MSCI moved Portugal to developed in the late 1990s at which point Credit Suisse would've still considered it emerging.
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Re: Emerging markets have failed to live up (says M* article)

Post by tvubpwcisla »

Now looks like a good time to get in.
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Re: Emerging markets have failed to live up (says M* article)

Post by Tom_T »

burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?
There are also "many" around here who are perfectly fine with Total World and don't consider it "absolute nuts." So you're right and they're wrong?
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Re: Emerging markets have failed to live up (says M* article)

Post by burritoLover »

Tom_T wrote: Sun Feb 13, 2022 7:22 am
burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?
There are also "many" around here who are perfectly fine with Total World and don't consider it "absolute nuts." So you're right and they're wrong?
Lol on “many”. I didn’t give an opinion on it so there’s no “I’m right” involved here.
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?
I'm one of the "20% of equities international" folks. I do not regard Total World as "absolute nuts" (nor do I regard 100% S&P 500 as "absolute nuts.") I'm not the least bit "worried" about the presence of emerging markets at relative cap weight within my holding of international.

The title of the piece is "Whatever Happened to Emerging-Markets Stock Funds?" He isn't criticizing the presence of emerging markets in Total International. He isn't saying to hold developed markets only. He's criticizing the widespread advice that was trumpeted to ordinary retirement savers to include big overweights in emerging markets by including a specific holding of an emerging markets stock fund.

What expectations were really set? At what point would you say it was irresponsible and wish people could be held accountable?

It was not and is not unusual to see equal weights being suggested for an international stock fund and an emerging markets fund. Larry Swedroe's 2004 model portfolio is nowhere that extreme but nevertheless the 100%-stocks portfolio was 30% in an international fund plus 6% in an emerging markets fund; he probably had DFALX in mind, so a 30% allocation would have included 3% of portfolio in emerging markets By explicitly adding 6% more in emerging markets he was calling for a 3X overweight in emergin markets. (In 2004 was great timing and paid off promptly for those who followed it).

For years it has been fairly common to object to international funds that tracked MSCI EAFE as shoddy goods for not including emerging markets.

Advice-givers got caught up in a faddish enthusiasm for emerging markets during a four-year run, 2003-2007, and ever since have been urging that investors not merely hold them, but overweight them.

What's a reasonable expectation for a time frame? What was implied as the time frame in which you might hope for a payoff? A sort of answer is provided by Jeremy Grantham and GMO, who have been constantly beating the drum for EM and forecasting payoffs within seven years. And I think that's a very reasonable time frame. If someone tells me "invest in this, it will pay off," that's kind of the time frame I think of; I'm willing to wait seven years, but not twenty.

Now, for example, in June 2008, they forecast that over the next seven years--that is to say by 2015 emerging markets stocks would beat US large growth and large value by +1.8%, and small-caps by +2.9%.

Here's what happened. Instead of beating US large growth, US large value, and US small-caps by two or three percent per year,
[https://www.portfoliovisualizer.com/fun ... F01%2F2015]

Image

emerging markets lagged large growth, large value, and small-caps by averages of -7% to -9% per year.

That's a stunning disappointment. You can't paper over it by saying "well, GMO wasn't wrong, just early" because GMO said "by 2015" and it hasn't happened yet. Every year since then GMO has forecast that emerging markets would pay off within seven years, and GMO has disappointed investors at the end of every one of those seven-year periods.

I don't want to "time the market in advice," but yes, all the overconfident people advising ordinary investors to overweight emerging markets, and allowing them to expect a payoff within a reasonable time like seven years, deserve criticism. Emerging markets have failed to live up to expectations widely set for them.
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

At least I found a posting from Noobvestor explaining why people pay attention to GMO's forecasts, which had previously been a mystery to me:

Posting

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Re: Emerging markets have failed to live up (says M* article)

Post by Elysium »

Alpha4 wrote: Sat Feb 12, 2022 7:32 pm
Elysium wrote: Sat Feb 12, 2022 9:27 am
Alpha4 wrote: Sat Feb 12, 2022 12:37 am In the first half of 1994 EM was coming off of a roughly eight year run of outperformance against US stocks in which it beat US so badly that $10000 invested in EM on 1-1-1986 was worth over $115,000 on 12-31-1993 while the same amount invested in the US TSM was worth just under $27,500. Of course, this meant that EM was very richly priced (i.e. very expensive) by that point compared to US stocks.
Do you have a source for this data that you can share. Where did you find the returns for EM from 1986?
The EM data I have (monthly and annual TR data) for 12-31-1975 to 12-31-1987 and that I used in my post in this thread is from the S&P IFC Emerging Markets index; the data for 12-31-1987 to 12-31-1993 was from the regular good ol' MSCI EM Index TR.

The S&P IFC data for 1976 to 1987 is (I believe) still available at https://www.cfainstitute.org/en/researc ... ograph-pdf (direct link is IIRC https://www.cfainstitute.org/-/media/do ... 60-pdf.pdf or https://www.cfainstitute.org/-/media/do ... 0-pdf.ashx ); the PDF is free for anyone to download.

If you want to use "funds that actually existed" instead of just an index then you are limited to starting on 6-1-1986 as that is when the first EM mutual fund (Capital Group's EMRGX.....Capital Group is the company that runs the American Funds series of active mutual funds) was introduced; after early 1987 you can average in the returns for EMF (Templeton's emerging markets closed end fund) and then in late 1989 you can add in the returns of Blackrock's MADCX and/or the returns from the Morningstar EM category average but by that point the MSCI EM index existed anyways so you could just use said index (with the ER from VEIEX added in) for the period from 1-1-1988 to mid-1994 (which was when VEIEX the actual fund itself came into existence).

For anything before 12-31-1975 I have no annual or monthly data; you would have to go to GFD or CS-DMS/Morningstar Corporate for that kind of info. From what I can tell of the limited amount of info on these two EM return series for 1900 to 1975 that is freely publicly available, however, I can pretty confidently say that EM would've--when added in place of some of the US stock in a 65/35 or 60/40 or 55/45--helped one's SWR in the "4% SWR failed" starting years of 1907, 1929, 1965, and 1966 (as well as the "4% came close to failing" years of 1906, 1912, 1969, 1972, and 1973); in the 30-year SWR series starting in 1937 it wouldn't have helped much but it wouldn't really have hurt either.
It's what I suspected, the data isn't available readily without mixing up by hand from various sources. Don't think it is of much use other than anecdotal evidence, as their index construction methods and data collection methods may be different. That said, I am okay to use the MSCI EM Index data that nisiprius posted above, starting 1989.
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Re: Emerging markets have failed to live up (says M* article)

Post by Actin »

Remember, it's not market timing if it's international, SCV, or EM. Just because it's exactly the same as market timing doesn't mean it's the same because reasons and stuff.
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Re: Emerging markets have failed to live up (says M* article)

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nisiprius wrote: Sun Feb 13, 2022 10:06 am At least I found a posting from Noobvestor explaining why people pay attention to GMO's forecasts, which had previously been a mystery to me:

Posting

Image
GMO Forecasts seem to be a good contrary indicator except for bonds. This is why I don't think people are well served by excessive pessimism, it promotes excessive conservatism in investing if not discouraging people from investing in the first place. Better to have optimism but to be realistic enough to know that bad things can happen.
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Re: Emerging markets have failed to live up (says M* article)

Post by burritoLover »

nisiprius wrote: Sun Feb 13, 2022 9:43 am The title of the piece is "Whatever Happened to Emerging-Markets Stock Funds?" He isn't criticizing the presence of emerging markets in Total International. He isn't saying to hold developed markets only. He's criticizing the widespread advice that was trumpeted to ordinary retirement savers to include big overweights in emerging markets by including a specific holding of an emerging markets stock fund.
I don't think that is what he's saying. He says EM shouldn't even be considered an asset class and if you are going to hold EM, have an active manager make stock picks in that area.
nisiprius wrote:That's a stunning disappointment. You can't paper over it by saying "well, GMO wasn't wrong, just early" because GMO said "by 2015" and it hasn't happened yet. Every year since then GMO has forecast that emerging markets would pay off within seven years, and GMO has disappointed investors at the end of every one of those seven-year periods.

I don't want to "time the market in advice," but yes, all the overconfident people advising ordinary investors to overweight emerging markets, and allowing them to expect a payoff within a reasonable time like seven years, deserve criticism. Emerging markets have failed to live up to expectations widely set for them.
Overweighting anything - whether that is EM or US stocks is putting on your active manager's hat. Total world is by definition agnostic. If you go with 20% international, you are making an active bet that overweighting of US stocks will be more beneficial to your portfolio. This is no different than someone overweighting EM in a global stock portfolio. Because of recency bias, it is easy to pooh-pooh that choice because US has had stellar returns in the last 10 years. In other periods, EM or ex-US developed would look better. EM is riskier, so we do expect more volatility. The US stock market, however, is not without its long periods of underperformance - three consecutive periods of 13-17 years where it underperformed short-term treasuries.

It is irrelevant that GMO made a prediction that turned out to terrible since the future in unknowable. There were plenty of bad predictions about the US stock market in the late 90's - that 20-30% returns were the norm going forward, for example (or DOW 36000). After the dot com bust, is the fact that those predictions were wrong inform as to whether we should invest in US stocks or not? Or in your case, overweight US stocks?
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Re: Emerging markets have failed to live up (says M* article)

Post by nedsaid »

burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?

I think having a 5-10% allocation to EM is reasonable given the uncertainty in the developed world with rapidly aging populations and declining birth rates. The problem is, everyone thinks the last 100 years is just going to repeat and they are going to get their 10% US returns. Guess what, the US and the world are a lot different now than then - the future sequence of returns is not going to be the same.
My enthusiasm for Emerging Markets has cooled in part because the EM Indexes and many EM Funds are about 40% mainland China. I am not a China bull. EM are sort of an odd asset class, they can disappoint for years and then have an amazing run. A market weight in EM is reasonable in my view, though my enthusiasm has lessened, I won't underweight.

A big reason for investing in Emerging Markets is that these stocks are very cheap, but then again you are taking on additional risks here. A safer bet would be Developed Markets which are cheaper than the US though not as cheap as EM but still has less of the additional risks of EM. Developed Markets are sort of a happy medium between an expensive US Market and a very cheap and very risky Emerging Markets. A big reason for interest in International Stocks in general are concerns that the US Market is just too expensive. There is also the desire for additional diversification.
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Re: Emerging markets have failed to live up (says M* article)

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nedsaid wrote: Sun Feb 13, 2022 10:59 am
burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?

I think having a 5-10% allocation to EM is reasonable given the uncertainty in the developed world with rapidly aging populations and declining birth rates. The problem is, everyone thinks the last 100 years is just going to repeat and they are going to get their 10% US returns. Guess what, the US and the world are a lot different now than then - the future sequence of returns is not going to be the same.
My enthusiasm for Emerging Markets has cooled in part because the EM Indexes and many EM Funds are about 40% mainland China. I am not a China bull. EM are sort of an odd asset class, they can disappoint for years and then have an amazing run. A market weight in EM is reasonable in my view, though my enthusiasm has lessened, I won't underweight.

A big reason for investing in Emerging Markets is that these stocks are very cheap, but then again you are taking on additional risks here. A safer bet would be Developed Markets which are cheaper than the US though not as cheap as EM but still has less of the additional risks of EM. Developed Markets are sort of a happy medium between an expensive US Market and a very cheap and very risky Emerging Markets. A big reason for interest in International Stocks in general are concerns that the US Market is just too expensive. There is also the desire for additional diversification.
The problem with developed is demographics - this is not post-WWII with a ton of potential - these are aging populations with ever increasing debt. I'd hate to concentrate my entire stock portfolio there for the next 50 years so having EM at market weight is a little insurance. We can't extrapolate the returns of the past to the future as if nothing is changing any more than we can look at EM's poor performance and extrapolate that out to the future. The world is not the same.
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Re: Emerging markets have failed to live up (says M* article)

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nisiprius wrote: Sun Feb 13, 2022 9:43 am That's a stunning disappointment. You can't paper over it by saying "well, GMO wasn't wrong, just early" because GMO said "by 2015" and it hasn't happened yet. Every year since then GMO has forecast that emerging markets would pay off within seven years, and GMO has disappointed investors at the end of every one of those seven-year periods.
I wonder if there is a fundamental flaw in the method Grantham/GMO use to forecasts expected returns based on price/valuations. If the assumption they have is that valuation reflects all information known and therefore cheaper EM value stocks are likely to have higher expected returns than higher valued US large, then it doesn't consider the effect of central bank & government ability in US and other Developed Markets to provide economic stimulus. Based on price alone, 2008 may have looked better for EM stocks, however, the ability of US central bank and administration to provide support for economic expansion could not be matched by EM countries. This certainly has made a difference to the next decade, and again we saw this in Covid-19 crisis. Perhaps someone has already done an academic research into this. Clearly, Grantham doesn't like Fed stimulus actions, he calls them as fueling the bubbles in US, and that clearly has been his bane.
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Re: Emerging markets have failed to live up (says M* article)

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nedsaid wrote: Sun Feb 13, 2022 10:59 am My enthusiasm for Emerging Markets has cooled in part because the EM Indexes and many EM Funds are about 40% mainland China. I am not a China bull. EM are sort of an odd asset class, they can disappoint for years and then have an amazing run. A market weight in EM is reasonable in my view,
Guess then you haven't bought into the BlackRock capital market assumptions, where China beats everything. Just another noise to add to the cacophony.
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Re: Emerging markets have failed to live up (says M* article)

Post by Booogle »

Is there an Emerging Markets Value ETF without China?
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Re: Emerging markets have failed to live up (says M* article)

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Booogle wrote: Sun Feb 13, 2022 11:35 am Is there an Emerging Markets Value ETF without China?
What is Emerging Markets without China? by that I mean China, Taiwan, HongKong. You take that out, you get India, Brazil, Mexico, South Africa. That should be 80% of any EM Index. Rest 20% is amalgamation of smaller countries. I'd argue that India is probably 3-4 large stocks, one big Petroleum company and rest aren't much. Brazil is one big petroleum, and another natural resources mining company perhaps. Mexico's largest are US companies anyway with factories setup, so you don't actually need local company which could be a Telecom company (fits the narrative of funneling money to govt officials and their relatives pockets), and South Africa is what, mostly mining and materials. So, as you narrow this down, we can see most of what EM offers is available through US and a couple of other large markets. EM is essentially currency play, when USD weakens they do well, and perhaps a boom in natural resources, mining, etc . China is different from rest of EM at the moment since they have a couple of large corporations breaking into the level that South Korean companies have done when they became the top EM country once and then moved out into a DM. Point is, you leave out the country with best possibility to break out into a DM in the next decade or two then you miss most of growth that can be from EM.
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Re: Emerging markets have failed to live up (says M* article)

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Elysium wrote: Sun Feb 13, 2022 11:23 am
nedsaid wrote: Sun Feb 13, 2022 10:59 am My enthusiasm for Emerging Markets has cooled in part because the EM Indexes and many EM Funds are about 40% mainland China. I am not a China bull. EM are sort of an odd asset class, they can disappoint for years and then have an amazing run. A market weight in EM is reasonable in my view,
Guess then you haven't bought into the BlackRock capital market assumptions, where China beats everything. Just another noise to add to the cacophony.
I have posted often on this topic in the past, late 1980's Japan on steroids and all of that. My opinions haven't changed and in fact I have become more bearish of China. But of course I know that my opinions are fallible, I could be wrong. More recent events have reinforced my bearishness and not lessened it. I have thought about replacing my Fidelity Emerging Markets Index Fund with an ex-China Emerging Markets ETF but I have not taken action.
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Re: Emerging markets have failed to live up (says M* article)

Post by nedsaid »

burritoLover wrote: Sun Feb 13, 2022 11:10 am
nedsaid wrote: Sun Feb 13, 2022 10:59 am
burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?

I think having a 5-10% allocation to EM is reasonable given the uncertainty in the developed world with rapidly aging populations and declining birth rates. The problem is, everyone thinks the last 100 years is just going to repeat and they are going to get their 10% US returns. Guess what, the US and the world are a lot different now than then - the future sequence of returns is not going to be the same.
My enthusiasm for Emerging Markets has cooled in part because the EM Indexes and many EM Funds are about 40% mainland China. I am not a China bull. EM are sort of an odd asset class, they can disappoint for years and then have an amazing run. A market weight in EM is reasonable in my view, though my enthusiasm has lessened, I won't underweight.

A big reason for investing in Emerging Markets is that these stocks are very cheap, but then again you are taking on additional risks here. A safer bet would be Developed Markets which are cheaper than the US though not as cheap as EM but still has less of the additional risks of EM. Developed Markets are sort of a happy medium between an expensive US Market and a very cheap and very risky Emerging Markets. A big reason for interest in International Stocks in general are concerns that the US Market is just too expensive. There is also the desire for additional diversification.
The problem with developed is demographics - this is not post-WWII with a ton of potential - these are aging populations with ever increasing debt. I'd hate to concentrate my entire stock portfolio there for the next 50 years so having EM at market weight is a little insurance. We can't extrapolate the returns of the past to the future as if nothing is changing any more than we can look at EM's poor performance and extrapolate that out to the future. The world is not the same.
Great point. China has worse demographic problems than the U.S. or even Western Europe but many Emerging Markets nations have more favorable population trends. I am not giving up on Emerging Markets.
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Re: Emerging markets have failed to live up (says M* article)

Post by Leif »

However, national growth does not neatly translate into corporate profitability. Emerging-markets countries are making more things, delivering more services, consuming more wares. Monies are being spent. But much of that cash does not make it to shareholders. It is squandered on profitless corporate expansions (empire building); or placed into government officials' pockets; or siphoned off to a CEO's friends and family.
...
Their diversification benefits appear to be dwindling, as the emerging countries become larger and ever-more entwined with the global economy, and their expected returns are suspect. It is not clear that buying a package of stocks from countries labeled as "emerging" makes more sense than, say, buying one from countries whose names begin with the letter B.
I came to some of the same conclusions myself a few years ago. Ghost cities caught my attention. China's "state secret" of corporate audit reports prompted me to action. I rolled my EM into total international. That still has EM, but much less as a percentage.
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

Seems like only yesterday that people were raking Vanguard over the coals for not having China...

August 2015
A few months ago Vanguard announced that they're adding China A shares to their international index funds. Has this already happened? If not, are they still planning that?
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Re: Emerging markets have failed to live up (says M* article)

Post by nisiprius »

nedsaid wrote: Sun Feb 13, 2022 12:14 pm...I am not giving up on Emerging Markets...
Do you mean you are not giving up on having an overweight in emerging markets, or just that you are not going to change to holding 100% developed markets?
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Re: Emerging markets have failed to live up (says M* article)

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nisiprius wrote: Sun Feb 13, 2022 9:43 am What expectations were really set? At what point would you say it was irresponsible and wish people could be held accountable?

It was not and is not unusual to see equal weights being suggested for an international stock fund and an emerging markets fund. Larry Swedroe's 2004 model portfolio is nowhere that extreme but nevertheless the 100%-stocks portfolio was 30% in an international fund plus 6% in an emerging markets fund; he probably had DFALX in mind, so a 30% allocation would have included 3% of portfolio in emerging markets By explicitly adding 6% more in emerging markets he was calling for a 3X overweight in emergin markets. (In 2004 was great timing and paid off promptly for those who followed it).
Jack Bogle was also known to advocate an equal weighting of EM and developed markets, of the 20% maximum international allocation he found acceptable.
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Re: Emerging markets have failed to live up (says M* article)

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nisiprius wrote: Sun Feb 13, 2022 1:08 pm
nedsaid wrote: Sun Feb 13, 2022 12:14 pm...I am not giving up on Emerging Markets...
Do you mean you are not giving up on having an overweight in emerging markets, or just that you are not going to change to holding 100% developed markets?
For now, I will just keep what I have. I haven't done anything with my Emerging Markets investments. I haven't trimmed them, I haven't switched my investments for "better ones". I think I am a bit overweighted in EM, this was a deliberate decision at the time but since my enthusiasm has cooled off I have not added to them. My attitude here is very similar to my attitude towards REITs, my enthusiasm has lessened but I have mostly let things ride. Certainly I am not adding to REITs or adding to EM, just keeping what I have.

My two Emerging Markets investments are Fidelity Emerging Markets Index fund and Templeton Developing Markets fund. Most of my International Stock mutual funds also have Emerging Markets stocks in them.
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Re: Emerging markets have failed to live up (says M* article)

Post by Nathan Drake »

nisiprius wrote: Sun Feb 13, 2022 9:43 am
burritoLover wrote: Sat Feb 12, 2022 9:05 am If you have a market weight global portfolio, EM is less than 10% of your equities. Since that portfolio is absolute nuts to many around here (too much ex-US!), a more typical international allocation is 20% which means EM is less than 5% of your equities. Why would you be so intently worried about 5% of your portfolio and not the 80% that is tied up in one country (the US)?
I'm one of the "20% of equities international" folks. I do not regard Total World as "absolute nuts" (nor do I regard 100% S&P 500 as "absolute nuts.") I'm not the least bit "worried" about the presence of emerging markets at relative cap weight within my holding of international.

The title of the piece is "Whatever Happened to Emerging-Markets Stock Funds?" He isn't criticizing the presence of emerging markets in Total International. He isn't saying to hold developed markets only. He's criticizing the widespread advice that was trumpeted to ordinary retirement savers to include big overweights in emerging markets by including a specific holding of an emerging markets stock fund.

What expectations were really set? At what point would you say it was irresponsible and wish people could be held accountable?

It was not and is not unusual to see equal weights being suggested for an international stock fund and an emerging markets fund. Larry Swedroe's 2004 model portfolio is nowhere that extreme but nevertheless the 100%-stocks portfolio was 30% in an international fund plus 6% in an emerging markets fund; he probably had DFALX in mind, so a 30% allocation would have included 3% of portfolio in emerging markets By explicitly adding 6% more in emerging markets he was calling for a 3X overweight in emergin markets. (In 2004 was great timing and paid off promptly for those who followed it).

For years it has been fairly common to object to international funds that tracked MSCI EAFE as shoddy goods for not including emerging markets.

Advice-givers got caught up in a faddish enthusiasm for emerging markets during a four-year run, 2003-2007, and ever since have been urging that investors not merely hold them, but overweight them.

What's a reasonable expectation for a time frame? What was implied as the time frame in which you might hope for a payoff? A sort of answer is provided by Jeremy Grantham and GMO, who have been constantly beating the drum for EM and forecasting payoffs within seven years. And I think that's a very reasonable time frame. If someone tells me "invest in this, it will pay off," that's kind of the time frame I think of; I'm willing to wait seven years, but not twenty.

Now, for example, in June 2008, they forecast that over the next seven years--that is to say by 2015 emerging markets stocks would beat US large growth and large value by +1.8%, and small-caps by +2.9%.

Here's what happened. Instead of beating US large growth, US large value, and US small-caps by two or three percent per year,
[https://www.portfoliovisualizer.com/fun ... F01%2F2015]

Image

emerging markets lagged large growth, large value, and small-caps by averages of -7% to -9% per year.

That's a stunning disappointment. You can't paper over it by saying "well, GMO wasn't wrong, just early" because GMO said "by 2015" and it hasn't happened yet. Every year since then GMO has forecast that emerging markets would pay off within seven years, and GMO has disappointed investors at the end of every one of those seven-year periods.

I don't want to "time the market in advice," but yes, all the overconfident people advising ordinary investors to overweight emerging markets, and allowing them to expect a payoff within a reasonable time like seven years, deserve criticism. Emerging markets have failed to live up to expectations widely set for them.
All of these issues you've raised can be levied against the US TSM investing approach.
  • If 100% US TSM is acceptable, surely 100% Japanese investing in the late 80s was acceptable as its market cap was a huge portion of the world like the US is today?
  • Why is it acceptable to overweight US TSM, but it's not acceptable to overweight EM? Is weighting relevant to portfolio decisions? Are there other factors that could play a role in portfolio construction?
  • Does the advice usually given today, to hold big overweighted positions in US Large caps, seem eerily similar to the performance chasing advice of the early 00s to overwieght EM after a good run?
  • US stocks lagged exUS and even bonds for periods of 30 years. That's a stunning disappointment that has happened to one of the world's BEST markets to invest in historically.
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Re: Emerging markets have failed to live up (says M* article)

Post by Northern Flicker »

Alpha4 wrote: They (Credit Suisse) started out their EM index in 1900 with the countries of China, Finland, Japan, Portugal, Russia, South Africa, and Spain. Russia was removed after basically losing 100% in the Russian Revolution/civil war/Communist takeover; Finland was moved to developed market status in 1932; I presume China was removed sometime in late 1949 or 1-1-1950; as such, their EM index in 1945 or 1946 would've included Japan (probably as the largest constituent, I might add), China, Portugal, South Africa, and Spain.
Argentina was as important as or more important than any of the above 1900-1930. Is it omitted from the list because they classify it as DM in that period?

I would add that many countries experienced poor returns because of wars and political upheavals. When we look back, these events may bias us to consider them EM, but there can be a hindsight bias. Had there have been well-defined concepts of DM and EM, how they were would have been defined at the start of the period before the political outcomes were known is what matters.

The Credit Suisse data is interesting and illuminating, but there are major limitations in generalizing it to DM and EM today, not the least of which is getting accurate data for global pre-WW2 equity returns.
Last edited by Northern Flicker on Sun Feb 13, 2022 7:10 pm, edited 1 time in total.
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Re: Emerging markets have failed to live up (says M* article)

Post by Northern Flicker »

Elysium wrote: What is Emerging Markets without China? by that I mean China, Taiwan, HongKong. You take that out, you get India, Brazil, Mexico, South Africa. That should be 80% of any EM Index. Rest 20% is amalgamation of smaller countries.
Taking any EM country individually, stocks are quite risky. Taiwan comes closest to being DM. The broad diversification across EM countries is important to reduce risk.

I think the point of the originally cited article is that back in the early to mid 1990's, there was a notion in the zeitgeist that things were played out in the US and other developed economies and EM was where higher returns were possible. EM was perceived at the time by some as "where the action is".

It did not work out that way. A small thing at the time called the internet turned out to be where the action was.
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Re: Emerging markets have failed to live up (says M* article)

Post by visualguy »

Northern Flicker wrote: Sun Feb 13, 2022 2:11 pm It did not work out that way. A small thing at the time called the internet turned out to be where the action was.
The thing is that Internet-related companies are also big in China, but making money on that by buying and holding Chinese (or EM) index funds is a different story.
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Re: Emerging markets have failed to live up (says M* article)

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000 wrote: Fri Feb 11, 2022 10:56 pm Yeah, having 0% exposure to where all the manufacturing is going sounds like a wise idea.....
Now this statement I like. Lol!
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