Any value investor buying a Russia fund?

[LadyGeek]

I merged BuyAndHoldOn's thread into here, which is a similar discussion. The combined thread is in the Investing - Theory, News & General forum (general discussion).

We have another Russia, Russia, Russia thread going, both should be merged. Good luck, y gracias por leer ~cfs~

p.s. You just don't want to be out of this market for ONE day !!!
p.p.s. Not the Russian market !!!

To get our attention sooner, please report the post using the "!" in the top-right corner of the post. One of the reasons is "Duplicate thread".

(Thanks to the member who reported the post.)

[alex_686]

I can't say whether or not the market has properly priced in the risks of Russian corruption. But I certainly remember that in 1997 issues with Russian bonds brought down Long-Term Capital Management and nearly brought down the US financial system with it. If the Nobel laureates at Long-Term Capital Management couldn't accurately assess the risk of Russian financial assets, I doubt that I can.

LTC lost about 1 billion over 6 weeks. 680k was from EM, including Russia. 420m was from increasing spreads on the on-the-run/off-the-run US Treasuries.

[Karamatsu]

I think the idea that national markets can be evaluated by the same metrics as US companies is likely to be fundamentally flawed. There are far more variables, far more unknowns, countries are so different, and their equity markets used for such different purposes that except in very stable, culturally similar, situations that allow the same kind of data fitting, I doubt it's possible to make meaningful comparisons and say that country A is overvalued while B is undervalued. And then, as a reformed value trader, just because your model says that stock X is undervalued absolutely does not mean that the market will ever wake up to share your opinion.

Finally, having just come back from Ukraine and talks with investors there, anyone contemplating an investment in Ukraine, Russia, or any of the former Soviet countries (or in some cases even the satellites) should heed the old advice about poker: if you don't know who the sucker is at the table, it's you. Take care.

[Whakamole]

One issue to think about is that Americans (and presumably any US-based mutual fund) will need to divest from certain companies by early May. That's going to have an effect on prices, of course, but it also means that you won't be able to own an actual index since it will need to exclude Rusal (which produces 6.5% of all aluminum), among other companies.

[unclescrooge]

I don't think Russian stocks are any more attractive today than they were 2,3,4, or 5 years ago. So if you were willing to invest in them then you should still now. Now, they are certainly more attractive than they were in 2007 and 2008, when the Russian CAPE ratio was higher than the US. But that's been true for a number of years, and hasn't panned out.

It just depends on how much risk you are willing to take and long you are willing to wait until things pan out (if they do at all).

Didn't they return 50% in 2016?

[Valuethinker]

If I contrasted them to Chinese companies, having seen the movie "The China Hussle" recently, I'd suggest that the risks in China re governance are there (if not to the same degree), and the valuation risks are much greater.

Xi Jinping seems to be making a serious effort to cleanup corruption in China. While SOEs may pursue China's geopolitical goals at the expense of its minority shareholders, I would be less concerned about embezzlement and bribes detracting from performance than say Russia.

If you watch the movie, that doesn't seem to be the issue.

This is Enron style corruption. Outright fraudulence on accounting numbers, which is not prohibited by Chinese law-- it's not illegal to lie to foreigners, for corporate execs.

The valuation of Chinese stocks is generally much much higher, so if the earnings are overstated, it's going to hurt, a lot. Think Sino Forest, a multibillion dollar market cap Canadian listed forestry company, which was manufacturing earnings via dealings with not-at-arm's length companies. The film doesn't mention that one, but it collapsed.

Russia it is outright theft by managements and insiders of valuable corporate assets*. You do have issues with Intellectual Property in China, but nothing, AFAIK, on that scale.

* something similar happened to Nat Rothschild and the Valare investment trust (closed end fund) in Indonesia, although litigation was eventually resolved, so I am not sure quite what the issues were resolved to be.

[LadyGeek]

Please stay focused on the investing aspects. Opinions of the political process, corruption, etc. are off-topic. See: Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

• US or world economic, political, tax, health care and climate policies
• conspiracy theories of any type
• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

[BuyAndHoldOn]

Please stay focused on the investing aspects. Opinions of the political process, corruption, etc. are off-topic. See: Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

• US or world economic, political, tax, health care and climate policies
• conspiracy theories of any type
• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

That's a blurry line here, I'm afraid. How do we have a discussion on Russia without discussing corruption, the political process, etc.? If Russia was a functioning democracy (by Western standards) AND possessed reasonable corporate governance standards: I doubt their Stock Market would have such low valuations.

I think the idea that national markets can be evaluated by the same metrics as US companies is likely to be fundamentally flawed. There are far more variables, far more unknowns, countries are so different, and their equity markets used for such different purposes that except in very stable, culturally similar, situations that allow the same kind of data fitting, I doubt it's possible to make meaningful comparisons and say that country A is overvalued while B is undervalued. And then, as a reformed value trader, just because your model says that stock X is undervalued absolutely does not mean that the market will ever wake up to share your opinion.

Finally, having just come back from Ukraine and talks with investors there, anyone contemplating an investment in Ukraine, Russia, or any of the former Soviet countries (or in some cases even the satellites) should heed the old advice about poker: if you don't know who the sucker is at the table, it's you. Take care.

I wonder about that, and you make a salient point. On the other hand: people like Meb Faber, Jeremy Grantham/GMO, etc. seem to be confident in valuation above all other measures. Markets are not perfectly efficient all of the time.

Not that "value investing" always outperforms, of course

[james22]

Relative to its own historical CAPE, Russia's current CAPE is not in value territory.

[denovo]

“And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful” – 2004 Annual Shareholder Letter.

https://www.investopedia.com/university ... quotes.asp

So go long on Russia?

[JoMoney]

“And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful” – 2004 Annual Shareholder Letter.

https://www.investopedia.com/university ... quotes.asp

So go long on Russia?

In context, he may have been talking about a different stock market...

http://berkshirehathaway.com/letters/2004ltr.pdf
... American business has delivered terrific results. It should therefore have been
easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a
diversified, low-expense way. An index fund that they never touched would have done the job. Instead
many investors have had experiences ranging from mediocre to disastrous.
There have been three primary causes: first, high costs, usually because investors traded
excessively or spent far too much on investment management; second, portfolio decisions based on tips and
fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to
the market marked by untimely entries (after an advance has been long underway) and exits (after periods
of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And
if they insist on trying to time their participation in equities, they should try to be fearful when others are
greedy and greedy only when others are fearful.

[Lauretta]

decisions based on tips and
fads rather than on thoughtful, quantified evaluation of businesses;

Well investing in Russia is supported by a pretty simple quantitative argument as far as I understand : Russia has a CAPE of about 6 and a P/E of 7, so you will earn 1$/year for every 6-7 $ you invest in it, assuming that earnings stay constant and that valuation multiples don't change and remain as low as they are now. In fact they are so low that if you believe in mean reversion they are more likely to go up than down, so this will result in extra gains if multiple expansion indeed occurs.
Also, my understanding is that it's so cheap precisely because noone wants to buy, as they are afraid and so both the stock market and the ruble are cheap; so far from being a fad, it is the very opposite of it. Be as it may; I just bought some more today

[BuyAndHoldOn]

decisions based on tips and
fads rather than on thoughtful, quantified evaluation of businesses;

Well investing in Russia is supported by a pretty simple quantitative argument as far as I understand : Russia has a CAPE of about 6 and a P/E of 7, so you will earn 1$/year for every 6-7 $ you invest in it, assuming that earnings stay constant and that valuation multiples don't change and remain as low as they are now. In fact they are so low that if you believe in mean reversion they are more likely to go up than down, so this will result in extra gains if multiple expansion indeed occurs.
Also, my understanding is that it's so cheap precisely because noone wants to buy, as they are afraid and so both the stock market and the ruble are cheap; so far from being a fad, it is the very opposite of it. Be as it may; I just bought some more today

Don't encourage us with sensible arguments like that. I posted [in] this thread originally so people would talk me out of a potentially risky investment choice.

That said:
1) Are you using an Index type product, or active fund for investing in Russia?
2) What industries or companies are you encouraged about within Russia? That is a hold up for me: I don't see much innovation or value add that competes on a global scale. I think other companies can do what the [big, Index dominant] Russian companies do. (If they are allowed to, within Russia).

[Valuethinker]

decisions based on tips and
fads rather than on thoughtful, quantified evaluation of businesses;

Well investing in Russia is supported by a pretty simple quantitative argument as far as I understand : Russia has a CAPE of about 6 and a P/E of 7, so you will earn 1$/year for every 6-7 $ you invest in it, assuming that earnings stay constant and that valuation multiples don't change and remain as low as they are now. In fact they are so low that if you believe in mean reversion they are more likely to go up than down, so this will result in extra gains if multiple expansion indeed occurs.
Also, my understanding is that it's so cheap precisely because noone wants to buy, as they are afraid and so both the stock market and the ruble are cheap; so far from being a fad, it is the very opposite of it. Be as it may; I just bought some more today

Don't encourage us with sensible arguments like that. I posted [in] this thread originally so people would talk me out of a potentially risky investment choice.

That said:
1) Are you using an Index type product, or active fund for investing in Russia?

It probably does not matter much. you might avoid some of the obvious (to insiders) fraudulent cases.

2) What industries or companies are you encouraged about within Russia? That is a hold up for me: I don't see much innovation or value add that competes on a global scale. I think other companies can do what the [big, Index dominant] Russian companies do. (If they are allowed to, within Russia).

Russian index is mostly about natural resources (+ some financials and other stocks). And those natural resources are worth something if world prices are high enough. That's their global competitive advantage-- they have something the world wants. The domestic stocks-- well, it's a tough place to compete as a foreign company, so probably they have an advantage there, too. There's nothing wrong with practical monopolies, from a shareholder viewpoint.

https://www.ishares.com/us/products/239 ... capped-etf

4 energy. 2 raw materials. 2 financials

A greater question is whether external shareholders will be allowed to profit from demand for the companies' products. Historically, if the money looks good, the cabal around Putin steals those assets. But, maybe, that policy has gone far enough, and they realize they need access to external capital. Certainly the valuations are appealing-- you are not being asked to take much on trust.

A connected problem is geopolitical -enough said.

[HomerJ]

Will add if price weakens further, or reduce if see significant gains.
Called 'rebalancing'.

Just FYI, changing your allocation is NOT "rebalancing".

Rebalancing is balancing back to your original allocation.

For instance if your AA is 50/50 and stocks are up 15% in a year, and bonds are up 3%, you may need to sell some stocks and buy some bonds to get back to 50/50. Switching to 30/70 or 70/30 is not "rebalancing".

[whodidntante]

If Russia had transparency, stability, effective legal protections of foreign investor interests and corporate interests, and a diversified economy, then it would be a screaming buy at these valuations. But as it is today, it's one of the places in the world where you could actually lose 100% of whatever you invest, and it has happened before. I think it would be fine to overweight Russia, and I would say the expected returns are quite high from here. But I wouldn't go crazy with it.

[golfCaddy]

decisions based on tips and
fads rather than on thoughtful, quantified evaluation of businesses;

Well investing in Russia is supported by a pretty simple quantitative argument as far as I understand : Russia has a CAPE of about 6 and a P/E of 7, so you will earn 1$/year for every 6-7 $ you invest in it, assuming that earnings stay constant and that valuation multiples don't change and remain as low as they are now. In fact they are so low that if you believe in mean reversion they are more likely to go up than down, so this will result in extra gains if multiple expansion indeed occurs.
Also, my understanding is that it's so cheap precisely because noone wants to buy, as they are afraid and so both the stock market and the ruble are cheap; so far from being a fad, it is the very opposite of it. Be as it may; I just bought some more today

Do you believe the earnings numbers though? If Russia overstates earnings by 2x on average, then the actual P/E would be 14, and it looks like less of a bargain.

[Lauretta]

Do you believe the earnings numbers though? If Russia overstates earnings by 2x on average, then the actual P/E would be 14, and it looks like less of a bargain.

Ah ok I didn't think of that; seems like that would be very dishonest though (when I think of Russia I think of Tolstoy and he was a very ethical man ) and I don't know whether such huge manipulation is even possible to do. A money manager once told me they don't invest in Russia after a European car manufacturer opened a branch there and cars started to diasapper from inside the factory (people were somehow stealing them) so probably some disgree of dishonesty exists, but I didn't think of that when considering the numbers

[Lauretta]

Don't encourage us with sensible arguments like that. I posted [in] this thread originally so people would talk me out of a potentially risky investment choice.

That said:
1) Are you using an Index type product, or active fund for investing in Russia?
2) What industries or companies are you encouraged about within Russia? That is a hold up for me: I don't see much innovation or value add that competes on a global scale. I think other companies can do what the [big, Index dominant] Russian companies do. (If they are allowed to, within Russia).

1) I am using an index ETF
2) I am not really thinking in terms of sectors or companies. There is a joke about quants being proud of not knowing what companies they invest in, and I think I can understand that. I think there is evidence that for most investors just sticking to the numbers (assuming that those numbers are reliable) when doing a value tilt, it works out better than adding further considerations. I remember a funny story by o'Shaughnessy about the time when he gave talks about value investing in the US. When he described the idea, everybody in the audience was nodding and was persuaded by the arguments. When o'Shaughnessy mentioned the names of a few value companies to invest in to implement the strategy, the expression of people in the audience suddenly changed: surely he was not suggesting that they invest in those - they all sounded too unglamorous and risky!

[boglerdude]

As mentioned above, Russia has a PE of 7, so you will earn $1/year for every $7 you invest in it. It will take 7 years to earn back your investment.

Amazon has a PE of 314, so you will earn $1/year for every $314 you invest in it. It will take 314 years to earn back your investment.

But there's no free lunch, so the market expects more earnings (net profit) increase from Amazon. 314/7=45x.

So the market expects Amazon's earnings to increase to 45x that of Russia's, each year, on average over 7 years.

Is this right? Other ways to think about it?

[Lauretta]

As mentioned above, Russia has a PE of 7, so you will earn $1/year for every $7 you invest in it. It will take 7 years to earn back your investment.

Amazon has a PE of 314, so you will earn $1/year for every $314 you invest in it. It will take 314 years to earn back your investment.

But there's no free lunch, so the market expects more earnings (net profit) increase from Amazon. 314/7=45x.

So the market expects Amazon's earnings to increase to 45x that of Russia's, each year, on average over 7 years.

Is this right? Other ways to think about it?

Amazon cashflow increased tenfold over the last ten years, but earnings increased only fivefold because most of the money was used to expand the business. So the idea is that at the moment Amazon is not profitable but people expect it to continue to expand in the future and become a larger and larger monopoly, at which point (perhaps in 10, 20 years) it can increase its margins and finally become profitable. To me there are a lot of assumptions with this argument, and lots of things that can go wrong on the way. So I am more confortable with low PE stocks.

[james22]

Are you familiar with Russia's historical CAPE, Lauretta?

It's the mean a value investor might expect it to revert to, not some global average.

[Lauretta]

Are you familiar with Russia's historical CAPE, Lauretta?

It's the mean a value investor might expect it to revert to, not some global average.

That is a good point james, and one I have been giving some thought to. If you look at StarCapital's forecasts, they assume that CAPE will revert to the same global average, regardless of country (thus Italy and EM have the same expected returns in their estimates, because they have the same CAPE). I haven't made up my mind yet as to whether their assuption is reasonable. If what you say is correct though, Sweden should have very high expected returns since their CAPE has been much above average during the last 40 years.

Being that as it may, my simple calculation above (CAPE=6 so you take 6 yrs to get your initial investment back through earnings) is valid precisely if CAPE stays fixed. If CAPE increases and you get multiple expansion, then you'll have extra gains. But if valuations and earnings stay constant, you still can expect a real yield of the order of 16% (actually more if earnings are reinvested).

Btw all this is true in reverse for the US. You don't need CAPE to revert to historical average for returns to be low. Even if CAPE stays the same, expected returns are low simply because earning yields (the inverse of PE) are low. Siegel, who believes that CAPE will not mean revert for the US, forecasts returns of the order of 5%, i.e. lower than historical average, precisely because earning yields are low (he simply takes the inverse of the PE ratio of 20 using operating earning).

[HongKonger]

If the rouble is down but Russia sells oil in dollars isn't that better for them? Just thinking out loud here.

[magneto]

Will add if price weakens further, or reduce if see significant gains.
Called 'rebalancing'.

Just FYI, changing your allocation is NOT "rebalancing".

Rebalancing is balancing back to your original allocation.

For instance if your AA is 50/50 and stocks are up 15% in a year, and bonds are up 3%, you may need to sell some stocks and buy some bonds to get back to 50/50. Switching to 30/70 or 70/30 is not "rebalancing".

If price weakens 3% allocation may become 2% of portfolio.
So we add to return to 3%, and so on?
Trust this clarifies.
Tricky stuff words

[Valuethinker]

If the rouble is down but Russia sells oil in dollars isn't that better for them? Just thinking out loud here.

Yes but no but yes.

If we just assume that the exchange rate is constant, Russia is better off-- its Terms of Trade (ratio of export prices to import prices) have improved. In the same way that Canada is better off, for the same reason (big oil exporter to USA in Canada's case). US is more or less neutral (big oil producer but also major importer & consumer) BUT higher price of oil increases fracking activity, which is good for US economy.

A higher oil price means Russia has a greater fraction of the world's economic resources running through its country.

Other factors:

1. you get a rise in domestic inflation w a weak rouble - Russia does not have low inflation to start with. That produces winners & losers in the society and govt pressure to do something in terms of raising social benefits etc. The welfare state in Russia, with an aging population, is a major expense.

2. Russia imports a lot of what it consumes - one of the reasons inflation rises with a weak rouble. Especially things like fresh fruit & vegetables (although European sanctions & Russian countersanctions have disrupted that).

3. It *is* overall good for the Russian economy because Russia is a major oil producer and exporter-- produces far more than it consumes. And many gas contracts are tied to the oil price as well (different from USA where Nat Gas has its own pricing cycle).

So overall the net economic resources of Russia have risen. The Russian government in particular is stronger. Russia is maintaining the world's 3rd largest military (ie discounting India: US, China, Russia) with an economy the size of Italy- -that costs big money.

This last point is independent of the rouble/ dollar exchange rate, although in practice higher oil prices tends to push the rouble up (since oil and gas are their main export).

At least one conspiracy theory suggests the US engineered low oil prices in the 1980s to kill off the USSR. That did happen-- the fall in oil prices made imports of consumer goods the USSR needed to maintain political stability impossible- -so it was at least a contributing factor both to Gorbachev embracing glastnost (although the Chernobyl disaster was very important there, too) and to the political fragmentation of the USSR. But I don't think it was a conspiracy-- it just happened. Just as Vladimir Putin's career as president of Russia has been successful because it has coincided with a period of strong to very strong oil prices. The link between Putin's career and Gazprom, the world's largest gas producer and exporter, is well documented.

Russia and world trade, btw, is not new. It was a catastrophic crop failure in the early 70s that forced Russia into world markets to buy wheat. That was (with the Oil Crisis of 1973) a major cause of the wage-price spiral of the 1970s in western countries. But it also forced the pace on Detente - USSR could no longer afford to be a self-sufficient autarky against the capitalist world. We have been locked in a mutually dependent embrace for a very long time, unfortunately one where both sides have nuclear weapons.

[comeinvest]

The answer is always the same: What do you know that the market does not know?

Victoria

I think its a legitimate strategy, the question is are you willing to hold it long enough to benefit and would you be ok if "expected" is not "realized"? I personally do tilt using a low CAPE strategy, which includes Russia, but I also include other low CAPE countries both developed and emerging in my tilt, such as Brazil, Poland, Italy, and Spain. I did the math and my tilt adds approximately 10-12 bps to my expenses. That is a trade-off I can live with. So I think it's ok if it is part of a basket of countries you are tilting with, and done as cheaply as possible and with broad based index funds. That way if it doesn't pan out at least you have minimized your expenses doing it, which is one aspect which you can control.
...

What funds did you use for Brazil, Poland, Italy, and Spain, and what is the average ER of those funds? How does it compare to the ER of GVAL?

[comeinvest]

If Russia had transparency, stability, effective legal protections of foreign investor interests and corporate interests, and a diversified economy, then it would be a screaming buy at these valuations. But as it is today, it's one of the places in the world where you could actually lose 100% of whatever you invest, and it has happened before. I think it would be fine to overweight Russia, and I would say the expected returns are quite high from here. But I wouldn't go crazy with it.

Do you have evidence for your argument that "transparency, stability, effective legal protections" affects fair valuations, or is it just what you intuitively think "should" be the case? I thought research has shown that, if anything, it is the expected future positive or negative change of those parameters that affects valuations.

[asif408]

The answer is always the same: What do you know that the market does not know?

Victoria

I think its a legitimate strategy, the question is are you willing to hold it long enough to benefit and would you be ok if "expected" is not "realized"? I personally do tilt using a low CAPE strategy, which includes Russia, but I also include other low CAPE countries both developed and emerging in my tilt, such as Brazil, Poland, Italy, and Spain. I did the math and my tilt adds approximately 10-12 bps to my expenses. That is a trade-off I can live with. So I think it's ok if it is part of a basket of countries you are tilting with, and done as cheaply as possible and with broad based index funds. That way if it doesn't pan out at least you have minimized your expenses doing it, which is one aspect which you can control.
...

What funds did you use for Brazil, Poland, Italy, and Spain, and what is the average ER of those funds? How does it compare to the ER of GVAL?

The IShares country ETFs. Average ER is about 0.56%. GVAL is 0.68% I believe. Another factor is that GVAL is not commission free where I am investing and the iShares ETFs I used were, so that adds more cost.

[comeinvest]

The answer is always the same: What do you know that the market does not know?

Victoria

I think its a legitimate strategy, the question is are you willing to hold it long enough to benefit and would you be ok if "expected" is not "realized"? I personally do tilt using a low CAPE strategy, which includes Russia, but I also include other low CAPE countries both developed and emerging in my tilt, such as Brazil, Poland, Italy, and Spain. I did the math and my tilt adds approximately 10-12 bps to my expenses. That is a trade-off I can live with. So I think it's ok if it is part of a basket of countries you are tilting with, and done as cheaply as possible and with broad based index funds. That way if it doesn't pan out at least you have minimized your expenses doing it, which is one aspect which you can control.
...

What funds did you use for Brazil, Poland, Italy, and Spain, and what is the average ER of those funds? How does it compare to the ER of GVAL?

The IShares country ETFs. Average ER is about 0.56%. GVAL is 0.68% I believe. Another factor is that GVAL is not commission free where I am investing and the iShares ETFs I used were, so that adds more cost.

Point well taken, I too am a penny-pincher when it comes to money, but commissions really do not matter for most buy-and-hold strategies, in relation to any other ongoing expenses, capital allocation, or effectiveness of strategies. My commission is typically less than $1 per trade of a few thousand $.
Regarding the low CAPE strategy: You saved 0.12% in expense ratio vs. GVAL. However, have you considered this: When it comes time to rebalance within your strategy as country valuations change, you will incur capital gains tax if your account is taxable, on the whole appreciation of the countries to be rebalanced out of. If you replicate the strategy with GVAL, my understanding is that typically ETFs don't make capital gains distributions even if appreciated positions of the ETF were disposed of, because ETFs can do this via redemption units. I don't know the details of this mechanism, but I checked a few Vanguard, iShares and WisdomTree ETFs and almost none had any capital gains distributions over the last few years, although there was turnover in the funds. I do not know what the average estimated capital gains tax distributions are in the long run. I think there were boglehead discussions regarding this a long time ago on this forum. But I would think the savings from deferred capital gains tax would be higher than the difference in expense ratios. The numbers depend on country turnover, performance, and other factors, but I would estimate the tax drag from capital gains tax in the 0.5%-1% p.a. range based on total capital invested in the strategy.

[asif408]

Regarding the low CAPE strategy: You saved 0.12% in expense ratio vs. GVAL. However, have you considered this: When it comes time to rebalance within your strategy as country valuations change, you will incur capital gains tax if your account is taxable, on the whole appreciation of the countries to be rebalanced out of. If you replicate the strategy with GVAL, my understanding is that typically ETFs don't make capital gains distributions even if appreciated positions of the ETF were disposed of, because ETFs can do this via redemption units. I don't know the details of this mechanism, but I checked a few Vanguard, iShares and WisdomTree ETFs and almost none had any capital gains distributions over the last few years, although there was turnover in the funds. I do not know what the average estimated capital gains tax distributions are in the long run. I think there were boglehead discussions regarding this a long time ago on this forum. But I would think the savings from deferred capital gains tax would be higher than the difference in expense ratios. The numbers depend on country turnover, performance, and other factors, but I would estimate the tax drag from capital gains tax in the 0.5%-1% p.a. range based on total capital invested in the strategy.

These are in an HSA, and over 90% of my investments are in tax deferred accounts, so I do not consider tax implications for these strategies. If I ever get to the point where I have a large enough taxable account I'll definitely put more thought into what you say. But at this point I can't even max out my tax deferred space, so I'm some time away from that problem.

The few taxable investments I do have are in boring old total market index funds or I bonds.

[Lauretta]

well represented in an Emerging Market Dividend ETF that I bought (European listed, but ishares)

May I ask what the rationale is for buying an EM Dividend ETF (as opposed to a simple market cap weighted one)? I saw e.g. that iShares SEDY (listed in Europe) has ongoing charges of 0.65% (as opposed to 0.2% for the cheaper market cap weighted ETFs, making it a pretty big difference in the long run). So what would the likely advantages be?

[HomerJ]

Do you believe the earnings numbers though? If Russia overstates earnings by 2x on average, then the actual P/E would be 14, and it looks like less of a bargain.

Ah ok I didn't think of that; seems like that would be very dishonest though (when I think of Russia I think of Tolstoy and he was a very ethical man ) and I don't know whether such huge manipulation is even possible to do. A money manager once told me they don't invest in Russia after a European car manufacturer opened a branch there and cars started to diasapper from inside the factory (people were somehow stealing them) so probably some disgree of dishonesty exists, but I didn't think of that when considering the numbers

You should not be investing in Russia (or many emerging markets) if you are surprised that corruption and dishonesty exists.

[Lauretta]

Do you believe the earnings numbers though? If Russia overstates earnings by 2x on average, then the actual P/E would be 14, and it looks like less of a bargain.

Ah ok I didn't think of that; seems like that would be very dishonest though (when I think of Russia I think of Tolstoy and he was a very ethical man ) and I don't know whether such huge manipulation is even possible to do. A money manager once told me they don't invest in Russia after a European car manufacturer opened a branch there and cars started to diasapper from inside the factory (people were somehow stealing them) so probably some disgree of dishonesty exists, but I didn't think of that when considering the numbers

You should not be investing in Russia (or many emerging markets) if you are surprised that corruption and dishonesty exists.

but why are they more corrupt or dishonest than developed countries?

[golfCaddy]

but why are they more corrupt or dishonest than developed countries?

If you have to ask the question, you shouldn't be invested in Russia.

[Lauretta]

but why are they more corrupt or dishonest than developed countries?

If you have to ask the question, you shouldn't be invested in Russia.

you mean that Russians are much more dishonest (assuming that's possible) than say Madoff or Kenneth Lay?

[Valuethinker]

but why are they more corrupt or dishonest than developed countries?

If you have to ask the question, you shouldn't be invested in Russia.

you mean that Russians are much more dishonest (assuming that's possible) than say Madoff or Kenneth Lay?

I am hoping that you are being rhetorical and the flaws in that of reasoning (Reasoning by False Analogy) are obvious to you?

https://en.wikipedia.org/wiki/Bill_Browder

read that

That's very different from 2 people who committed crimes and were sentenced to very long prison terms for defrauding investors.

There's a difference between a systemically corrupt system where external minority shareholders simply have no effective rights and one which has pockets of malfeasance and corruption.

[drk]

but why are they more corrupt or dishonest than developed countries?

If you have to ask the question, you shouldn't be invested in Russia.

This is nonsense, and it's condescending to boot. A central idea* behind the Boglehead approach to investing is that individual investors should buy the market because they do not have the resources to beat the market. There's a lot of the market that we cannot know. I reserve the right to be surprised when I find out about shoddy security practices at Equifax or criminally misguided incentives at Wells Fargo, just as I'll excuse people who are shocked to learn that Facebook is recklessly loose with your PII. That doesn't mean that we should avoid buying them. Hell, one can't even avoid Russian corruption by avoiding funds that own Russian stocks. Look at Deutsche Bank.

* Edited from "The whole idea" to "A central idea" to avoid inaccurate hyperbole.

[LadyGeek]

Please stay focused on the investing aspects. Opinions of corruption and dishonesty are off-topic.

Update: I removed an off-topic post below. We posted at the same time.

[garlandwhizzer]

Those who hold FNDE have 13.8% of their exposure in Russia. Value and fundamental indexes like low PE and PB. EM Cap weight is less than 4%.

Garland Whizzer

[BuyAndHoldOn]

but why are they more corrupt or dishonest than developed countries?

If you have to ask the question, you shouldn't be invested in Russia.

you mean that Russians are much more dishonest (assuming that's possible) than say Madoff or Kenneth Lay?

I am hoping that you are being rhetorical and the flaws in that of reasoning (Reasoning by False Analogy) are obvious to you?

https://en.wikipedia.org/wiki/Bill_Browder

read that

That's very different from 2 people who committed crimes and were sentenced to very long prison terms for defrauding investors.

There's a difference between a systemically corrupt system where external minority shareholders simply have no effective rights and one which has pockets of malfeasance and corruption.

Precisely....While it doesn't make sense to talk honest/dishonest from an Ethical standpoint, the "Systemic" differences between countries matter.

Madoff and Kenneth Lay - eventually, once discovered/uncovered - were reprimanded by the legal process. Both are still in Prison (I believe).

Dishonest and other less-than chivalrous traits abound in Emerging and Developed markets, but there are fewer "checks and balances" in the legal/regulatory frameworks of many Emerging markets to counter them.

...and I [personally] have leaned away for doing more with Russia outside of traditional indexes. More worried about my bond portfolio at the moment

[comeinvest]

but why are they more corrupt or dishonest than developed countries?

If you have to ask the question, you shouldn't be invested in Russia.

you mean that Russians are much more dishonest (assuming that's possible) than say Madoff or Kenneth Lay?

I am hoping that you are being rhetorical and the flaws in that of reasoning (Reasoning by False Analogy) are obvious to you?

https://en.wikipedia.org/wiki/Bill_Browder

read that

That's very different from 2 people who committed crimes and were sentenced to very long prison terms for defrauding investors.

There's a difference between a systemically corrupt system where external minority shareholders simply have no effective rights and one which has pockets of malfeasance and corruption.

Precisely....While it doesn't make sense to talk honest/dishonest from an Ethical standpoint, the "Systemic" differences between countries matter.

Madoff and Kenneth Lay - eventually, once discovered/uncovered - were reprimanded by the legal process. Both are still in Prison (I believe).

Dishonest and other less-than chivalrous traits abound in Emerging and Developed markets, but there are fewer "checks and balances" in the legal/regulatory frameworks of many Emerging markets to counter them.

...and I [personally] have leaned away for doing more with Russia outside of traditional indexes. More worried about my bond portfolio at the moment

... but corrupt or not, it appears that due to low valuations, Russia generates more earnings, and Russia returns to me more dividend dollars for every dollar invested, than e.g. the U.S. market. If due to corruption, corporate assets were constantly misappropriated ("stolen") or misallocated, wouldn't it already be reflected in earnings and cash flow numbers? Earnings could be manipulated, but not dividend cash. The end result is what matters, or not? I understand that return on equity is also a factor, but I'm not skilled enough in accounting to pinpoint which numbers the "slippage" due to corruption would be reflected in. If I'm not mistaken, growth measures usually favor Russia too vs. the U.S.

[LadyGeek]

This thread has run its course and is locked (derailed on corruption).