It's An Asset Class

Last night I was IM-ing with a friend who has some experience working in the investment industry and now works elsewhere but manages is own portfolio.

He says he reads this site but who knows. People that do read this site no doubt tire of how much I carry on about foreign and emerging market investing.

My friend told me he has no exposure to emerging markets. He said he missed that boat. My friend is not one to take advice so I didn't offer.

Emerging markets is an investment class. My friend does not look at it from the perspective of having a diversified portfolio. If you were starting a portfolio today and you wanted proper diversification you would include emerging markets. Perhaps, given the run, you would hold back on a full allocation for a little while but completely ignoring an asset class could be a big mistake.

I have previously disclosed owning BLDRS Emerging Markets 50 (ADRE) personally and for clients. Over the last 12 months ADRE is up 38%. This is not great stock picking, I haven't picked a stock. I picked an asset class that any article in Money Magazine would tell you to own. I haven't looked, recently, to see if ADRE is been a leader or laggard compared to other emerging market ETFs but they are all up similar amounts I imagine. The key is the exposure.

A diversified portfolio needs a couple of holdings to go up a lot in a year to have a shot of outperformance. Just having the diversification is a whole lot easier than just trying to pick stocks.

Even in top down management, eventually stocks have to be picked. Lets use my exposure to Chile, that I've written about many time before, as an example. Clients with more tolerance for volatility own a Chilean bank. From a top down assessment I decided I wanted to own Chile. Since commodities are what drive the economy (similar to Australia) I didn't think I necessarily needed a materials stock.

There are several financial ADRs from Chile. Once I decided I wanted to own Chile, I hoped that by some sort of bottom up study I could find one to own. I picked one and lucked out. The name I bought actually did a little better than ADRE over the last year.

Even if I had not been lucky with the pick and gone with one of the other names I would have wound up with a stock up almost 20% and better than a 5% dividend.

I'm not sure that Chile finds its way on to the radar of a lot of bottoms up people. In this example I only had to get one thing right, Chile. I did not have to be right about emerging markets because I will always have some exposure, that's just being diversified.

My wife just woke up, I have to help cook a turkey. Happy Thanksgiving!