Our Arizona Sundogs put on quite a show in their franchise home opener as you can see here. Unfortunately they got waxed 6-0. The game was fun, the action was good and there were a couple of fumbles along the way that you might expect from a new minor league hockey team. We will definitely go to more games.On to market related stuff. There was an article in Barron's last Tuesday that quoted several different money managers opining about how much foreign exposure they have now or how much they plan to have in the future.
One advisor was quoted saying "her firm will not allocate more than 15% of a client's portfolio to one sector, including international, as a way to control risk." This seems like a peculiar comment to me. I count 22 single country ETFs from iShares. Of the 22, twelve have a correlation of less than 0.60 to the S&P 500. I would say that risk control is the result of how a portfolio's components are blended not whether a specific holding is volatile or not. Of the 20 single country funds that existed from 1/1/2001-12/31/2002, nine outperformed the SPX, this during a particularly bad run for the US market. Of those nine, seven outperformed dramatically.
The manner in which this person is quoted (here I am saying the above quote could be out of context) makes it seem like she really does not understand foreign investing or diversification. Assuming the quote was wrong and she does know, you will no doubt encounter people that you maybe looking to have help you that don't know.
Here I think the onus is on you. It is not that difficult to learn the big macro for some other countries and to also learn generally how volatile those markets, what makes them tick, how they correlate to the US market and how they could incorporate into a portfolio.
If your plan is to manage your own portfolio I think you need to be willing to explore and learn about this sort of thing. I don't think you can just count on hiding out in iShares EAFE (EFA) either. It looks like it listed in summer 2001. From its inception until 12/31/2002 it dropped by the same amount as the S&P 500.
EFA has never been my first choice for foreign diversification. I own it for a couple of accounts where circumstantially it is what fits but there are countless alternatives that are superior.
9 comments:
How about some examples of what you think is superiour to EFA? Because I am "hiding out" in EFA, EEM and EWC.
> rs
EFA and EEM are excellent core holdings, but because they are cap weighted and lean towards growth stocks, I believe they should only represent about half of your international holdings. Unfortunately, there aren't a lot of good options to accessing small cap international stocks unless you buy a managed fund or have access to DFA funds.
You might want to look at I-Shares MSCI EAFE Value Index(EFV) to plus-up your value allocation. Also look at WisdomTree Int'l Small Cap Div Fund (DLS).
State Street and Vanguard have announced new funds: SPDR S&P World (ex-US) Small Cap ETF and Vanguard small cap international index fund.
Once you have a balanced cap/style allocation to EAFE and Emerging, you can overlay small theme positions using country, region, or intl sector ETFs.
I wish more people would talk about correlation.
Non-correlated international investments would make it easier to ride out market cycles.
Where can one find the correlation of various ETF's to the S&P500?
Hi Roger,
I enjoy reading your Big Picture Market musings, and wanted to comment again on your thoughts – I liked you comments on Barron’s article where different money managers talked about how much foreign exposure they have now or how much they plan to have in the future.
I was also exploring other Web musings, and came across Benjamin Graham’s principles, and I think they apply to all aspects of investing, even in foreign stocks. Here are seven of his principles on buying stocks that I believe are worth hearing sharing:
1. The companies should be soundly managed.
2. The companies have demonstrated earning capacity with a likelihood that this will continue.
3. The companies should have consistently high returns.
4. The companies should have a prudent approach to debt.
5. The businesses of the companies should be simple and investors should have an understanding of the companies.
6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety.
These principles align with our ideals at Stillwater Capital of providing the potential for clients to preserve and grow their capital using a risk-controlled approach to investing.
Thanks for listening! -- Jack Doueck
Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital
As investors hurt by Amaranth this month sort through the damage, here are some principles they may want to have in mind:
1. Sophisticated hedge funds apparently have no clue about should have basic concepts like money management, position sizing and ‘risk of ruin‘ knowledge, and should use stops or have a point where they know to exit.
2. Bennett McDowell once said that, “Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.”
3. The smaller the amount you risk for any one trade relative to your capital base the lower the risk of ruin.”
4. And of course it goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups.
5. With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion).
How do we avoid these two pitfalls of investing in hedge funds?
The answer is long and complex. It takes years to walk on the high wire and not fall off. If you're a long term hedge fund investor and you haven't been burned by one or both of these, you've been either incredibly skilled or incredibly lucky. I should know, for I have been burned by both of these. We have invested billions of dollars in hedge funds over the last ten years in this business. We have done well despite our battle scars and thankfully we have been blessed with a lot of good luck from above.
Suffice it to say that this should be the main question investors should be focused on as they interview and select hedge funds to entrust their dollars to.
Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital
At Stillwater Capital we believe that all hedge fund managers with more than $25 million under management or more than 14 clients should register with the SEC. We have been registered with the SEC and went through a thorough but appropriate audit last summer. The SEC Auditors checked all our books and records, and reviewed our checks and balances, trying to discover any conflicts of interest, any inconsistencies between what we promise our clients and what we actually deliver. They checked the books and records of our funds and our management company. When I saw the level of detail that they paid attention to, I was very excited about the possibility that EVERY hedge fund that we invest in would be subject to these periodic audits without a lot of notice. That is a good check for the industry in general. Our Stillwater Asset Backed Lending business invests money with other asset backed hedge funds which are complex and difficult to do the due diligence work on. If every one of these funds were audited by the SEC, we would feel much safer and more certain that these managers would be operating in accordance not only with GAAP, but with
the rules of the SEC, that they are delivering what they are promising and that there is less of a chance of foul play.
That being said, the best way to regulate the Hedge Fund Industry is for SEC to require that every manager publish or make public their assets (in general, without specifics) via independent administrators and brokers on a monthly basis. That would further deter greedy and reckless managers from fraud. Our decision to register with the SEC was a good one and we hope managers follow our lead.
Jack Doueck
Stillwater Asset Backed Strategies
Does being an Accredited Investor actually make you a Sophisticated
Investor?
Robert Smith is 41, well educated having gone to Harvard and then Yale for
his masters. Lives in Minneapolis with his wife and two kids. Owns is
home, makes $150,000 a year and works hard as an analyst for a mutual fund.
Has $750,000 in savings, reads the Wall Street Journal every morning and
watches CNBC all day.
Jenny Burns is 21, skipped collage to pursue her "acting" career. Lives in
California, loves MTV and VH1, rents her apartment, watches Charmed and The
OC. Has never taken a business class, never read a business magazine or
paper and doesn't understand the difference between an equity and
bond.thinks the stock market is like Costco. Last month she inherited $1.1
million dollars from her grandmother.
Guess who the "Sophisticated Investor" is under the law??? You got
it: JENNY.
Under the current "Accredited Investor" rules, Jenny is considered the
Sophisticated Investor and can invest in some of the best and brightest
hedge funds around, while Robert can not. For some strange reason the
government is under the impression that just because someone has money, it means that they must be able to understand and analyze investment choices!
There should clearly be an updating of the current rules and regulations
that more realistically reflects the true definition of a "sophisticated
investor" and takes into account knowledge, intelligence and education.
Jack Doueck
Stillwater Asset Backed Lending Division
How to invest in Hedge funds and avoid Hedge Fund Fraud in the process:
We have been investing in hedge funds for more than a decade and we found that there are two ways to avoid fraud and blowups in our investments has been:
First: to NEVER invest in a "One Man Show". That is a fund run by one person who "does it all" with no checks and balances, no one to bounce ideas off, no one to keep him honest. One man that can get desperate one day and take huge bets or misappropriate funds.
Second: to NEVER invest in a fund which does not allow some level of
frequent transparency. Investing with a seeming successful manager that
pretends to be "closed" and says "trust me, I'm great, you don't need to know anything more....you're lucky to get in..." increases your chances of being a victim of a fraud or a blowup. We have invested billions of dollars in hedge funds over the years and even in our Stillwater Asset Backed lending strategies, we insist on monthly transparency. When we could not get this, we regretted investing and learned our lesson.
Jack Doueck
Stillwater Asset Backed strategies
Many small to medium size law firms are constrained from growing by a lack of capital. That doesn't have to be the case. At our firm, Stillwater Capital in New York, we have a specialty lending to the legal industry. We have a fund that lends money to small and medium sized law firms and the loans are collateralized by a secured interest in the firm’s fee income. The fund underwrites the loans by carefully analyzing many of the borrower's major cases and lends only a
portion of the prospective income. The program has been highly successful.
Richard Rudy, Stillwater Capital
Insurance Premium Financing
Some have a sense that there's a morbid element to the business in that
a more successful transaction is one in which the stakeholder hopes for
an insured's ill health.
On the other hand, the economic reality is that there exists an arbitrage - a mispricing - that seniors can now monetize. And there are many seniors that would like to know that and take advantage of it. I feel they should be able to do so. There are lenders, such as
Stillwater Asset Backed strategies, which take an approach that focuses
on allowing the insured to benefit from the 'asset' that's truly theirs.
My real concern is the failure of many players to disclose the key
risks:
- potential loss of future insurability
- potential tax issues
- etc.
If the risks are properly disclosed, then it becomes a marketplace issue and I am a believer in allowing participants, once informed, to make their choices. Life insurance is a critical tool to individuals but my gut sense is that the industry is not, on the whole, jeopardized by senior life settlements.
Richard Rudy, Stillwater Asset Backed Strategies
ACL,
Someone posted this think on the preceeding thread: http://www.spdrindex.com/correlation/
Cool tool but you can't limit it to ETFs.
I actually agree with the manager Barron's quoted to an extent. Most people have a specific country in mind to benchmark their investments against (usually the one they plan on living in permanently). To treat international as a single sector is somewhat correct (although I would say 15% is too low) as you are most concerned with achieving acceptable results in the home country.
Of course you're right too - diversification is not as simple as X% international, Y% bonds, Z% shares.
With the state of the American economy, why not invest the majority of your assets in foreign stocks. For every outstanding American stock there is an equally outstanding foreign stock. Why not buy outstanding top of the line foreign stocks in countries that have more a stable economic out look. A stock like Total it seems to me is as well thought of as Chevron.
i do not think the people that advice limiting your international exposure are only worried about volatility.
Rightly or wrongly it is often stated that other markets, economies and political structures are not as mature as ours. The implication is that you run the risk of ruin due to events such as a country defaulting on its debt, currency devaluation, violent change of government or other similar events. With that argument in mind, the correlation with the SPY is really irrelevant.
Lumping everything outside the USA as one international sector with a 15% cap seems random and meaningless. I do not know how you can group the economies of Japan and Bangladesh in one "international sector".
Making things even more complex is the fact that many US based multinationals derive a large portion of their revenues from overseas. Do we include XOM in the 15% cap, because the majority of their products are produced internationally? How about Toyota? a foreign company listed in the USA that gets a large portion of its revenue from US sales.
How about the fact that China and Japan own a chunk of America via t-bonds and t-bills. How would that factor in the 15% cap?
p.s. i think you should add a special section for those wanting to shamelessly promote their business instead of having them take over the comments section.
As I see it, (and lord knows I should turn this into a blog post).
1. EEM is hopelessly dominated by VWO (The vangaurd EEM etf) which follows the exact same index except with 80% lower expenses.
2. My take is that a core equity position should be about 60% US and 40% ex-US. Mostly because US investors are already very exposed to the US economy by virtue of living here in the US.
3. Shortly, SSgA is going to introduce the MCSI world ex-US ETF which will cover the entire world (developed and emerging) on a market cap weighted basis. This will be the ultimate international etf.
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