There was an interesting post from IndexUniverse that I found on Seeking Alpha by Matt Hougan about six intriguing asset classes available via ETFs.The six Matt cited are international small cap, China, Japan, bonds, themes (like timber and water) and the last one was more of what might come in the future as opposed to current ETFs and here he cited maybe a 130/30 or a market neutral fund.
I think the investment product evolution we have been witnessing in the last few years is leading to retail investors (whether they are on their own or hire someone) being able to assemble portfolios in the same manner as pensions and endowments.
Currency is an asset class. Infrastructure is an asset class. Absolute return is an asset class. Private equity is an asset class.
I've been writing favorably about using currency and infrastructure for a while, I have written about absolute ideas a few times as more of an exploration but I have not been a fan of private equity products. PowerShares has two private equity ETFs, PSP and PFP. I wrote about both of them for TheStreet.com and concluded that these were more like proxies for the financial sector as opposed to actually capturing private equity.
There is a closed end fund that is kind of in the ball park but I am not sure what to make of the result. You might remember the MVC Capital Fund (MVC). Originally it was an exchange traded product (CEF) that was to provide direct access to a venture capital fund. It floundered for years, had some controversy and now may have righted the ship. So maybe it took six years or so before righting itself. If you look at the holdings it seems like it is more like a pool of capital as opposed to a company that benefits from managing a pool of capital like most of the contents of PSP and PFP. To be clear I don't own MVC nor have I studied it.
The ultimate goal of this sort of study, as I see it, is smoothing out the ride where possible. Invariably if this evolves the way I think it will there will be people who misuse these products and blow themselves up. It happened with tech and based on emails and blog comments people made similar, albeit generally less dire, big bets on emerging markets and Canadian royalty trusts.
I make a point of reiterating moderation with anything and that will go for whatever great thing might be coming.
The picture is not a fire I fought but it is a cool photo.
11 comments:
The so-called "small cap international" funds still don't deliver the asset class they promise. GWX is 48% mid-cap and DLS is 62% mid-cap.
DFA and OAKEX come much closer to what one would expect: 44% mid, 44%small,and 12% micro AND 34% mid, 50% small, and 12% micro. Unfortunately DFA is not available to individuals and OAKEX is closed to new investors.
I'm still waiting for someone like Vanguard to wise up and offer a legitimate international small cap index product.
TomK
According to the WisdomTree site 76.53% of DLS' holdings are below $2 billion market cap.
What am I missing in your comment?
Another way to get private equity is units in Conversus Capital (CCAP.AS on Yahoo Finance).
Conversus is similar to a closed-end fund, but it holds a bunch of large private equity limited partner interests.
Right now, it's not all that liquid, but I believe after the first of the year that situation is supposed to change.
Roger,
I was using Morningstar - their site classifies DLS as a mid cap value fund.
I actually own DLS as a proxy for intl small cap value in my lazy portfolio because there isn't a better alternative out there. The problem is I can't be very precise about what is being allocated to certain asset classes if the funds available don't truly reflect the asset class they're supposed to.
I own DLS also. Regardless of M-star, I am inclined to be more intersted in the info from the company site but either way.
I got caught with my hand in the Canadian Income Trust cookie jar. It hurt. It still hurts.
1:21 PM Anon. I feel your pain. I also owned several Canadian Energy Trusts, recently sold the last one at a loss, and about broke even over a 2-3 year period taking the dividends into account. The Canadian politicians lied and have probably hurt their country in the process. I know it will be some time into the future before I feel I can trust what the Canadian gov't says. JCarr
Anon 1:31,
I agree, it was a complete lie. Grandma couldn't survive on under 4% (bonds), but she could on 12% (which Canadian Income Trusts were going for). They are still paying her but the value has already been lost. I've been reluctant to just give up and sell cause its still giving her revenue and many are being bought out for well above their current values (in other words at current prices they are good investments so why sell at this price (especially when they still giving me ~12%)?
Roger - how do you suggest using currency in your portfolio, beyond hedging? Unlike stocks, currencies are a zero-sum game. Stocks have an upside bias, but currencies do not since they trade relative to each other. The dollar wont go in one direction forever.
Phil I use the ETFs from Rydex and I don't think they are zero sum at all. I think of options as being zero sum.
They will obviously either go up or down and to be sure the dollar is not one way, i have said as much before.
I have also described how I use the ETFs in past posts. I think of cash in the same way I do stocks and bonds--I want some portion exposed to foreign. I use a small portion only and really just hope for it to stay about even and pay the interest.
Being a small allocation i won't be hurt if the dollar goes up a lot.
Longer term I do think the dollar is headed lower but there will be years where it is stronger. 2008 being one of those years would not be a shock. That is not a prediction just my way of preparing to be wrong.
Finally, I don't suggest anyone use anything, I do say it is an asset class and I do think do-it-yourselfers should learn about the asset class to decide for themsleves whether to participate in that market or not.
There is obviously nothing wrong with a small allocation to a currency ETF, and clearly it wont have a high corr to a equities, but the investment is very much a zero-sum, or a 50-50 bet.
The value of a currency relative to another may change, but the basket of all currencies will always equal 1. You dont buy Euros, you buy EUR/USD, or EUR/GBP or EUR/JPY, etc. Any of those bets is a 50-50.
Alternatively, equities, bonds, commodities, baseball cards, etc. can all appreciate over time.
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