As a follow up yesterday's double post here and at Greenfaucet about sector investing and thematic investing based on articles from the Journal of Indexes, there was another article of interest called Sectors In The World of Global Investing.
It is written by David Blitzer and Maureen Maitland. While I will not likely out debate Blitzer on anything I do disagree with his central thesis which is that country selection matters less and less as sector selection matters more and more.
Anyone who has ever read this site will know I am a huge believer in sector investing but country selection is just as important IMO.
Many countries are known for a certain something like Norway and oil, Brazil and natural resources and so on. A decision needs to be made as to whether you want your exposure to a country to be in the area that it is most known for or not. This ultimately boils down to an opinion but for Norway and Brazil I do want what the countries are known for. But for Australia I went with a bank instead of a resource company. For me the process of portfolio building involves selecting countries and then figuring out how they can work into the portfolio best.
During the worst of the bear market (assuming the worst is really behind us) much attention was paid to the fact that correlations all went up (everything went down) and so many people said that diversification did not work.
My thoughts about this have been the same since long before the last bear market started. We saw in the bear market earlier in this decade that all markets went down then as well. The expectation I tried to set here for our clients (and any readers so inclined) was not that other markets won't go down but that might do so on a slightly different time table than our market and thus could start to turn up sooner than our markets. Anyone going in with this expectation may not have concluded foreign diversification did not work.
Another long running theme here has been that the best chance for this different timing effect is to select countries with different economic makeups from the US. For example commodity based economies have a very good chance of being on different economic cycles and so different stock market cycles. I've been writing about Norway, Australia, Brazil and Chile in this light for years.
On the last go around Norway, Brazil and Chile lived up to this billing one way or another.
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3 comments:
Maybe a little OT--Interesting story at bloomberg.com this morning about heads rolling at the Norway sovereign wealth fund. It appears that returns were highly correlated with the market over the past decade. Not surprising, since it holds positions in "around 8000" companies. Holy cow, 8000 companies to follow?
Roger,
I think your approach is good, but the correlation is so high these days that you will never get the benefits from diversification you expect.
It will not always be this way and there are likely still benefits to diversification, just less that normal.
I wish Index Universe had made it a bit more obvious that the person who wrote yesterday's sector article on Index Universe was a representative of Alps.
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