Tag Archives: opinion

The Long-Term Superiority Of Frontier Markets, Emerging Markets, And Gold

Summary Higher value will be found in frontier and emerging markets in the future. I plan to focus solely on frontier and emerging markets in Asia, Latin America, and Africa. The threats these markets are facing have created low valuations, and consequently a flurry of buying opportunities. I was extremely grateful to hear that the Fed decided to delay hiking interest rates, as this would have resulted in an unnecessary relegation of frontier and emerging markets. A strong USD, low commodity prices, and low investor confidence in frontier and emerging markets has resulted in extremely low valuations. Therefore, there are a flurry of investment opportunities available in frontier and emerging markets, for those willing to take a long-term view of these markets’ potential. A rationally constructed portfolio, with low valuation, invested into high-growth frontier and emerging markets, is highly unlikely to fail in the long term. As a Seeking Alpha contributor, my objective is to promote the superior long-term value of frontier and emerging markets in Asia, Latin America, and Africa. The FX risk of frontier and emerging markets is certainly justified by the high growth, low valuation, and high dividend yields. I am skeptical of the recent increased strength of the USD, and personally prefer investing in gold, frontier markets, and emerging markets. Vietnam: Low Valuation + High Growth = Paradise In my opinion, Vietnam is clearly the most superior destination for investment in Asia. I recently posted an article on Market Oracle explaining the growth of the Asian Hedge Fund industry, which mentioned that Vietnam was the superior location for investment, due to high growth and low valuation. I remained shocked as to why a large portion of investors are still deciding to take a wait-and-see attitude with Vietnam, only to potentially arrive too late, when valuation is higher. Increased consumer spending has been a substantial catalyst for Vietnam, which recently experienced annual GDP growth of 6.44% . Vietnam’s stock market has had a P/E of approximately 12, a far cry from the valuations in other Asia. The fusion of low valuation and high growth in Vietnam results in the country being a superior destination for value investors. Moreover, the Vietnamese dong has been a relatively stable currency, and the FX risk is well worth taking, considering the low valuation, high growth, and high dividend yields. Investors can invest in the VinaCapital Vietnam Opportunity Fund( OTCPK:VCVOF ) and Vietnam Holding Ltd.( OTC:VNMHF ) on the US OTC market, although higher liquidity can be found on the London Stock Exchange Listings. Anytime I mention Vietnam, I also highly discourage investors from investing in the Market Vectors Vietnam ETF(NYSEARCA: VNM ), based it on its poor historical performance. India: Small Cap Approach India’s economy has also had substantial growth, with most recent annual GDP Growth of 7% . As ETFs that invest their assets in India generally have high valuation, I have previously promoted the small cap approach to India. Small cap ETFs have lower valuation, and have had substantial earnings growth. This can be accessed through the Market Vectors Small Cap ETF(NYSEARCA: SCIF ) and the EG Shares India Small Cap ETF(NYSEARCA: SCIN ). Other favorable aspects of India include projections for continued high economic growth, high growth driven by consumer spending, relatively low inflation, increasing disposable personal income, and the country having the world’s largest youth population. The Philippines: High Growth at a High Price The Philippines has been experiencing substantial economic growth, with some noteworthy developments including the high growth of the business process outsourcing industry and the growth of townships outside of Manila. While the investment environment and growth is favorable, its appeal is somewhat offset by the high valuation. The Philippines’s stock exchange currently has a P/E of 25.05 , and the iShares MSCI Philippines ETF(NYSEARCA: EPHE ) currently has a P/E of 18. The Philippines can certainly be characterized as a high growth, favorable investment environment, although the valuation is a bit too high. Indonesia: Approach with Caution Indonesia is certainly no economic paradise in Asia, but I have identified a specific buy opporutnity for the Aberdeen Indonesia Fund(NYSEMKT: IF ), due to its low valuation and high discount. Favorable aspects of investing in Indonesia include growth in consumption, recent annual GDP growth of 4.67%, and high loan growth rates. I would not recommend investing in other ETFs with higher valuation, due to the substantial inflation and FX risks that Indonesia presents. Pakistan: A Contrarian Suggestion Pakistan is certainly a contrarian place to suggest , although the country’s decreasing terrorism and stock market’s yearly gain of 16.31% certainly justify this as a viable suggestion. Valuation is substantially low given the consistent rise of the Karachi Stock Exchange, making now a strategic time to enter. The newly launched Global X MSCI Pakistan ETF(NYSEARCA: PAK ) provides exposure to a variety of publicly listed companies in Pakistan, and currently has a P/E of 9.12. Chile: Latin America’s Highest Credit Rating Chile is another excellent site for investment , although its economic growth has been offset by the plunging price of copper. However, the country is continuing to fare well in terms of economic growth, and has the prestige of its banking industry to offer to investors. Chile’s banking industry has the highest credit rating in Latin America, and three of its banks are available to US investors at extremely low valuation. These banks include Banco de Chile (NYSE: BCH ), Banco Santander Chile (NYSE: BSAC ), and CorpBanca (NYSE: BCA ). General exposure to Chile’s economy can be accessed through the iShares MSCI Chile Capped ETF (NYSEARCA: ECH ) Colombia: Rebound I have also been following Colombia, based on my conclusion that low oil prices have unjustly lowered the valuation of many companies in Colombia, particularly in the banking industry. The most convenient way for investors to gain exposure to Colombia is through the Global X MSCI Colombia ETF (NYSEARCA: GXG ) which currently trades at 9.02, a far cry from its 52 week high of 19.72. Despite the current low oil price, Colombia has still been able to economically thrive and lead Latin America in terms of economic growth, with most recent annual GDP growth of 3% . A rebound in oil prices is essential for full recovery, but now is certainly an excellent time to investigate investment opportunities in Colombia. Investors can gain exposure to Colombia’s high growth banking industry through BanColombia S.A. (NYSE: CIB ) and Grupo Aval Acciones Y Valores S.A. (NYSE: AVAL ). Nigeria: Strength in its Newly Diversified GDP I have previously mentioned that Nigeria’s newly diversified GDP offsets the risk of the current low oil price environment. Moreover, while the threat of Boko Haram is substantial, it can not offset the high growth of consumer products, construction, and banking industries in Nigeria. The Global X MSCI Nigeria ETF (NYSEARCA: NGE ) offers very convenient exposure to Nigeria, with my biggest concern being the high valuation of the consumer products industry. The construction and banking industry are the most favorable sites for investment, with low valuation and high growth. The fund’s P/E is currently 8.22, which further justifies the logic of investing in Nigeria, although a further plunge in oil prices would prove to be damaging to the fund in the short term. Gold: On the Rise after The Fed’s Delay The Direxion Daily Junior Gold Miners Bull 3X ETF (NYSEARCA: JNUG ) rose by 10.63% after the Fed announced its decision to delay hiking interest rates. Historically, this fund has traded substantially higher, before QE in 2014. The historically higher price of gold, and this fund in particular, presents opportunities for investors willing to take a long term bullish view on gold. Volatility of this fund has been substantial, but its recent bottoming out presents opportunity. Investors should be willing to hold long term, as some financial experts have mentioned the likelihood of gold falling near $800/ounce. JNUG data by YCharts Conclusion To quote Jim Rogers , ” The US Dollar is not a safe haven, but people think it is; that’s why they put money there.” The rise of the USD, and its prestige as the world’s reserve currency, should be questioned by those investing in companies in the United States. Gold is certainly a conservative alternative, for those who do not want to risk investing in frontier and emerging markets. Furthermore, I consider the high growth environment of frontier and emerging markets to be superior to options in the United States. Plunging commodity prices and the strong USD are relevant threats to be acknowledged, but will be unsuccessful in presenting a long term threat to frontier and emerging markets. I do not focus on general emerging market funds, due to the discrepancies in opportunities in emerging markets. Thailand Malaysia are two examples of countries that I am concerned with, and would not invest in. Proper due diligence can result in a successful value based investing in frontier and emerging markets. The undertakings of the Fed will not be able to offset this in the long term. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long JNUG, GXG, NGE, IF, BCA, BCH, BSAC. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Why Comparing Returns Is A Bad Way To Choose An Investment Manager

Summary Short-term or recent returns give little information about future returns, and they increase the odds you’ll make a bad decision. Far too often, investors put significant weight on short-term performance, in many cases by choosing the investment with the highest recent investment return. This tends to actually produce future underperformance. The better way to choose an investment manager is to look at service, fit, and investor returns. The greatest trick the stock market ever pulled was convincing investors that historical returns are predictive. They aren’t. In fact, historical returns not only give you very little information about future returns, but they can also increase the odds you’ll make a bad decision. We often see this bias in investors. Both reporters and prospective customers often ask us, “What are your returns?” I cringe when I hear this. Out of all the questions you should be asking, this one should be low on the list. There are far more informative and useful questions to ask, once you know what’s in our portfolio . To be fair, there are aspects of the answer that can be helpful. Returns can give you an idea of the size of upswings and drawdowns, and how the portfolio relates to other asset classes. But in a passive, index-tracking portfolio, such as Betterment’s, you shouldn’t expect to see market alpha in our performance. When properly benchmarked, we are the benchmark. The other common mistake people make is comparing our portfolio to another over a short period of time. If, after six months, our portfolio has a lower return, they’ll often ask, “Why should I use you if your returns are worse?” Far too often, investors put too much weight on small sample, recent historical performance, choosing the investment with the highest investment return. How deceptive can this be? Our interactive tool below shows that this method leads to astonishingly high odds that they’ll underperform both in absolute and risk-adjusted terms in the future. How the Data Deceives You might not realize it, but when you look at historical returns, you’re doing a statistical analysis. Any set of historical returns comprises a sample of behavior over a certain period. Any inferences you make about what they tell you of the future should be balanced by placing them into context of how variable they are. And when you do that, two clear issues arise. Fooled by Randomness The first is being “fooled by randomness,” a phrase coined by Nicholas Nassim Taleb, a risk analyst and statistician. When you choose the highest returning of two correlated investments using a small sample of historical data, the odds are incredibly high that you picked the wrong fund. The randomness of small samples overwhelms the truth. Let’s work through some examples. We’ll use hypothetical portfolios with return probabilities we know for certain, because we’ve created them through simulation, and see how well the short-term data mimics the long-term truth. These are not Betterment portfolios. Portfolio A will have a mean annual return of 6% and a volatility of 14%. Portfolio B has a mean return of 6.5% and annual volatility of 13%. The portfolios will also have a 0.90 correlation to each other-most stock funds have higher correlations. By both measures of absolute return and risk-adjusted return, Portfolio B is better. Yet over the first randomly simulated six-month period, Portfolio A came out ahead. One 6-Month Simulation (click to enlarge) How often does the worse portfolio come out ahead over a short time period? In this case, we’ll call them C and D, with the same parameters. Let’s look at running 1,000 of such simulations over a six-month period. How often does Portfolio D, who should be the winner, come out ahead? Many Simulations Over 6 Months (click to enlarge) The answer is so close to 50% as to be indistinguishable from it. In fact, we can increase the differences in expected returns and this remains true. Let’s give Portfolio D a mean return of 8% and Portfolio C a mean return of 6%. Both have 14% volatility. The significantly higher return Portfolio D will still lose over 40% of the time over a six-month period. Many Simulations Over 6 Months (click to enlarge) While the odds are just better than 50/50 in the short term, they have big consequences in the long term. Here are the distributions of 20-year outcomes for those same portfolios: Many Simulations Over 20 Years (click to enlarge) The randomness in half-year returns results in choosing the wrong portfolio about half the time, even with large difference in return. You might as well save yourself the time and expense and flip a coin. Over long periods of time (20 years), and with large differences in average returns, the odds of picking the correct choice do increase. But you may be surprised how long it can take. For portfolios with a 1% return difference, by 20 years you still have about a one-in-four chance of picking the portfolio that will have worse underlying returns over even longer periods of time. Chance of Choosing Worse Portfolio Based on Performance Return Difference 3 months 6 months 1 Year 5 Years 10 Years 20 Years 0.50% 49% 48% 48% 42% 40% 37% 1.0% 47% 46% 44% 36% 32% 26% 2.0% 44% 43% 37% 26% 16% 9% Each cell based on 3,000 simulated cumulative returns of better portfolio (8% return) versus a benchmark portfolio with a mean return of 6% and 14% volatility. Correlation of 0.90 between portfolios. To be clear, there are statistical tools you can use to improve your odds of picking the right portfolio, but most investors aren’t professional statisticians. They just go by the cumulative returns over a short period of time. Performance Chasing Is Worse Than Random If the low odds of correctly choosing a better portfolio above didn’t convince you, it’s even worse than that. Empirically, choosing the best funds, a strategy called performance chasing, is likely to reduce your returns. The graph below comes from an excellent research paper from Vanguard. It shows the returns achieved by investing in the best fund in each asset class, compared to a buy-and-hold strategy. Performance chasing-picking investment based on recent performance-produced worse returns of about -2% to -3.5%. Buy-and-Hold Superior to Performance Chasing, 2004-2013 (click to enlarge) If every year, you picked the investment manager with above average returns over the past 12 months, you’d end up underperforming an investor who stuck with the passive index-tracking manager. The Right Things to Consider If recent investment performance is such a poor way to choose an investment manager, how should you select one? Use a set of clear principles that are likely to be true in the future: Monetary Cost: A certain drag on returns, if the service doesn’t deliver value above cost. Consider commissions, trade fees, and assets under management (AUM) fees. Non-Money Costs: How much time and and effort does it take for you to use it well? Does it have a high time or stress cost for you to get the most out of it? Services Offered: Do the services offered make you better off? Does it do things for you which you wouldn’t do yourself? Does it help you make better decisions? Does it make some of those decisions for you, automatically? Experience: Is it easy to use? Do you enjoy using it? Philosophy Fit: Consider its investment philosophy, and if it is parallel to yours. Some funds seek to deviate from the index and cost more, some seek to track it passively. Tax Management: Returns will likely not take into account actual value-adds , such as tax loss harvesting. You won’t have received a comparison tax bill that allows you to compare after-tax returns across services; it will be up to you to compare them. Behavior Management: Does the service have a proven track record of reducing the behavior gap? When choosing an investment manager, the key isn’t to focus on investment performance; it’s to focus on service, fit, and investor returns. Information in this article represents the opinion of the author. No statement in this article should be construed as advice to buy or sell a security. The author does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision.

Balanced Investing For Balanced Living

In the market’s never-ending story, we never know how its most recent action will play out. One thing we do know is that when the market is more volatile than usual, investors who lack a personalized, long-term plan to guide their way are far more likely to make the wrong moves by the time the cycle is complete. In our opinion, every investor’s long-term plan should include embracing a buy, hold and rebalance approach to investing. This is one of the simplest and most effective ways to diversify, and it may help you prosper in various financial markets over the long term. To achieve this goal, a portfolio is initially allocated based on each investor’s needs across different asset classes, such as stocks, bonds and real estate. The portfolio mix is then maintained by periodically rebalancing. Winning investments are pared back, and underperforming investments are increased during a rebalancing. A rebalancing can occur on a specific date, such as a birthday or anniversary, or it can be done using a percentage of asset method. See my book All About Asset Allocation for a detailed discussion of rebalancing techniques. Figure 1 is an illustration of rebalancing using a 50% stock and 50% bond allocation. When stocks gain versus bonds, their percentage or allocation becomes too large. Shares of the stock investment are sold, and the proceeds are reallocated to bonds. This serves as a risk control mechanism for the portfolio. Another effective way to rebalance is to employ new dollars when they are available. For example, if you were to receive a modest lump sum of cash , you could use it to “feed” the portion of your portfolio that requires additional assets. If you were underweighted in bonds, for example, you could apply the new dollars there. This helps you rebalance, while minimizing the transaction costs involved. Figure 1: Rebalancing a 50% stock and 50% bond portfolio (click to enlarge) (Chart by R. Ferri) Some financial pundits criticize a balanced approach. They say a buy, hold and rebalance strategy is simple-minded and a relic of the past. Often, their solution is to be tactical, meaning they suggest that investors aggressively move in and out of the markets in an attempt to avoid the worst returns and capture the best ones. As it turns out, the data suggests that more than half the experts fail to time the markets correctly ; their portfolios are expected to fall short of the simple strategy they mock so much. Consider Figure 2, which illustrates the returns of a portfolio initially allocated to 50 percent in stocks and 50 percent in bonds from January 1, 2007 through August 31, 2015. The period begins just prior to the worst bear market in recent memory, and includes a surge in stock prices that occurred in the years thereafter. The proxy for stocks was the CRSP Total Stock Market Index, and the proxy for bonds was the Barclays Capital US Aggregate Bond Index. Both indexes hold broad representations in their respective markets. The 50/50 portfolio was rebalanced monthly; annual rebalancing works just as well. Figure 2: Comparing a 50/50 Bond/Stock Portfolio to Each Index (click to enlarge) (Source: CRSP and Barclays Capital data from DFA Returns Program, chart by R. Ferri) At least on paper, every stock investor lost portfolio value during the crushing bear market that began in October 2007. Prices were down nearly 60 percent from peak to trough. A 50 percent stock and 50 percent bond portfolio was down about 20 percent from the peak. Even a portfolio holding only 20 percent in stocks didn’t escape the bear, and was down about 5 percent by the time the market hit bottom in March 2009. Still, Figure 2 shows that the 50/50 diversified, rebalanced portfolio fared quite well during the bear market and the recovery that followed. The return hasn’t matched a 100 percent stock portfolio over the entire period, but the volatility was considerably lower – and volatility matters! Investors who assume the party will never end and take on too much equity risk when the markets are surging upward over extended periods run the risk of capitulating in the next bear market. They often lack a disciplined plan to see their way through, and may never fully recover the realized losses they incur after selling. Lower volatility created by a disciplined allocation to stocks and bonds helps keep you invested during all market conditions. Ideally, our crystal ball could tell us to get out of stocks before the crisis, but realistically, no one knows what the market is going to do in the future. We invest in stocks because in the long term, the returns are expected to be substantially better than those from bonds. We need this growth just to stay ahead of inflation and taxes. Patience is a virtue, though. Bear markets occur without warning; bull markets often follow on their heels with equal unpredictability. And so on, and so forth. Only those with discipline throughout can expect to build wealth according to a rational course, rather than depending on random and very fickle fortune to be their “guide.” Balanced investing is part of balanced living. A buy, hold and rebalance strategy using broad market index funds is one of the simplest and most effective ways to diversify and prosper over the long term. It helps keep us sane and our portfolios more reliably on track during good times and bad. Disclosure: Author’s positions can be viewed here .