A long running theme on this site has been the need for increased portfolio exposure to foreign markets without making too large a bet on any one country and also owning different types of countries; if all you buy are surplus-commodity based countries you are not diversified. At some point that will bite you hard, it would have in 2008.
In the video I said something about 6-8 countries weighted no more than 6% each which gets you up to 36-48% of the portfolio. As a side note 6% would work out to two stocks at 3% each or three stocks at 2% each. I haven't done a lot with country funds but if you would allocate as much as 6% to any single country there would be certain country funds that I think would work for capturing the country that way.
In addition to 6-8 countries weighted above I think there would also need to be several other countries weighted smaller like maybe 2-3%.Longer term I expect client portfolios might need to get up near 65-70% foreign. For most of this decade I have been in the 30s expecting to get closer to 50% early in the next decade and then maybe 65-70% after that.
A while back one reader asked about going all foreign. First there is a long way between here and 70% but there are several domestic stocks that we own that I think we can hold forever like Johnson & Johnson (JNJ), FPL Group (FPL) and Philip Morris International (PM). I would have included Bank of America (BAC) in that list a year ago but I didn't hesitate to sell it when it did something I thought would be ruinous. I have to think in owning a defense contractor one of the US companies will always be a good bet.
In thinking about countries I would go to 6% in (I am not weighted that heavily in any foreign country now) I would consider Norway, Canada, Australia, China, Switzerland, the UK, Sweden, Chile and Brazil. There might be a couple of others. In the 2-3% category Israel (could be a sixer though), New Zealand (in a few years maybe), Finland, Japan (from the bottom up there are some interesting companies but I don't own any), Taiwan, Singapore, Peru, a couple of Eastern European countries (at some point they will make sense), Morocco, Egypt, Vietnam and there are more.
That obviously is a ton of work but the workload is not the only obstacle. A big one is access. Morocco, well I know the big phone company trades in France which makes it a little easier but getting trades done in European stocks is not necessarily easy. Everyone has heard of Vestas Wind right? Its a biggie in Denmark but trading the ADR just depends on when you come in. Recently the volume has been low, a couple of months ago it was pretty good.
Also for many countries your choices, forget liquidity for a moment, are limited to very few stocks like a phone company, a bank and a few others. Well you can't buy 20 phone stocks and call it a day.
There are country funds but many of them may not be very effective proxies. The Peru ETF (EPU) is probably the best fund for being a narrowly focused proxy for a country. That is not a buy recommendation but the fund is 65% materials for a country that lives and breathes commodities. I also think the Taiwan ETF is a pretty good proxy for tech and again, not a recommendation. EGShares offers emerging market sector ETFs but they are all very heavy in BRIC countries. This will make a lot of sense for a couple of sectors, like maybe energy, but not all.
Another long term tie in is the need to follow many countries and choose them selectively. I've written quite a few posts about Latvia (probably never going to invest there) and Kazakhstan (maybe one day).
Matt Hougan's webinar focuses on thinking about emerging markets differently than we have in the past. I would expand that to all foreign market investing; the need to think about it differently than we have in the past. I might expect comments expressing this would be very difficult. Yes it will be. Others may opine it is unnecessary to do all this. Then those people should not do it.
23 comments:
Great post, Roger, thank you.
very informative Roger...thanks as always. As I do my weekend reading,
I am getting a urge to short Europe...am I alone? and maybe
Asia...Oh, how does one invest in Cuba for the long haul? The
CUBA fund can't be the only way..
Roger,
Most of the rationale here makes sense. I am a little surprised that Canada is on your 6% list. Could you elaborate as to why? Or if you've already mentioned it in a previous post, I'd appreciate a link (I couldn't find much relevant to Canada with a quick search).
Cuba? Not really sure. The CUBA fund is not Cuban companies but looking under the hood might lead you to some company that comes close to pure exposure? There could be a company or two that generates a lot of its revenue selling into Cuba but again I don't know.
BillB, I have had one Canadian bank for years so from there it would seem to be easy to add one resource company or one of those high yielding vehicles in a bull market. This might be more of a bottoms up the make up of the canadian economy is diff than the US but the proximity dampens some of that difference.
I always thought you were to lite on foreign stocks even if you had more than many advisers. Looking forward I think you are planning very well, but I still think all foreign may be appropriate in the future (not now after this years run up)
Hi Roger--Do you foresee the same trend toward foreign for bonds?
Thanks very much.
US TIPS can be a big part of the long term solution for people still accumulating. i also think certain corporate credits can be owned as well.
I 've been writing about owning Norwegian sovereign debt for a while, some folks also have Aussie debt too. Many clients have WIP. Foreign is grwoing in my ownership universe but not a quickly as equities for now.
A lot of people overweight Canada slightly because it's an energy play.
"Longer term I expect client portfolios might need to get up near 65-70% foreign."
Could you please explain the reasoning behind this statement? How do you determine the need as opposed to desire? Does the need come from your expectation of higher expected returns in foreign?
Roger,
Your strategy is interesting, but you might be missing some developed and EM small cap since the individual companies you buy are probably all large cap. Adding developed and EM small cap ETF(s) would add a bit more diversification.
i expect returns from foreign to be better in general terms. 65-70% would be a long way off i have a knack of figuring what is right for me way in advance and being close to right about it.
re small caps, my interest, past posts and willingness to explore things like fisheries, farm stocks, toll roads and airports might be evidence that i may not completely ignoring the space
"i have a knack of figuring what is right for me way in advance and being close to right about it"
Classic over confidence bias. I'm not saying that you have it, but that statement is a classic indicator according to the behavioral finance books I have read. According to a book on the subject by Pompian, overconfidence bias is the most detrimental of all cognitive and emotional investing biases.
Many people have converted to passive investing because they have been badly burned by overconfidence.
fair criticism but usually a performance issue as opposed to a an anticipated allocation.
for now i'm not a big fan. I've never really been a fan of REITs and I'm not sure why.
I have stumbled across some interesting foreign reits but never pulled the trigger. candidly I do not know when I will go back.
in terms of capturing the diversification I have wondered in past posts whether farmland was the way to go. I'm still working on that one.
Take it from a farmer, there is no connection anymore between farm commodities and the value of farmland. The prices have been pushed up by speculators. Farmland cannot be paid for by the crops the land produces. Whether this continues remains to be seen. The value of farmland has barely kept up with inflation over the years. So buying now almost guarantees negative real return.
the impetus from others and this is what I am thinking of as well is foreign farmland. do you think the same dynamic exists in other countries?
I have no idea about the value of foreign farmland. I do know that ownership of land in some foreign countries is prohibited by non-citizens. In other cases, property rights can vanish at the whim of who ever is in power, take Zimbabwe for example or Venezuela. Brazil is a country that was in vogue with midwestern corn and soybean farmers for a while. That died down after the hype did not live up to the expectation. It is my understanding that even in Mexico who is one of our largest agricultural trading partners and a participant in NAFTA, a foreign national cannot own farmland. A local fertilizer dealer was putting together a deal to begin operations in Honduras, until about two weeeks ago. The U.S. cotton industry has been destroyed by adverse rulings from the WTO that benefitted someone else. Kind of like a random number generator. You get the picture.
The United States is second to none in terms of the ability to produce. Unfortunately U.S. farmers can be very uncompetitive economically. The regulations that the U.S. imposes on its farmers are almost non-existent in other countries. Next time you need groceries, take a look at where a lot of produce comes from, it is not the United States.
Without getting too political, our country for right or wrong has decided that producing grain crops as cheaply as possible should be the aim of the agricultural industry. Producing cheap calories from corn, wheat, pork, beef, and soybeans rather than high quality food has been the goal and has been largely achieved throught the USDA's subsidy programs. Many believe that calories over quality is the cause of high rates of obesity, diabetes, heart disease, cancer, and other chronic diseases that was much less common a couple of generations ago. I bet you would be surprised to learn that produce receives no federal agricultural subsidies in the United States. The latest government policy to distort land values is the ethanol mandate. We're sure to see another with the cap and trade coming down the line. All of these policies and their unintended consequences affect the value of farmland.
I think the more you look into the matter, the more you will find out that farmland is vital to a nation's security and access is tightly controlled by government. For example, there are strict laws in the U.S. concerning who can legally receive farm program payments, without which one cannot stay in business. The United States, supposedly the bastion of free enterprise, basically has a centrally planned agricultural economy. It goes downhill internationally from here.
I'm not sure I really addressed your question, but farm ownership can really be a hornet's nest if you don't know what you are doing.
If your goal is to capture returns from agribusiness, invest in global agribusiness companies such as ADM.
Other than my tiny truck garden and regional farmers market (fresh, local produce is hard to beat), I know next to nothing about farming but have read enough to understand that corn rules the roost in the US, followed by soybeans and wheat. Corn is so dominant and corn-state senators so focused on maintaining that dominance that significant resources are directed to finding ever more ways to use the product. Whether it is animal feed or ethanol the task of expanding use is made easier because the product appears relatively cheap; that is, total cost of corn and its byproducts is actually relatively high if you include the subsidies but since corn-producing states are among those who pay less in taxes than they receive in government offsets that cost is not born regionally and the cost at each stage of production reflects the subsidy discount to some degree also.
Shorter version, this is welfare on a vast scale and I have no reason to question the observation that it badly distorts American farming as our friend here points out. I also strongly suspect that similar policies for different products in other countries do the same and prices of farmland reflect this reality; i.e., it seems quite reasonable to suppose that support for farmland prices could change independently of factors normally associated with farm production.
My own pet peeve (rant coming) is that one of the effects of these subsidies is the vastly increased use of high fructose corn syrup (HFCS) in commercially produced food. HFCS has a similar nutritional impact as processed 'white' sugar on diet and health factors but is much cheaper (subsidized) and, since it also apparently has other 'desirable' effects on consistency and taste in processed foods, HFCS's have become nearly ubiquitous with obesity and diabetes rates reflecting this reality; i.e., the challenge today is to find a commercial food product that does not have HFCS in it. Rant mode off.
Now I've got to figure out whether it is time to get back into Turkey (agriculturally that used to mainly mean olives, cotton and tobacco but things have become rather more complex the past decade or two; surprise, surprise).
Much of the produce we consume does not come from the U.S. because a) some of it can't be produced here due to climate and b) we can't produce it year round.
"there is no connection anymore between farm commodities and the value of farmland. "
Well, perhaps not. Was there ever? As studies have shown, the long term price growth of commodities is basically zero. I'd guess value of farmland is more attuned to something like interest rates?
"Farmland cannot be paid for by the crops the land produces. "
Where does this idea come from? We're coming off 2 of the best years about any farmer can remember (sure, it's due to an energy policy that's dead plus great weather during those years, but the fact remains). What are farmers doing to pay for their land if not produce crops?
"buying now almost guarantees negative real return."
I'd assume that depends on where you are buying land.
What worries me is that half the blogs I read are talking about farmland speculation and apparently a few hedge funds are buying farmland. That's just what we need - hedge funds buying tons of farmland using some sort of credit mechanism.
RW,
If you haven't alredy, check out Michael Pollan's, "In Defense of Food" The opening sentence, "Eat food. Not too much. Mostly plants." Check out the comments at Amazon. Based on your post, I think it will reinforce you views.
I believe your rant is legitimate. The depression era farm program has morphed into a monster of unbelievable proportions. It is not just high fructose corn syrup, but highly processed foods of all kinds with a high glycemic index that is linked with diabetes and obesity.
I have often said to my farming colleagues that the politicians believe a well fed population is a largely complacent population. Americans are too fat and lazy to even care anymore.
I'm curious as to what you mean by getting back to Turkey. Diet?
Sorry to hijack your blog Roger, as this has drifted away from investing.
SD,
I too am coming off some very good years, but onwing farmland is a long term proposition. I would say that a good analogy would be saying to someone during the heyday of the McMansion era, "...why can't you afford a $850,000 house?, we have had two or three years of a great economy."
Things are not so great anymore down on the farm, and are likely to get worse. Credit has almost completely vanished. In my area, dairies and feedlots are in bankruptcy as are many ethanol plants. That will trickle down to crop producers in the next year or so. Just take a look at futures prices.
Was there ever a connection between farmland and commodities? Sure there was, but it has been several generations ago. Those same families for the most part still own their ancestoral farms. That's why if you want to become a farmer, you either have to be born into a farming family or marry into one.
Your first statement is only partially correct. Most produce cannot be produced here (economically). What produce do you speak of that cannot be grown in the United States?
I'm not sure where the McMansion statement is going. If you were profitable before the commodities bubble, you're still profitable. The commodities bubble has given us $9 soybeans.
Anon 7:01, thanks for the Michael Pollan reference; I thought his "Ominvore's Dilemma" was well written and agreed with many of its central points even though I also believe the quest for more 'cheap' calories will not, indeed probably can not, cease. The rather significant hidden or latent costs that calories from processed carbohydrates exact will, ironically, likely only be avoided by those who can afford to pay higher prices still (directly and/or in expended effort).
Reference to Turkey was as an investment destination: A rather weak bid to remain on Roger's topic [g]
Post a Comment