International stocks - index or actively managed?

[JohnnyBGoode]

Hey gurus - question about international stocks.

I am a Boglehead "lazy portfolio" convert and earlier this year got rid of our financial advisor (and the 1% fee) and simplified into the following allocation:

35% US Total Stock Market (FSTVX)
30% International (FSIVX)
30% Bonds (FSITX)
5% Real Estate (FSRVX)

In each category, I selected the lowest fee index fund I could find. Most of it is in a taxable retirement account but I've got most of the bond fund in the IRA account. I'm with Fidelity and chose their index funds, but not wed to them. Obviously I'm feeling pretty smart since the returns have been stellar since I reallocated

So the question: I was chatting with a Fidelity representative yesterday (he's not a commissioned broker, but his salary is paid by Fidelity). He generally liked my portfolio but questioned my use of an index fund for international holdings. He said that index funds are intentionally "dumb" and don't take into account political considerations. Not a big deal on a US total market fund, but for international he was saying that a managed fund (for example: FMI International Fund (FMIJX)) was well worth it even with a higher expense fee because being aware of geopolitics was important. And to be fair he wasn't pushing me to pick a different Fidelity fund, but just pick one of the top rated international ones.

Certainly the returns over 3 or 5 years would seem to bear this out (managed vs index for international), but I'd love to get an opinion from you all. Thanks!

 

[Senator]

Are you looking for growth, or stability? If you want stability, go with an international index fund. That is what they are great for.

If you want growth, skip international and go with the S&P. The S&P outshines the rest of the world, in virtually every 10-year time period since 1850.

 

[bingybear]

Much depends upon what you want. You have an international fund that is really a large blend and ignores emerging markets. You could use FTIEX if you wanted a more diversified international fund. Diversified as it includes an emerging market component. Or you could go to an ETF and use something like VXUS for the same reason.

really a matter of choice.

 

[Onward]

IMO the real struggle in investing is not so much about maximizing returns as about being able to stick with your investments when the serious sh*t hits the fan.

I've learned over the decades that I can stick with a battered investment much more easily if there is no active manager to second guess.

So I index everything possible, including international and bonds.

 

[Lsbcal]

... Not a big deal on a US total market fund, but for international he was saying that a managed fund (for example: FMI International Fund (FMIJX)) was well worth it even with a higher expense fee because being aware of geopolitics was important. And to be fair he wasn't pushing me to pick a different Fidelity fund, but just pick one of the top rated international ones.

Certainly the returns over 3 or 5 years would seem to bear this out (managed vs index for international), but I'd love to get an opinion from you all. Thanks!

I took a quick look at FMIJX in M*. Looks like it is now 27% North America (any US or all Canada ?). Is this really an international fund or do they swing to the US at times? Will they continue to do this well?

Is it a good bet that a fund can time geopolitics? I would not bet on that.

I personally use a trend following approach to move my international to US when this home brew mechanical system says to do so. So I'm no critic of doing things differently. But I have no faith in black box methods or unknown managerial excellence.

If I wanted more out of international, I'd increase international small cap. Like VINEX when appropriate. And no, it is not an index fund and is my only stock fund not an index. But I don't own it presently.

So just some thoughts on the subject. In case you have not guessed it, I'm not a guru.

 

[photoguy]

If you are a boglehead then skip the actively managed high expense fund. That's pretty much the antithesis of their core beliefs.


Sent from my iPad using Early Retirement Forum

 

[LOL!]

I am pretty sure the Fidelity sales reps have a monthly or weekly internal sales memo to tell them which actively-managed funds to talk about to folks who had or want to have index funds. The backoffice researchers continually scour their funds to find the ones that have outperformed index funds. So this time an international fund, then next time a small cap fund, then ….

They can probably always find something to tout. That's the way it works. They also must've honed their sales skills to seed Fear, Uncertainty, and Doubt when talking to clients. Everybody is good at cherry-picking the past, but what about predicting the future? (See, even I can use FUD.)

I would not be looking for a buy-high, sell-low deal right now. I would be looking for something out of favor to purchase. I would not do performance chasing.

 

[DrRoy]

Is it a good bet that a fund can time geopolitics? I would not bet on that.

+1 for this comment. Don't forget the fine print of 'Past performance is no guarantee of future results.' The manager may have just been lucky for a while, but the fees will always be higher.

 

[target2019]

FMIJX inception was 2010. So take the performance with a grain of salt. It is a fund which invests in companies which have global offices. You need the full prospectus to understand their strategy.

 

[JohnnyBGoode]

If you are a boglehead then skip the actively managed high expense fund. That's pretty much the antithesis of their core beliefs.


Sent from my iPad using Early Retirement Forum

Yes, agreed. Given the research I've done I am a big fan of index funds. But his argument about the international situation got me wondering, so I thought I'd seek second (third, fourth,...) opinions here. I will likely still stick with the index fund approach.

 

[JohnnyBGoode]

I took a quick look at FMIJX in M*. Looks like it is now 27% North America (any US or all Canada ?). Is this really an international fund or do they swing to the US at times? Will they continue to do this well?

Is it a good bet that a fund can time geopolitics? I would not bet on that.

I personally use a trend following approach to move my international to US when this home brew mechanical system says to do so. So I'm no critic of doing things differently. But I have no faith in black box methods or unknown managerial excellence.

If I wanted more out of international, I'd increase international small cap. Like VINEX when appropriate. And no, it is not an index fund and is my only stock fund not an index. But I don't own it presently.

So just some thoughts on the subject. In case you have not guessed it, I'm not a guru.

Yes, I agree - what is really "international" any more? I would expect all of the Fortune 500 have significant international exposure and would themselves shift more resources overseas if the climate in the US changes. Maybe @Senator is right and just double down on the S&P 500 and be done with it.

 

[JohnnyBGoode]

+1 for this comment. Don't forget the fine print of 'Past performance is no guarantee of future results.' The manager may have just been lucky for a while, but the fees will always be higher.

True enough - it is just another type of market timing, I suppose.

Thanks!

 

[MooreBonds]

I believe in broad diversification, and I like exposure to a lot of areas. When it comes to international, there are so many countries that I don't just rely on a fund like an ETF that just takes a smattering from a few countries - so while I have some VWO and other Vanguard int'l funds, I also try to pick some ETFs that are focused on a wide variety of emerging countries or regions, so I have more exposure beyond just the brief exposure of a broad-based ETF.

 

[nwsteve]

My Fido rep awhile back was gently chiding me for not having a higher percentage exposure to Intl since I was under 10%. So, I posted a thread awhile back on the Forum looking for insight about where others were. Surprised how many members here are over 25%.
I subsequently read an analysis that included following stats.:
* MSCI All Country World Index (approx. 50/50 US/Foreign) 10 yr performance 4.3% versus a all US return of 9.3
S&P 500 Index has outperformed MSCI Index over the past 5,10,20, and 25 periods!!
During US bear markets, foreign stocks decline in lockstep e.g 2008, S&P dropped 37% vs MSCI at -42%
Those are past which has we all know is no guarantee of future. In that context, consider uncertainties associated in Europe economies and politics, China's slowdown, and current oil prices negatively impacting a number of economies. 2016 Growth forecasts for EU currently only 1.5%, Japan, no mater how much stimulus they push, is struggling to get even1.0%. (The above info is from article in Bottomline Personal, by Ken Winans, 9/15/16)
Add in uncertainties from the likes of Brexit, EU political unrest and global currency risks, I am happy to get my foreign exposure from the 50% of S&P revenue coming from offshore and stay with my paltry 6% allocation.
Nwsteve

 

[DrRoy]

My Fido rep awhile back was gently chiding me for not having a higher percentage exposure to Intl since I was under 10%. So, I posted a thread awhile back on the Forum looking for insight about where others were. Surprised how many members here are over 25%.
I subsequently read an analysis that included following stats.:
* MSCI All Country World Index (approx. 50/50 US/Foreign) 10 yr performance 4.3% versus a all US return of 9.3
S&P 500 Index has outperformed MSCI Index over the past 5,10,20, and 25 periods!!
During US bear markets, foreign stocks decline in lockstep e.g 2008, S&P dropped 37% vs MSCI at -42%
Those are past which has we all know is no guarantee of future. In that context, consider uncertainties associated in Europe economies and politics, China's slowdown, and current oil prices negatively impacting a number of economies. 2016 Growth forecasts for EU currently only 1.5%, Japan, no mater how much stimulus they push, is struggling to get even1.0%. (The above info is from article in Bottomline Personal, by Ken Winans, 9/15/16)
Add in uncertainties from the likes of Brexit, EU political unrest and global currency risks, I am happy to get my foreign exposure from the 50% of S&P revenue coming from offshore and stay with my paltry 6% allocation.
Nwsteve

+1 About 5 years ago, my FA from Merrill Lynch (whom I have since fired) noted that my int'l % was low and recommended that I increase it. I ignored that and instead sold almost all I still had. Since then that move has been to my benefit. I completely agree with the above post.

 

[JohnnyBGoode]

My Fido rep awhile back was gently chiding me for not having a higher percentage exposure to Intl since I was under 10%. So, I posted a thread awhile back on the Forum looking for insight about where others were. Surprised how many members here are over 25%.
I subsequently read an analysis that included following stats.:
* MSCI All Country World Index (approx. 50/50 US/Foreign) 10 yr performance 4.3% versus a all US return of 9.3
S&P 500 Index has outperformed MSCI Index over the past 5,10,20, and 25 periods!!
During US bear markets, foreign stocks decline in lockstep e.g 2008, S&P dropped 37% vs MSCI at -42%
Those are past which has we all know is no guarantee of future. In that context, consider uncertainties associated in Europe economies and politics, China's slowdown, and current oil prices negatively impacting a number of economies. 2016 Growth forecasts for EU currently only 1.5%, Japan, no mater how much stimulus they push, is struggling to get even1.0%. (The above info is from article in Bottomline Personal, by Ken Winans, 9/15/16)
Add in uncertainties from the likes of Brexit, EU political unrest and global currency risks, I am happy to get my foreign exposure from the 50% of S&P revenue coming from offshore and stay with my paltry 6% allocation.
Nwsteve

Good points for sure. That being said, I do think that the US is heading to 4 years of uncertainty as well (good or bad economically I'm not sure, but I doubt anyone can know how the policies coming out of the new administration will play out). Will there be a flight of $$ to Europe, Japan, or China if the US becomes unstable? Or would an unstable US drag the rest of the world down anyway?

 

[Totoro]

Certainly the returns over 3 or 5 years would seem to bear this out (managed vs index for international), but I'd love to get an opinion from you all. Thanks!

Are you implying international managed funds outperform index international funds as a group? That is not my perception. Of course there are lucky ones and maybe even a skilled one, but how do you differentiate?

Furthermore, all the basic logic elements still apply for indexing:

• How confident are you to select a winning fund? If you are, why not skip the middle man and do your own stock picking?
• Stock picking in aggregate is zero-sum. Focus on low costs if you want to stay away from a game where a lot of brainpower is dedicated full-time.
• If you believe markets are at all efficient in aggregate, any and all political risks are priced in. Just look at Russia's stocks right now. Gazprom in particular.
• Geopolitical stuff almost by definition is unpredictable. The Swiss letting go of their euro peg, Russia attacking Ukraine, death of Fidel Castro, toppling of middle eastern regimes, a failed coup attempt in Turkey, ... they were all surprise events. What arrogance does a money manager have to claim to navigate those waters when not even whole governments know what will happen. South Korea is another recent example.

The only valid concern in international is that several countries with listed companies are unstable, commodity dependent and as a consequence their stock prices will vary wildly.


This however is not an argument for a managed fund. On the contrary, it's an argument for diversification and passively managed funds.


Might as well argue that a fund managed by an earthquake expert is well worth the expense - you know, for countries that have large fault lines. Assuming the said expert gets an incredible complex thing right in what will happen, the timing is another thing and it might not even matter for the companies involved ..

 

[samclem]

If you believe markets are at all efficient in aggregate, any and all political risks are priced in. Just look at Russia's stocks right now. Gazprom in particular.

This point is the only one where I think the Fido rep's argument has a grain of truth. Sometimes foreign markets aren't entirely efficient. Some indices invest in stocks that aren't subject to entirely free-market pricing (e.g Chinese A-shares. There are so many price controls in place that MSCI nd FTSE have differed in the past over whether they belong in their respective emerging-market indices). If a stock's price doesn't entirely reflect what the market "knows," then indexing suffers.

That said, this is a rather small detail compared to many other things, and generally doesn't match the costs that come with active management.

 

[Animorph]

I have some narrower international index funds and some active funds for international. I don't think there are any broad active funds that are so much better than index funds that they really stand out. I have my mom in the broad Fidelity index funds and they're doing fine.

I do use FSGDX instead of FSIVX since it is slightly more comprehensive.

While S&P 500 has been good, I did very well with just an international fund in my 401k back around 2000 (I was fearless then...). It always had the best performance of the available funds each year I was in it. So they do, and will again, trade off leadership.

 

[Lsbcal]

This point is the only one where I think the Fido rep's argument has a grain of truth. Sometimes foreign markets aren't entirely efficient. Some indices invest in stocks that aren't subject to entirely free-market pricing (e.g Chinese A-shares. There are so many price controls in place that MSCI nd FTSE have differed in the past over whether they belong in their respective emerging-market indices). If a stock's price doesn't entirely reflect what the market "knows," then indexing suffers.

That said, this is a rather small detail compared to many other things, and generally doesn't match the costs that come with active management.

Interesting point Samclem. I notice that VFWAX (FTSE international large cap) has only 5% China.

Another thought, some low cost active management might be alright. Some of Vanguard's low cost actively managed funds have done well over the years. For instance, VINEX is a small cap international fund and the ER is 0.42% as compared to another same asset class index VFSVX with ER of 0.31%. BTW, both have low exposure to China.