Emerging Market Allocation?

[Spanky]

An article by Yesim Tokat, Ph.D. from Vanguard recommends 10-15% of international holding to emerging allocation. A lots of postings in Boglehead forum shows 40-50% because EM is cheap relative to developed markets. Gus Sauter (ex-Vanguard chief investment officer) says that he allocates 100% of foreign holdings to emerging market. I am skeptical about allocating a significant portion to EM despite its potential returns.

What's your allocation to EM and why?

 

[trouthog]

We are 5 to 10%

 

[Spanky]

We are 5 to 10%

5-10% of international, total equity holding or portfolio? Thanks.

 

[trouthog]

5-10 international EM of total

 

[kramer]

I live abroad so I keep about 60% of equity in international. If I were living and retiring in the USA I would probably only hold about 45% international.

I keep 1/3 in Emerging Markets even though I would probably want a bit more.

All ETFs. In addition to Vanguard Euro and Pacific, I own Vanguard Emerging Markets and Vanguard Small Worldwide (VSS) which includes Emerging Markets. Because I live in the Philippines, I also own the ishares Philippines ETF (EPHE) purely for currency diversification and long term inflation protection. I also own VNQI, Vanguards Worldwide Real Estate fund which includes emerging markets.

It's complicated enough that I have to keep it in a spreadsheet to figure out what I have. This is how my foreign equity holdings are allocated at the moment:

23.6% Euro Large
13.2% Pacific Large
24.9% Developed Small
16.1% Emerging Large
6.2% Emerging Small
10.5% Philippines
4.5% Developed International Real Estate
1.0% Emerging Real Estate

 

[LOL!]

First, what Vanguard designates as Emerging Markets countries and what Morningstar designates as Emerging Markets are different, so one needs to be aware of that when reading any recommendation and when calculating one's own allocation to Emerging Markets.

Second, on Bogleheads perhaps lots of posts show 40%-50% EM, but that doesn't mean that many posters have 40%-50% EM. I think most folks over there recommend the market weight for EM.

Third, I will buy more EM when it drops significantly and sell when it goes back up all while holding a core position in it. The core position is the market weight of about 21% of international equities (Vanguard definintion of EM countries). I am currently slightly underweight with 20% EM after a recent sale. However, I overweight EM small caps. I note buys and sells in the market timing thread: http://www.early-retirement.org/forums/f44/lol-s-market-timing-newsletter-57042-10.html

I wish to note that my int'l equities are about 30% of the portfolio (and 50% of equities), so 20% EM of 30% int'l means EM is about 6% of my portfolio. Furthermore, the OP stated "recommends 10-15% of international holding to emerging allocation." That would be a significant underweight to the market weight of 21% which I cannot believe Vanguard would recommend. Is there a link to the Vanguard article that one can read?

Fourth, since the low of the year on Feb 3rd, large-cap EM is up 10%, but US small-cap value US is up even more, and of course, everything is up.

So my conclusion is that EM is something to use, but one shouldn't have 40% to 50% of their international allocation in it. EM has been quite a drag on one's portfolio the past 3 years.

 

[MichaelB]

This is the third thread this year on Emerging Markets.

Our portfolio allocation is 50% equities, 1/4 of that is EM, so around 12.5% of the total portfolio. This is a bit below the average of the past decade. Lots of volatility, so it's not for the faint of heart.

 

[utrecht]

I don't like international stocks very much. I have 100% of my international exposure in EM (not counting US large cap funds that happen to have international exposure with companies like Coke). EM is a total of about 5% of my portfolio.

 

[karluk]

By Vanguard's reckoning, about 17% of a broadly diversified international fund is in emerging markets. You can verify this by looking at the allocations in the pie chart in the link to VTIAX.

https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT

I looked into emerging markets in January. Back then the vast majority of my international holding was in VTIAX, and I discovered that because of my relatively small international allocation along with VTIAX's 17% emerging market exposure I had only about 1% of my portfolion in emerging markets. I decided to bump this up, so I started buying Vanguard's emerging market fund (VEMAX). I am now at 3% emerging markets. VEMAX has been on fire for the past couple of weeks, which is good in the sense that my recent purchases have made a nice profit, but bad in the sense that additional purchases will be more expensive.

I don't make changes to my asset allocation lightly, but in this case I decided that emerging markets are quite noticeably uncorrelated with U.S. and international developed markets. This makes them a very attractive diversifier, and the fact that they've done poorly in the last few years makes them priced quite reasonably now, at least in my opinion.

 

[photoguy]

It's complicated enough that I have to keep it in a spreadsheet to figure out what I have. This is how my foreign equity holdings are allocated at the moment:

23.6% Euro Large
13.2% Pacific Large
24.9% Developed Small
16.1% Emerging Large
6.2% Emerging Small
10.5% Philippines
4.5% Developed International Real Estate
1.0% Emerging Real Estate

Are these also your categories for rebalancing? If so, how do you maintain the emerging small slice? (would it be correct to assume you get this from VSS which is mixed with developed small)

In terms of the OP question, I have about 43% of all equities in international and 10% in EM (EM is ~25% of international). EM is obtained through vanguard funds (mainly VWO) but many others also have partial allocations like VSS (20%).

 

[ronin]

We hold 55% of portfolio in (non-REIT) equities, 45% of that is international, and 25% of the international is our target for EM. That works out to about 6.2% of total portfolio in EM. Due to recent market performance, the actual total is 5.2%. Not enough to trigger a re-balance at this point, so am not doing anything.

 

[LOL!]

VEMAX has been on fire for the past couple of weeks, which is good in the sense that my recent purchases have made a nice profit, but bad in the sense that additional purchases will be more expensive.

Lots of things have been on fire for the past couple of weeks, not just VEMAX.

 

[prototype]

....... Lots of volatility, so it's not for the faint of heart.

I am one those faint of heart'ers. Without checking to confirm today's exact numbers, I have about 10% of my 60% equities in EMs. So about 6% of my total portfolio, probably a tad low for what "I should have in EMs.

PS - I think my recent "freebie" Vanguard yearly financial plan did recommend raising my EM allocation.

 

[Spanky]

I wish to note that my int'l equities are about 30% of the portfolio (and 50% of equities), so 20% EM of 30% int'l means EM is about 6% of my portfolio. Furthermore, the OP stated "recommends 10-15% of international holding to emerging allocation." That would be a significant underweight to the market weight of 21% which I cannot believe Vanguard would recommend. Is there a link to the Vanguard article that one can read?

Here's the link to the article by Vanguard:
https://institutional.vanguard.com/iwe/pdf/emergingmarkets_072004.pdf

 

[Spanky]

I don't make changes to my asset allocation lightly, but in this case I decided that emerging markets are quite noticeably uncorrelated with U.S. and international developed markets. This makes them a very attractive diversifier, and the fact that they've done poorly in the last few years makes them priced quite reasonably now, at least in my opinion.

The correlation between U.S. stocks and EM stocks (e.g., VTSMX & VEIEX) is about 81.4% for the last 10 years. Thus, it is not uncorrelated. However, it might be a "good" buy since it took some beatings earlier.

 

[kramer]

Are these also your categories for rebalancing? If so, how do you maintain the emerging small slice? (would it be correct to assume you get this from VSS which is mixed with developed small)

In terms of the OP question, I have about 43% of all equities in international and 10% in EM (EM is ~25% of international). EM is obtained through vanguard funds (mainly VWO) but many others also have partial allocations like VSS (20%).

Those are my exact current holdings. Yes, I get both the emerging small and the developed small via VSS.

In order to come up with the percentages, I had to look in the prospecti to get the emerging/developed mix (for instance, for VSS and VNQI).

Also, the developed small includes Canada since the FTSE index used by VSS includes Canada. So that is why I did not break up that part by Europe and Pacific.

I am about 63% stocks. So at about 60% foreign equity and 1/3 of that Emerging Markets, that gives me about 12.5% of my total portfolio is in Emerging Market equities.

 

[Animorph]

30% US, 28% Foreign developed country, 16% EM, 4% Frontier Markets, 10% energy, 10% real estate, 2% cash

EM was roughly globally proportionate when I started with this AA.

 

[LOL!]

Here's the link to the article by Vanguard:
https://institutional.vanguard.com/iwe/pdf/emergingmarkets_072004.pdf

Thanks for link with 2006 © from Vanguard and it appears to be originally published in 2004. Kinda old, isn't it? And before Vanguard changed what they are calling emerging (Taiwan? South Korea?).

 

[gcgang]

Just read where revenues of the S&P500 are about 45% international and 10% EM.

It's a small world after all...

 

[karluk]

Lots of things have been on fire for the past couple of weeks, not just VEMAX.

Really? Judging by the performance of the relevant Vanguard ETFs, U.S. markets as measured by VTI are up 1.06% in the two weeks from March 19 to yesterday's close, international developed markets as measured by VEA are up 3.38%, and emerging markets as measured by VWO are up 7.42%. So emerging markets have beaten U.S. stocks by a factor of seven in the past two weeks and have more than doubled the performance of international developed markets. I guess we have slightly different definitions of what it means to be "on fire".

 

[karluk]

The correlation between U.S. stocks and EM stocks (e.g., VTSMX & VEIEX) is about 81.4% for the last 10 years. Thus, it is not uncorrelated. However, it might be a "good" buy since it took some beatings earlier.

If you look at more recent data, I think you will find a much different story. Last year, for example, emerging markets were far more closely correlated with the performance of long term U.S. government bonds than with the U.S. stock market. I stumbled upon this correlation in December, which is why I decided to look into increasing my emerging market allocation. So far it's worked out very well for me, although of course there is no guarantee that the low correlation between U.S. stocks and emerging markets will continue in the future.

 

[FIREd]

I own the Vanguard FTSE all world ex-US index fund for international equity exposure. Morningstar indicates that 20% of that fund is invested in EMs.

 

[LOL!]

Really? …. I guess we have slightly different definitions of what it means to be "on fire".

Sorry, I guess I used a different date range. If one charts from the low back in February everything is up 8%-11%:

Also don't forget about the March dividends available since Monday.

 

[Animorph]

If you look at more recent data, I think you will find a much different story. Last year, for example, emerging markets were far more closely correlated with the performance of long term U.S. government bonds than with the U.S. stock market. I stumbled upon this correlation in December, which is why I decided to look into increasing my emerging market allocation. So far it's worked out very well for me, although of course there is no guarantee that the low correlation between U.S. stocks and emerging markets will continue in the future.

Probably because they both went nowhere?

 

[Spanky]

Thanks for link with 2006 © from Vanguard and it appears to be originally published in 2004. Kinda old, isn't it? And before Vanguard changed what they are calling emerging (Taiwan? South Korea?).

Yes, it's old. The EM weight is now close to 17%, which is larger than the recommended weight (10 - 15%) in the article.