International investing-- a year later

[Nords]

It just doesn't seem possible that the dollar could go any lower, could it? Last week it's been setting record lows against the euro, a 26-year low against the British pound, and a 17-year low against the Australian dollar. I heard the other day that a primary expat quality-of-life indicator, the Thai baht, has risen to 45/dollar at some exchanges.

Yet China is still clamping down on the yuan, I bet that the U.S. Treasury is still running the presses nights & weekends, and the Fed is still trying to keep inflation alive. While Tweedy, Browne claims that currency hedging is a neutral strategy over 20-30 years, I'm having a hard time trying to find a reason that the dollar would start shooting back up.

International mutual funds soar when the dollar sucks-- as long as they're unhedged. Hedging is a drag on a fund's returns when the dollar is dropping and the cost of hedging is always a drag. So due to hedging (and other concerns), a year ago we dumped Tweedy, Browne Global Value (TBGVX) from our IRAs and replaced it with the (then very new) PowerShares International Dividend ETF (PID). TBGVX is still 9% of our ER portfolio (in a taxable account) but PID is 22%.

I tend to jump aboard a trend about a month before it falls flat, so the result of this switch was a pleasant surprise. Over the last year TBGVX has still managed to rise over 15% but PID has risen over 20%. That's probably due to a lower expense ratio (0.6% vice 1.38%) and no hedging. I don't think the chart even considers the effect of reinvesting dividends, and PID yields 2-3%.

We'll eventually get rid of the rest of the TBGVX shares and keep our international allocation at around 25%. But with Berkshire Hathaway and a DOW dividend ETF (DVY) in our ER portfolio, our actual international exposure is probably higher. And I suspect that international investments will continue to outperform domestic indexes-- especially as the dollar keeps dropping.

 

[Lsbcal]

In February the Economist Big Mac index, a simple-simon way of showing under/over valuation of the dollar showed:

Euro 19% overvalued
Japan 28% undervalued
China 56% undervalued

If you believe these PPP numbers will be roughly corrected some time in the future then you can do the math to see what your international stock exposure is to dollar changes. The huge upward spike in the US dollar in the 1980's dwarfs anything we've seen lately. But personally I don't think we can really outguess the currency markets.

Nords, I got rid of my TBGVX last year too. It was a long term holding but I felt it was time to move on and dump the high ER. Currently hold DODFX and HAINX, 36% of equities. If we see something like the Reagan dollar runnup I may move some international back to US. Don't expect such changes without big political/economic changes.

Les

 

[Gone4Good]

It's hard to complain with the 23.5% average annual 5-year return of my Vanguard International Explorer fund. Or even the 16.5% 5-year return on the Global Index.

Although I will admit complaining about paying £2 for a regular cup of Starbucks coffee in London when that translates back to $4.

 

[Spanky]

Robert J. Shiller from Yale allocates most of the equity portion to international stocks.

 

[dex]

I just started putting money into the new international vanguard fund VFWIX FTSE all world Ex Us

My allocation is below - excluding home
5.1% US Large Stocks
5.1% Growth & Income
7.0% US & Int'l Bond
6.2% High Yield Bond
4.1% REIT
13.9% International Stocks
5.1% US Mid Stocks
5.1% US Small Stocks
4.3% Commodity
44.1% Foreign Exchange
100.0%

I think my foreign exposure is well over 55% when you consider a lot of the US stocks/bonds have international exposure.
www.FXstreet.com is a good source of info on FX.
A recent article says Sterling's top might be $2.10.

I'm guessing the eruo's top might be about 1.4 and the Australian dollar is about .855 or .86. I don't believe the dollar will greatly appreciate from those tops.

The other telling aspect is Fed interest rates the USD fall will not begin in earnest until after the firs Fed cut. The the speculation will begin about how many more will be required. So my numbers above might be conservative.

 

[soupcxan]

Is there any way to tell how much an international equity fund (like VFWIX) is hedged against FX changes? Even just a high level estimate?

 

[Nords]

Is there any way to tell how much an international equity fund (like VFWIX) is hedged against FX changes? Even just a high level estimate?

TBGVX lists their hedging contracts in their semiannual reports.

If it's not in the prospectus then I guess you'd have to ask them...

 

[wabmester]

PID has risen over 20%. That's probably due to a lower expense ratio (0.6% vice 1.38%) and no hedging. I don't think the chart even considers the effect of reinvesting dividends, and PID yields 2-3%.

I've looked at PID, but it seems pretty concentrated in the financial sector. Compare it to EPP, which has a higher dividend, better cap gains performance (so far), a lower concentration in financials, but a high concentration in Australia. Asia ex-Japan also has a better demographics story compared to Europe and Japan.

But it's hard for me to get a handle on international investments. We have a wealth of data on the US economy and US stock market, but relatively little freely-available data on other markets and economies. PID, with an average P/E of 13 and price/book of 2 looks pretty good (according to Yahoo). Especially their top holding: take a look at NTE.

I'll probably take a shot-gun approach and buy some (or at least NTE)....

 

[Nords]

I've looked at PID, but it seems pretty concentrated in the financial sector. Compare it to EPP, which has a higher dividend, better cap gains performance (so far), a lower concentration in financials, but a high concentration in Australia. Asia ex-Japan also has a better demographics story compared to Europe and Japan.
But it's hard for me to get a handle on international investments. We have a wealth of data on the US economy and US stock market, but relatively little freely-available data on other markets and economies. PID, with an average P/E of 13 and price/book of 2 looks pretty good (according to Yahoo). Especially their top holding: take a look at NTE.
I'll probably take a shot-gun approach and buy some (or at least NTE)....

Geez that's a lot of Australia. (Hope they don't mess with their currency.) It's a lot more Australia than PID is putting in financials.

PID claims to be in the "Non-US Equity" sector and says "fund may invest 90% of its total assets in dividend paying non US common stocks that comprise the Broad Dividend Achievers Index." Yet somehow 29% of their holdings are in US companies and 32% are invested in "Other", a country I'm having trouble finding in my atlas.

EPP says "Non-US Equity" also and "publicly traded securities in the Australia, Hong Kong, New Zealand, and Singapore markets as represented by the MSCI Pacific ex-Japan Index" which, judging from the pie chart, apparently translates to "Australia".

It seems that value, small-cap, international, and financial asset classes have been the energizer bunnies of at least the last five years. (Maybe the next five, too, considering the performance that J.P. Morgan just turned in.) I don't think they'll continue forever but even reversion to the mean might not be any worse than bringing them down to the level of the Gordon equation-- a level that many other sectors have been "underperforming" at for years.

What attracted me to PID would also attract me to EPP: dividends. It's a lot harder to lie when you have to pay dividends.

 

[Gone4Good]

Robert J. Shiller from Yale allocates most of the equity portion to international stocks.

Maybe a good speculative bet but I question the wisdom of having mostly international investments for a retiree's portfolio. After all, your expenses are denominated in dollars. If most your assets are overseas, you not only have to worry about a bear equity market but also a bull USD market. If they happen simultaneously its probably back to work for you.

International equities have had a good run for a number of years. It's not surprising that all manner of investment sages are upping their international exposure recommendations - wouldn't want to leave any past performance unpursued. I have my allocation set right around 20%, which I figure provides plenty of diversification without overexposing myself to FX movements. 20% also happens to be about the size of my travel budget, so it soothes somewhat the sticker shock I experience when overseas.

 

[wabmester]

Maybe a good speculative bet but I question the wisdom of having mostly international investments for a retiree's portfolio.

I don't think Shiller is speculating on great performance of international stocks as much as he's predicting lousy forward returns for US stocks.

 

[Spanky]

The articles that talks about Schiller's view on real-estate and what's investing in:

http://money.cnn.com/2007/04/09/real_estate/shiller.moneymag/index.htm?postversion=2007041218

 

[DangerMouse]

I also bought PID about a year ago, and as Nords did, it was for the dividends. Before I purchased I looked at the companies they hold in Australia, and as an Aussie I thought they were all good solid companies that were not likely to cut their dividends. Stocks in Australia are different from the US, I would say dividend yields are higher and appreciation of the stock price is lower. 3 of the top holdings of PID are Westpac, NAB and ANZ, all banks. If I buy a banking stock in Australia I expect to have a 5% yield. I do have a position in each of these banks. The only other Australian holding they have at the moment is BHP which is on a gangbuster due to rising resource prices.

Interestingly enough I believe a year ago Telstra was in their holdings, but there has been some doubt over it's future with regards to dividends and it looked as if they may have jettisoned it from their portfolio.

 

[TargaDave]

In addition to a basket of international equities I have also held onto my gold and silver. I figure that they are both a hedge against any continued dollar weakening. I'm not a gloom and doomer gold bug (happy to lighten up when the time is right), but as long as the pressure on the dollar continues I'll keep a small slice of that old fashioned money in the basket.

 

[d]

International equities have had a good run for a number of years. It's not surprising that all manner of investment sages are upping their international exposure recommendations -

it is hard to conclude that the increased recommendations for international over the past several years is other than performance chasing.

 

[Nords]

it is hard to conclude that the increased recommendations for international over the past several years is other than performance chasing.

"Performance chasing" or "growth & momentum investing"-- tomato, tomahto.

 

[janeeyre]

I am beginning to think that I should move more money into global markets, especially Dubai.

 

[lswswein]

I am beginning to think that I should move more money into global markets, especially Dubai.

You do realize that Dubai is one of the most speculative and bubbly market out there right?
Check out UAE in this list
http://tickersense.typepad.com/.shared/image.html?/photos/uncategorized/2006globalreturns_1.jpg

-h

 

[SecondCor521]

it is hard to conclude that the increased recommendations for international over the past several years is other than performance chasing.

The same thing happened in reverse with company stock.

I once looked for myself what other folks were saying as to how much of your own company stock you should own. I soon discovered a pattern: pre-Enron and pre-dotComBust days, the conventional wisdom was 15-20% was about the highest one should go. After that time, the percentages were much lower - 5 to 10% at most.

I thought most pundits until recently recommended 10-20% international, and now I read 40%. Yikes! I wouldn't want 40% of my money in international personally.

2Cor521

 

[bpp]

it is hard to conclude that the increased recommendations for international over the past several years is other than performance chasing.

Then again, perhaps the low international recommendations were also a form of performance chasing. Sometimes you can't win.

 

[justin]

I'm 26. Plan on FIREing in mid-30's. I have a 5 to 7 decade time horizon for my investments. That's a long time. Who's to say that the USA will remain dominant in the world economy for the next 7 decades? What if the USA has a few decades of stagnant market returns while the rest of the world keeps slowly trickling along, growing and making profits?

Economic theory suggests that in the long term, exchange rate fluctuations are a wash.

I've got my bets placed at 50% international equities just in case. Worst case (versus a predominantly USA portfolio), the dollar gets stronger, the USA outperforms the world over the next 7 decades. I should still be ok with my portfolio. If the dollar gets really strong, that means I can retire abroad really cheaply if necessary.

I'm as patriotic as the next guy, but it seems foolhardy to accept the USA as the best place to have all or most of your money invested, when access to more diverse investments can be had for a few basis points in expense ratio.

 

[bpp]

I've got my bets placed at 50% international equities just in case.

I have settled on 50/50 domestic/foreign, too. Running "Japan 1990" scenarios helped me feel comfortable with that. I suspect that if you look back in history, there were a lot more times and places where being all or almost all in domestic had more downside than having a more even split, and I expect on general principles for that to be true in the future, as well.

Added: Point being that it has more to do with minimizing the downside than maximizing the upside.
(To which no doubt someone will reply, "Ah, but that's what they all say just before they jump on the bandwagon.")

 

[soupcxan]

Maybe a good speculative bet but I question the wisdom of having mostly international investments for a retiree's portfolio. After all, your expenses are denominated in dollars. If most your assets are overseas, you not only have to worry about a bear equity market but also a bull USD market. If they happen simultaneously its probably back to work for you.

1) Your expenses are directly denominated in dollars, but many of the inputs into the things you buy are not priced in dollars, so you will feel the pass-through pricing pain. If you need an example, look at almost any manufactured product - chances are, it's produced outside the US so your effective price will rise as the dollar's value declines. 2) Most international equity funds are at least somewhat hedged against FX changes, so you are partially immunized from currency swings.

As far as the split between US and intl equities, if you look at the global market cap, the US is about 50% versus the rest of the world. Some believe that your portfolio should mirror the global capital markets to get to the efficient frontier, but plenty will disagree. Then you get into issues of home bias - why investors all over the world seem to prefer to hold their own countries' securities versus others. As far as explaining the increased attention for international funds lately, it's not necessarily performance chasing - there are plenty of rational reasons why int'l markets are more favorable now. Consider decreased transactions costs brought about by ETFs, greater transparency because of increased oversight (more investors scrutinizing those non-GAAP financial statements), the need for assets with low correlation to the US, and growth prospects for countries that were flagged as "developing" only 20 years ago.

 

[lswswein]

2) Most international equity funds are at least somewhat hedged against FX changes, so you are partially immunized from currency swings.

I agree with your comment on goods being produced overseas, but very few Intl equity funds are hedged at all. TBGVX - TweedyBrowne is one of the few funds which is hedged and they charge a big ER of 1.38

-h
p.s: Another stretch for Intl equities like the one Japan had between 1989-2000 would tell us who believes in Intl investing; I am betting the % would drop below 10% for a lot of people.

 

[bpp]

p.s: Another stretch for Intl equities like the one Japan had between 1989-2000 would tell us who believes in Intl investing; I am betting the % would drop below 10% for a lot of people.

Japan is just one country. Any one country can have a terrible run without the rest of the world being dragged down. Which is more likely: the country you live in crashes and the rest of the world doesn't, or the whole rest of the world crashes and the country you live in doesn't?

Consider the 4 simplified extremes:

a) Home country crashes, rest of world does ok: foreign equity helps
b) Home country does ok, rest of world crashes: foreign equity hurts
c) Everybody does ok: foreign equity neutral
d) Everybody crashes: foreign equity neutral

Attach probabilities to the 4 cases, and pick your poison. I suspect that b) is the least likely scenario of them all.

But you're probably right that many people will thrash their allocations as the markets ebb and flow, no matter what happens.