Selling Tweedy, Browne for Powershares Int'l Div ETF

[Nords]

Quote:

Originally Posted by soupcxan ...is it foolish to only hold dividend focused stocks as the equity portion of your portfolio? Obviously this goes against MPt and the conventional wisdom, and I'll miss out on mid-, small-, and international stocks...but I just don't like investments that don't produce current income. Reminds me too much of the "greater fool" theory.

Soup triggered a thought with this post from another thread-- Jeremy Siegel ("The Future for Investors") thinks that dividends are a great investment strategy.

International investing is presumed to be a necessary diversifier, but disclosure & investor advocacy seems to be an even bigger problem than American stocks. I have a tough enough time deciding whether or not to trust the 10Ks & 10Qs I'm reading now, and I have even less faith in other country's investor GAAP transparency. However dividends make it difficult to tell lies. If a company is paying, even growing, their dividends without taking on an unsustainable payout ratio-- they they're probably making money.

PowerShares' international dividend ETF (PID) is paying out nearly 3% divs from large value companies. They're over 90% outside the U.S. with a huge financial exposure (35%) followed by consumer staples, utilities, & energy. Their largest country investments are Canada, the UK, & Australia but presumably they can have someone do foreign-language stock research. Stocks in the index have been raising their dividends for five years or longer. (Ironically one of their biggest holdings appears to be Barclays, the owner of the iShares brand of ETFs.) PID is unhedged, of course, and has a 0.5% ER. That's a big ER for ETFs but small compared to most international mutual funds.

While we believe in an international asset allocation, we also believe that Tweedy, Browne (TBGVX) has had its day. We've been buying shares since 1996 and have pretty substantial cap gains but we need to rebalance again. Things that concern me are the fund's high expense ratio (1.39%), its bloat (closed for several months now) and the relative underperformance of its sister fund, American Value (pretty much the same team running both funds). Tweedy also hedges against the dollar. Hedging was quite comforting to us in the mid '90s but Tweedy themselves admit that hedging is probably a long-term wash, and in the short term it's costing us money. Higher volatility of an unhedged fund isn't an issue for us any more.

Tweedy has always been a very low turnover fund (6-13%) but even they admit that they're having trouble finding investments and they're selling a lot of their stocks at their estimate of fair value. They're tax efficient, but this year I bet they're going to cough up quite a bit (for them) in cap gains. So we plan to "rebalance" by selling the Tweedy shares in our IRAs and buying about the same amount of PID. We'll keep reinvesting those dividends, so I guess we should be praying that PID's share price stays flat or that the dollar recovers.

Again, PID's two biggest attractions are (1) international stocks with dividends and (2) a cheap ER. TBGVX is our last mutual fund and we're not interested in buying more MFs. Are we missing other ETFs with better options, or other types of choices?

[preben]

PID looks interesting for sure. Combined with DVY one would have a pretty diversified dividend machine.
Say: 25% DVY, 25% PID, 25% GIM(global bonds), 25% TIPs (or AGG) = avg. 4%/year.
Cheers!

[free4now]

Thanks Nords for your perspectives... I have been watching Tweedy Brown for a while now from a distance. * *They seemed to be good at executing value plays, but I never could get past the expense ratio. *

Call me old fashioned, but I still don't have any international positions. * The rampant corruption in most emerging markets serves as a big anchor, like a high expense ratio that shareholders have to pay. *Not to mention the lack of enforced transparency that you rightly are concerned about.

Watching the movie "The Corporation" we see how much privilege we in the US give to corporations. *We see that they can literally get away with murder if it makes money. *The liberal in me is outraged and demands that the rules be changed so that externalized costs like environmental damage get charged back to corporations. *But the investor in me sees that this is where my money attracts more money. *As long as our corporations are efficiently raping and pillaging our resources for profit, I want my cut. *

[wildcat]

Nords -

How tax efficient is PID or is it too early to tell? For what you want I have not found anything like PID. iShares Intl' Value is the closest cousin but dividends are not the focus.

[Nords]

Quote:

Originally Posted by wildcat How tax efficient is PID or is it too early to tell?

I think it's too early to tell. They don't post any turnover numbers on their website and I haven't found anything elsewhere. I think they just buy/sell whatever's in the International Dividend Achievers index, which I believe is a Mergent product. I don't think it'll approach anything near the rest of the mutual-fund industry's turnover.

UncleMick, can you set me straight on that and on where to find the index's turnover? I looked the index up at http://www.dividendachievers.com/4_factsheets.php?id=55 and I see only two stocks have been dropped over the last year. I can't tell if there've been any additions.

One "mistake" that I'm making is having an international investment in a tax-free account, so I won't get to deduct the foreign investment tax credit from my profits. But I don't think I care-- I the savings on the ER (plus the boost of not hedging against the dollar) could more than make up for that. It's a smaller mistake than the one I'm already making of having TBGVX in a tax-free account.

Quote:

Originally Posted by wildcat For what you want I have not found anything like PID. iShares Intl' Value is the closest cousin but dividends are not the focus.

I figure dividends are the closest thing we'll find to truth in advertising. I have to admit that I'm a bit concerned about getting in on the bleeding edge, but I don't see us tapping our IRAs during the next 20-25 years. That renders irrelevant any concerns about a short-term price drop. Reinvesting the dividends (which Fidelity has confirmed they'll do for free) will smooth out the price changes.

[brewer12345]

I guess the only real gotcha I see here is the implicit sector bets you would be making by buying PID. Don't get me wrong, banks, insurers, etc. make lots of money and are often good investments, but I'm not sure I would want too huge an outsized bet on them.

[maddythebeagle]

http://www.ishares.com/fund_info/det...D50?symbol=EFA

Why not go for something like MSCI EAFE Index Fund. It seems like a few folks have it as an option through their work plans cheaper. It just seems like there are a lot of new "dividend" funds but it seems like if you buy the large cap funds, you are also getting the dividend payers, but cheaper or am I missing something? This index has a large percentage of financials as well

[MasterBlaster]

You probably know all this but I'll blurt it out anyway...

The general funds (like MSCE EAFE index) consist of stocks that pay good dividends and stocks that don't pay such good dividends. In very general terms the older established firms with lower growth potential pay the best dividends. The stocks of newer companies that are growing rapidly tend not to pay such good dividends.

So a dividend fund focuses on only those stocks with the good dividends.

When you buy the general index the good dividend stocks are diluted with other stocks (like growth stocks).

Therefore the general index funds are really not a good choice if you are seeking to maximize dividends.

[Nords]

Quote:

Originally Posted by brewer12345 I guess the only real gotcha I see here is the implicit sector bets you would be making by buying PID.* Don't get me wrong, banks, insurers, etc. make lots of money and are often good investments, but I'm not sure I would want too huge an outsized bet on them.

Says the man who controls the PLMD float! Just kidding. Spouse & I are no paragons of diversification virtue.

It is an accidental sector bet, but we're also hoping that we're 25 years away from distributions. I don't know how financials will play out over that time but I don't think they're anything like the sector was in the '80s & '90s. I'm also hoping that most of their implicit risk has been packaged & dumped on the eager heads of the institutions & retail investors... Buffett's rants against derivatives notwithstanding.

I think we put more faith on letting the index determine the sectors, screened by their dividends. If financials tank then the index will take a "short-term" hit for two or three years, but the weak will get pruned and the index will get reconstituted with stronger performers from other sectors. In fact considering seasonality we may see a 10% whack in the next six months, and I sure hope all those multinationals aren't watching American mid-term elections either. I hope that cutting our ER by almost 0.9% and reinvesting will make more of a difference over the next quarter century (about 25% all by itself!) than the strength of the financial sector. And I think the bet on the dollar's weakness is a slam dunk.

Quote:

Originally Posted by Maddy the Turbo Beagle Why not go for something like MSCI EAFE Index Fund. It seems like a few folks have it as an option through their work plans cheaper. It just seems like there are a lot of new "dividend" funds but it seems like if you buy the large cap funds, you are also getting the dividend payers, but cheaper or am I missing something? This index has a large percentage of financials as well

Quote:

Originally Posted by MasterBlaster You probably know all this but I'll blurt it out anyway... Well the general funds (like MSCE EAFE index) consist of stocks that pay good dividends and stocks that don't pay such good dividends. In very general terms the older established firms with lower growth potential pay the best dividends. The stocks of newer companies that are growing rapidly tend not to pay such good dividends. So a dividend fund focuses on only those stocks with the good dividends. When you buy the general index the good dividend stocks are diluted with other stocks (like growth stocks). Therefore the general index funds are really not a good choice if you are seeking to maximize dividends.

What he said.

Our focus is on value investing, and I'm thinking that the only truth among international stocks is dividends-- especially among international value stocks. We also hold a big chunk of small value, for which we've been handsomely rewarded, and eventually the long-predicted resurgence of large-cap investing will occur.

[justin]

Quote:

Originally Posted by Nords We also hold a big chunk of small value, for which we've been handsomely rewarded, and eventually the long-predicted resurgence of large-cap investing will occur.

Is that international small-cap value? I'm looking for a good fund in that sector (low expense, low turnover) but haven't found one that I like yet.

[Nords]

Quote:

Originally Posted by justin Is that international small-cap value?* I'm looking for a good fund in that sector (low expense, low turnover) but haven't found one that I like yet.

Yeah, I wish. It's the S&P600 Small-cap Value ETF (IJS).

Page me when you find the international small-cap value index ETF. I want to get in on the ground floor!!

[justin]

Quote:

Originally Posted by Nords Yeah, I wish. It's the S&P600 Small-cap Value ETF (IJS). Page me when you find the international small-cap value index ETF. I want to get in on the ground floor!!

For some reason I was thinking you had posted a while back about a good small cap international fund (value or 'blend') you own?

[maddythebeagle]

Quote:

You probably know all this but I'll blurt it out anyway... The general funds (like MSCE EAFE index) consist of stocks that pay good dividends and stocks that don't pay such good dividends. In very general terms the older established firms with lower growth potential pay the best dividends. The stocks of newer companies that are growing rapidly tend not to pay such good dividends. So a dividend fund focuses on only those stocks with the good dividends. When you buy the general index the good dividend stocks are diluted with other stocks (like growth stocks). Therefore the general index funds are really not a good choice if you are seeking to maximize dividends.

Of course I understand this, but this isnt my point. My point is that I think that these dividend funds are a marketing ploy. The general indexes are weighted more to the larger more established companies that usually are the dividend payers. So my point is why pay more? I guess that I will move on and say "NM"

[brewer12345]

Quote:

Originally Posted by Nords It is an accidental sector bet, but we're also hoping that we're 25 years away from distributions.* I don't know how financials will play out over that time but I don't think they're anything like the sector was in the '80s & '90s.* I'm also hoping that most of their implicit risk has been packaged & dumped on the eager heads of the institutions & retail investors... Buffett's rants against derivatives notwithstanding.

I guess what bothers me about these types of funds is the marketing. After all, When i look at what is in the fund, I think a case could be made to market it as the "International Financial and Utility Fund". Doesn't change the underlying assets, but you might not feel the same way about the fund if it were called that.

[Nords]

Quote:

Originally Posted by justin For some reason I was thinking you had posted a while back about a good small cap international fund (value or 'blend') you own?

I wish it was me, but for the last few years Tweedy has been our only mutual fund. There's nothing terribly wrong with it but after 10 years it's showing the classic signs of getting too big to manage.

The rest of our portfolio has been ETFs, although I've been ruminating over ETFs like EFA & EFV.

[preben]

Wisdomtree Investments (having Pro. jeremy Siegel, Stocks For The Long Run and The Future for Investors as investment strategy advisor/board member) have filed for a slew of new ETFs:

Quote http://etfinvestor.com/article/9102:
At the moment, PowerShares is the only player for investors seeking international dividends for income and as a hedge against the decline of the dollar. That is about to change, however, as WisdomTree recently filed with the SEC for 20 dividend ETFs. Wisdomtree has proposed to create universes of dividend paying stocks from both the United States and the rest of the world. The index will be weighed based on dividends paid in proportion to the total dividends available in the universe; a similar methodology to the Morningstar Dividend Leaders Index Fund (FDL) from First Trust. Morningstar has published a white paper on their available dividends index method.

What is most interesting about the proposed International Dividend funds from WisdomTree is that they plan to slice the non-US universe into regions (Europe, EFA, Japan, Pacific ex-JP) and market cap tranches. When the WisdomTree ETFs get listed, investors could, for example, choose to have exposure to small cap Japanese companies that pay dividends.

These dividend funds will be the first funds to offer explicit small-cap and mid-cap international exposure. The requirement that companies pay dividends will act as a screen against immature companies with weak cash flow and give the indices a value bias. I predict that these WisdomTree ETFs will become very popular with investors and be an essential part of a balanced portfolio.
UNQUOTE

Maybe it is time to pick up some of that Wisdom Tree Investment stock (WSDT.PK) before they got those ETFs out? Cheers!

[unclemick]

Wow Ben!

Now that dividends are popular - feeding the ducks has reached new heights!

heh heh heh heh heh heh heh heh heh

[justin]

I briefly skimmed through the N-1A that Wisdomtree Trust filed with the SEC. Expense ratios were not disclosed in that document. I'm guessing they'll be on the high end. Any thoughts?

[Nords]

Quote:

Originally Posted by justin I briefly skimmed through the N-1A that Wisdomtree Trust filed with the SEC.* Expense ratios were not disclosed in that document.* I'm guessing they'll be on the high end.* Any thoughts?*

These guys popped up on my radar last month and I considered waiting until they got their act on the road, but then I remembered that we were in a similar position last year with Powershares. Waiting for the ultimate investment machine is as deadly as paralysis by analysis.

We'll see how they're doing next year.

[preben]

Small cap international value - I am willing to pay for that. Cheers!