Frequently Asked Questions
Investment Process
What investment process does Beyond Borders Investment Strategies use?
Why do you use single-country ETFs instead of picking individual stocks in foreign countries?
Why do you use single-country ETFs instead of broad based international equity indices?
Could you give us an example of your country analysis?
Why don’t you use leverage or short-selling?
Why do you run money in Separately Managed Accounts?
Performance – First Three Years
Explain your firm’s portfolio performance during the first three years of operations?
Why did you run only your own money during the first three years?
Please scroll down the page to see answers to these questions.
Investment Process
What investment process does Beyond Borders Investment Strategies use?
Our investment process is quantimental as it includes both quantitative and fundamental analysis techniques. It is based on decades of experience in the analysis of global and country specific macroeconomic growth, investment valuations, as well as political and regulatory risks gained at both industry and academic settings. These skills were honed over more than a decade at some of the world’s leading asset management firms, such as State Street Research & Management (now BlackRock), Fidelity Management & Research, Batterymarch Financial Management (a Legg Mason company), and BNY Mellon Asset Management.
Our investment process involves the following steps.
1. Identification of countries where stock markets trade at low valuations compared to their long-term histories (Quantitative)
2. Understanding reasons for these low valuations (Fundamental)
· Often, these countries go through country-specific political, economic, or social crises
· Sometimes, these countries just go through difficult economic times caused by global or regional developments (e.g. low demand for commodities or manufactured goods produced by these countries)
· In some cases, these countries’ stock markets valuations could be impacted by geopolitical crises that does not have anything to do with the internal situation within these countries
3. Identification of potential catalysts that would make these stock market valuations expand to their historical averages (Fundamental)
4. Identification of risks to these catalysts and these countries' economic growth (Fundamental)
5. Calculation of expected returns for these countries (Quantitative)
6. Construction of concentrated portfolios that consist of 10-20 ETFs of countries where markets trade at low valuations and have high expected returns (Quantitative)
BBIS’ investment process is described in the report titled Quantimental Investing in International Equity Markets published in August 2015.
Why do you use single-country ETFs instead of picking individual stocks in foreign countries?
While possible, it is extremely difficult to consistently find the best performing individual equities even in one country, let alone in fifty. Investing in individual equities also brings with it exposure to idiosyncratic risks that the individual companies face. The stock pickers often invest in just several companies per country, which in our view, does not provide investors with an adequate protection against the risk of stock prices of one or several companies falling dramatically, or even going all the way to zero if these companies go bankrupt.
Our strategy gives our investors targeted exposure to countries where stock markets trade at significant discounts to their long-term averages and, therefore, have high expected returns. In addition, our use of ETFs, or funds that have at least 20 equities in them, as portfolio building blocks gives investors better protection against loses caused by one or several companies going bankrupt.
The idea of developing an international strategy that would use single-country ETFs as building blocks came to me after Yukos Oil Company, one of the best run and most profitable companies in the emerging market universe, was unexpectedly forced into bankruptcy during the first decade of the 21st century. Investors, no matter how diligent and knowledgeable they were about the company, could not have forecast this development. Unless one was at the very pinnacle of the Russian Federation's political and economic power, nobody could have forecast the company’s bankruptcy. During and after the affair, I realized that some risks cannot be forecasted even by people who know individual companies extremely well.
Why do you use single-country ETFs instead of broad based international equity indices?
There are two major problems with getting exposure to the international markets through the broad based international indices. First, these indices give investors exposure to equity markets of several largest countries but do not give investors adequate exposure to smaller countries. For example, the weight of the top 7 countries in MSCI ACWI ex USA Value Weighted Index, an international index that we compete against, was more than 61% (as of December 31, 2015). This extremely high weight in the largest countries means that an investor would not be able to invest meaningful percentages of his/her international portion of the portfolio in the remaining 41 countries. Their weight within the index is less than 39%, or less than 1% per country on average. The second problem is also related to the high weights of several countries in the indices. When stock markets of some of the countries with the largest weights trade above their historical valuation averages, investors get significant exposure to the markets with low expected returns. Investors cannot do anything to change weights of countries in the indices as only index providers can do it.
At BBIS, we can also allocate much higher weights (up to 10% of our portfolio) to any country ETF depending on such factors as the country market’s expected returns, investment valuations, catalysts to the country crisis alleviation, risks to these catalysts, and the ETF’s liquidity. We are also flexible in our country selection and can shift our investments from countries with lower expected returns to the ones that offer higher expected returns.
Could you give us an example of your country analysis?
Below is a report on Chilean ETF (iShares MSCI Chile Capped ETF, Ticker: ECH) titled Buy Chilean Equities: Impact of Copper Oversupply is Overblown published in March 2014
Why don’t you use leverage or short-selling?
At BBIS, we focus most of our attention on selecting countries and investment positon sizes. We are satisfied with unleveraged returns of ETFs as countries that they represent get out of the crises. In 2016, for example, some of our largest investment positions were ETFs of Brazil (iShares MSCI Brazil Capped ETF, Ticker: EWZ), Peru (iShares MSCI Peru Capped ETF, Ticker: EPU) and Russia (iShares MSCI Russia Capped ETF, Ticker: ERUS) that had total returns (price appreciation and dividend payments) of 64.5%, 64.0% and 54.6%, respectively. We would be OK with getting this types of unleveraged results.
We do not use leverage (borrowed money) or short-selling of single country ETFs because it could unnecessarily raise investment risk of our portfolio. We feel that we have an appropriate amount of risk in our portfolio without using these tools. While the use of leverage or of short-selling can increase investment returns, it could also lead to the rapid loss of the investment. The fascinating story of Long-Term Capital Management hedge fund (LTCM), serves as a warning tale to us. LCTM employed some of the brightest financial minds of our time, but was undone by its humongous leverage (debt) that it could not pay out as a result of a bad surprise. As a result of the Russian government’s totally unexpected default on their domestic local currency bonds in 1998 and the ensuing flight to quality (less-risky) investments by most investors, LTCM was forced to sell its positions in a highly unprofitable manner and still was not able to pay off its debt.
We also do not sell ETFs short or bet that their prices will decrease because it is very difficult to pinpoint timing of the future price decrease. Even if one believes that a certain market is overvalued and sells an ETF representing it short, the investor could easily lose money if the timing of their shorting is wrong. When we believe that a certain ETF is overvalued, we just do not invest in it.
Why do you run money in Separately Managed Accounts?
We chose Separately Managed Accounts (SMAs) rather than commingled funds, where various clients’ money is mixed with each other, for the following four reasons:
Performance – First Three Years
Explain your firm’s portfolio performance during the first three years of operations?
Over the long term, value stocks usually outperform growth stocks. However, during the first couple of years value managers usually do not have fantastic returns since they invest in assets (e.g. stock, bonds, ETFs) with problems. These problems are usually pretty severe and are not likely to get resolved quickly. If they were, the market participants would have been able to see through these problems and the assets would not have been selling at discounts.
Why did you run only your own money during the first three years?
In 2014, when I invested close to 90% of my own liquid assets in the firm's portfolio, I anticipated that I would not be raising money before I test the strategy in the real world. Before starting the firm, I performed back-tests that demonstrated that the firm should expect strong returns from building portfolios from ETFs that traded at significant discounts to the long-term averages. But there is a difference between back-tested and actual returns. The dramatic rise and fall of F-Squared Investments, one of the largest ETF money managers in the country that managed to attract money by using "optimistic" back-tested returns, clearly demonstrated this inconsistency. I thought that it would be better to run a strategy with my own money and build the actual performance record rather than attract outside money only to see that there were problems with the strategy. When I started the firm, I did not know about any competitors pursuing exactly the same country equity value strategy. As an engineer by training, I did not want to offer my clients an investment vehicle that was not tested in the real world. I did not want to lose clients’ money and my firm’s reputation due to avoidable mistakes in the firm’s investment strategy or its implementation. It was very important for me to see that my firm's actual portfolio value would start increasing by the end of the three-year period, which in Beyond Borders Investment Strategies’ case coincided with the second half of 2016. When I observed these increases, which were in line with our expectations, BBIS started actively marketing our services to potential clients.
Investment Process
What investment process does Beyond Borders Investment Strategies use?
Why do you use single-country ETFs instead of picking individual stocks in foreign countries?
Why do you use single-country ETFs instead of broad based international equity indices?
Could you give us an example of your country analysis?
Why don’t you use leverage or short-selling?
Why do you run money in Separately Managed Accounts?
Performance – First Three Years
Explain your firm’s portfolio performance during the first three years of operations?
Why did you run only your own money during the first three years?
Please scroll down the page to see answers to these questions.
Investment Process
What investment process does Beyond Borders Investment Strategies use?
Our investment process is quantimental as it includes both quantitative and fundamental analysis techniques. It is based on decades of experience in the analysis of global and country specific macroeconomic growth, investment valuations, as well as political and regulatory risks gained at both industry and academic settings. These skills were honed over more than a decade at some of the world’s leading asset management firms, such as State Street Research & Management (now BlackRock), Fidelity Management & Research, Batterymarch Financial Management (a Legg Mason company), and BNY Mellon Asset Management.
Our investment process involves the following steps.
1. Identification of countries where stock markets trade at low valuations compared to their long-term histories (Quantitative)
2. Understanding reasons for these low valuations (Fundamental)
· Often, these countries go through country-specific political, economic, or social crises
· Sometimes, these countries just go through difficult economic times caused by global or regional developments (e.g. low demand for commodities or manufactured goods produced by these countries)
· In some cases, these countries’ stock markets valuations could be impacted by geopolitical crises that does not have anything to do with the internal situation within these countries
3. Identification of potential catalysts that would make these stock market valuations expand to their historical averages (Fundamental)
4. Identification of risks to these catalysts and these countries' economic growth (Fundamental)
5. Calculation of expected returns for these countries (Quantitative)
6. Construction of concentrated portfolios that consist of 10-20 ETFs of countries where markets trade at low valuations and have high expected returns (Quantitative)
BBIS’ investment process is described in the report titled Quantimental Investing in International Equity Markets published in August 2015.
Why do you use single-country ETFs instead of picking individual stocks in foreign countries?
While possible, it is extremely difficult to consistently find the best performing individual equities even in one country, let alone in fifty. Investing in individual equities also brings with it exposure to idiosyncratic risks that the individual companies face. The stock pickers often invest in just several companies per country, which in our view, does not provide investors with an adequate protection against the risk of stock prices of one or several companies falling dramatically, or even going all the way to zero if these companies go bankrupt.
Our strategy gives our investors targeted exposure to countries where stock markets trade at significant discounts to their long-term averages and, therefore, have high expected returns. In addition, our use of ETFs, or funds that have at least 20 equities in them, as portfolio building blocks gives investors better protection against loses caused by one or several companies going bankrupt.
The idea of developing an international strategy that would use single-country ETFs as building blocks came to me after Yukos Oil Company, one of the best run and most profitable companies in the emerging market universe, was unexpectedly forced into bankruptcy during the first decade of the 21st century. Investors, no matter how diligent and knowledgeable they were about the company, could not have forecast this development. Unless one was at the very pinnacle of the Russian Federation's political and economic power, nobody could have forecast the company’s bankruptcy. During and after the affair, I realized that some risks cannot be forecasted even by people who know individual companies extremely well.
Why do you use single-country ETFs instead of broad based international equity indices?
There are two major problems with getting exposure to the international markets through the broad based international indices. First, these indices give investors exposure to equity markets of several largest countries but do not give investors adequate exposure to smaller countries. For example, the weight of the top 7 countries in MSCI ACWI ex USA Value Weighted Index, an international index that we compete against, was more than 61% (as of December 31, 2015). This extremely high weight in the largest countries means that an investor would not be able to invest meaningful percentages of his/her international portion of the portfolio in the remaining 41 countries. Their weight within the index is less than 39%, or less than 1% per country on average. The second problem is also related to the high weights of several countries in the indices. When stock markets of some of the countries with the largest weights trade above their historical valuation averages, investors get significant exposure to the markets with low expected returns. Investors cannot do anything to change weights of countries in the indices as only index providers can do it.
At BBIS, we can also allocate much higher weights (up to 10% of our portfolio) to any country ETF depending on such factors as the country market’s expected returns, investment valuations, catalysts to the country crisis alleviation, risks to these catalysts, and the ETF’s liquidity. We are also flexible in our country selection and can shift our investments from countries with lower expected returns to the ones that offer higher expected returns.
Could you give us an example of your country analysis?
Below is a report on Chilean ETF (iShares MSCI Chile Capped ETF, Ticker: ECH) titled Buy Chilean Equities: Impact of Copper Oversupply is Overblown published in March 2014
Why don’t you use leverage or short-selling?
At BBIS, we focus most of our attention on selecting countries and investment positon sizes. We are satisfied with unleveraged returns of ETFs as countries that they represent get out of the crises. In 2016, for example, some of our largest investment positions were ETFs of Brazil (iShares MSCI Brazil Capped ETF, Ticker: EWZ), Peru (iShares MSCI Peru Capped ETF, Ticker: EPU) and Russia (iShares MSCI Russia Capped ETF, Ticker: ERUS) that had total returns (price appreciation and dividend payments) of 64.5%, 64.0% and 54.6%, respectively. We would be OK with getting this types of unleveraged results.
We do not use leverage (borrowed money) or short-selling of single country ETFs because it could unnecessarily raise investment risk of our portfolio. We feel that we have an appropriate amount of risk in our portfolio without using these tools. While the use of leverage or of short-selling can increase investment returns, it could also lead to the rapid loss of the investment. The fascinating story of Long-Term Capital Management hedge fund (LTCM), serves as a warning tale to us. LCTM employed some of the brightest financial minds of our time, but was undone by its humongous leverage (debt) that it could not pay out as a result of a bad surprise. As a result of the Russian government’s totally unexpected default on their domestic local currency bonds in 1998 and the ensuing flight to quality (less-risky) investments by most investors, LTCM was forced to sell its positions in a highly unprofitable manner and still was not able to pay off its debt.
We also do not sell ETFs short or bet that their prices will decrease because it is very difficult to pinpoint timing of the future price decrease. Even if one believes that a certain market is overvalued and sells an ETF representing it short, the investor could easily lose money if the timing of their shorting is wrong. When we believe that a certain ETF is overvalued, we just do not invest in it.
Why do you run money in Separately Managed Accounts?
We chose Separately Managed Accounts (SMAs) rather than commingled funds, where various clients’ money is mixed with each other, for the following four reasons:
- Transparency: Clients can see their positions in their online accounts any minute they want.
- Safety: In our opinion, in the post-Bernie-Madoff world, clients feel more secure if they know that only they, and not investment managers, can withdraw money from the separately managed accounts.
- Tax Management: SMAs are more tax-efficient than commingled funds (e.g. mutual funds). If a mutual fund sells an investment asset that appreciated dramatically over many years, an investor in the mutual fund who bought the fund a day before the sale would be a subject to capital gain tax even though he/she has hardly benefitted from the asset appreciation. An investor in a SMA would be responsible for taxes charged for his/her asset appreciation only.
- Low Costs: We chose Interactive Brokers (www.interactivebrokers.com), one of the most highly-ranked online brokerages, to custody money of our clients. This brokerage is known in the industry for its extremely competitive (low) trading commissions.
Performance – First Three Years
Explain your firm’s portfolio performance during the first three years of operations?
Over the long term, value stocks usually outperform growth stocks. However, during the first couple of years value managers usually do not have fantastic returns since they invest in assets (e.g. stock, bonds, ETFs) with problems. These problems are usually pretty severe and are not likely to get resolved quickly. If they were, the market participants would have been able to see through these problems and the assets would not have been selling at discounts.
- Seeding Stage: As we expected, BBIS’ performance during 2014 and 2015 was not stellar. We invested close to 100% of the firm's portfolio in single-country equity ETFs of countries where markets traded at discounts to their long-term valuation averages due to ongoing country crises. Since we mostly invested money and did not sell many ETFs during the first two years, we call this period our firm’s Seeding Stage. During this stage, valuations of the overwhelming majority of ETFs in our portfolio were low since the countries that these ETFs were representing were going through crises (e.g. financial, geopolitical, political, or social) or difficult economic times (e.g. low demand for countries’ exports such as commodities or manufactured goods). These crises and difficult times were serious. Otherwise, investors would have seen that they were not likely to last, and valuations would not have been so low.
- In our estimate, these country crises last from one to three years. BBIS performance could have been great in 2014 and 2015 if performance of international value stocks had been strong. In this case, valuations of a large number of ETFs in our portfolio could have increased to their long-term averages resulting in excellent performance for the portfolio. However, 2014 and 2015 were not great years for international value stocks. The benchmark measuring their performance, MSCI All Country World (ACWI) Value Weighted Index, dropped by 5.4% and 7.8% in 2014 and 2015, respectively. In 2015, performance of the equity markets around the world was especially skewed to the downside. Out of the 48 countries that we followed that year, the stock markets of only four countries (8% of the country universe) had positive performance of above 5%, while the stock markets of 26 countries (54% of the universe) had performance of below negative 5%.
- Operating or Harvesting Stage: Since, as we observed at BBIS, the country crises last one to three years on average, we expected that some of them would pass and that our portfolio’s performance would be stronger in 2016, our third year in business. The thinking was that by Year 3, some crises would pass and stock market valuations would increase. Our expectations were correct. Our benchmark’s total investment returns were 10.6%, while BBIS portfolio’s total return was 14.9%, or 4.3% higher than the benchmark. We call this stage Operating or Harvesting, and expect that in the future BBIS portfolio’s performance would be a part of this stage. We expect that every year some ETFs will increase in value as country crises alleviate, and some will reach our target goals, and we will sell them. We are planning to reinvest money in ETFs of countries facing crises at that time. If market conditions allow it, we would like to have more than 50% of our holdings in countries where crises are alleviating or have passed. Implementing this strategy means that we would have less than 50% of holdings in countries where crises are still going on and valuations are low since these ETF’s total returns are not likely to increase dramatically right away. For comparison, during the Seeding Stage, we had close to 100% invested in ETFs of countries with ongoing crises.
- Comparison with Piloting a Plane: When I think about our first three years in business, an example from the aviation field comes to mind. Launching a strategy is like piloting an airplane from the takeoff until it reaches its cruising altitude. If the weather is good, you can get to your cruising altitude faster. However, during the turbulent weather (e.g. thunderstorms, strong winds), pilots usually reduce their speed to what is known as turbulence penetrating speed. It takes them longer to get to the cruising altitude. For us, the cruising altitude is associated with higher expected returns and is reached when the weight of ETFs of countries in crises constitutes less than 50% of the firm’s portfolio. The rest are ETFs of countries where crises are over or about to be over, and valuations of these markets increase dramatically fueling the growth of the whole portfolio. During 2014 and 2015, when the equity markets’ performance (or the weather) around the world was not good, we experienced turbulence and our portfolio returns reflected it. In our opinion, we reached the cruising altitude in 2016 fueled by rapid increases in prices of such ETFs as Brazil, Russia, Peru, and Chile.
Why did you run only your own money during the first three years?
In 2014, when I invested close to 90% of my own liquid assets in the firm's portfolio, I anticipated that I would not be raising money before I test the strategy in the real world. Before starting the firm, I performed back-tests that demonstrated that the firm should expect strong returns from building portfolios from ETFs that traded at significant discounts to the long-term averages. But there is a difference between back-tested and actual returns. The dramatic rise and fall of F-Squared Investments, one of the largest ETF money managers in the country that managed to attract money by using "optimistic" back-tested returns, clearly demonstrated this inconsistency. I thought that it would be better to run a strategy with my own money and build the actual performance record rather than attract outside money only to see that there were problems with the strategy. When I started the firm, I did not know about any competitors pursuing exactly the same country equity value strategy. As an engineer by training, I did not want to offer my clients an investment vehicle that was not tested in the real world. I did not want to lose clients’ money and my firm’s reputation due to avoidable mistakes in the firm’s investment strategy or its implementation. It was very important for me to see that my firm's actual portfolio value would start increasing by the end of the three-year period, which in Beyond Borders Investment Strategies’ case coincided with the second half of 2016. When I observed these increases, which were in line with our expectations, BBIS started actively marketing our services to potential clients.