OUR SOLUTION
Our objective is to provide a cost-efficient way to alleviate the home country bias thereby helping investors increase the returns on their portfolios while decreasing their risk. We use our proprietary “country value” investment style to achieve these goals, which includes:
- Global Macro Analysis: We begin by researching global macroeconomic and political trends to develop global and regional scenario forecasts, taking the long view. Some of these trends could include such factors as significant changes to oil and other energy prices, changes to monetary policies of major central banks around the world, and others.
- Country Analysis: Next, we identify country equity markets that trade at low valuations and have high expected returns. We then analyze these countries and stock markets from the top-down perspective. In addition to financial factors, we analyze risks and catalysts for these countries’ growth. These risks and catalysts could arise from such areas as politics, regulations, international trade relations, business environment, technology adoption and other.
- Portfolio Construction: We then use single-country equity ETFs of 45 developed, emerging and frontier economies as building blocks of our client portfolios. We build concentrated portfolios that consist of ETFs of 10-20 countries where equity markets trade at low valuations and have high expected returns. Over time, we rebalance portfolios and rotate country investments based on the continuous application of our investment process.
COUNTRY ANALYSIS EXAMPLE
Research Report: "Buy Chilean Equities: Impact of Copper Oversupply is Overblown"
ETFs versus Other Vehicles as Portfolios’ Building Blocks
We chose ETFs as building blocks for our client portfolios because ETFs give us advantages over other investment instruments that are commonly used for global diversification: individual stocks, global equity indices and closed-end funds. The ETF-based portfolios provide our investors with better diversification on the country-level and within each country than mutual funds that actively pick stocks, broad global equity indices and closed-end country funds.
1. ETF Portfolios Are Better Diversified Than Active Stock Picking Funds: We invest in ETFs that follow countries’ equity indices, which give us instant exposure to dozens of stocks within each country. Our portfolios are usually better diversified than portfolios of active stock pickers (e.g. active mutual funds) that often invest in just one or two stocks per country, often ignoring smaller countries whatsoever. We are not trying to find these one or two winners in each country as many active stock picking managers do. We understand how difficult it is to do it even in one country. It is much more difficult to do it in 45 countries. Our exposure to at least dozens of stocks per country instead of one or two reduces the risk of our country positions as they are not dependent on risks related to just one or two companies.
2. ETF Portfolios Have Better Exposure to Small and Medium Countries than Broad Global Equity Indices: We often invest sizable percentages of client portfolios (5-10% of total portfolio) in ETFs of medium and small countries. It allows us to have differentiated returns compared to widely-followed global indices. We choose country weights in our portfolios based on such factors as the attractiveness of each individual market and its correlations with other countries rather on the countries’ weights in the MSCI All Country World + Frontier Markets Index (MSCI ACWI + FM Index) and other broad global equity indices. With 2,573 companies, the MSCI ACWI + FM index, which serves as a benchmark for our portfolios, covers approximately 85% of the global equity investment opportunity set in 70 developed, emerging and frontier countries.[1] However, by investing in the index, it is impossible to get a meaningful exposure to medium and small countries. The weight of the US in the index is close to 50%, while the weight of the top five countries (US, Japan, UK, Canada and France) is close to 72%. It means that remaining 65 countries represent only 28% of the index’s weight.
3. Number of Single-Country ETFs Exceeds That of Closed-End Country Funds: The number of single-country ETFs is much higher than the number of closed-end country funds. Also, closed-end funds charge their investors higher fees and are less tax efficient.
[1] Source: MSCI, MSCI ACWI + Frontier Markets Index Profile, August 29, 2014.
1. ETF Portfolios Are Better Diversified Than Active Stock Picking Funds: We invest in ETFs that follow countries’ equity indices, which give us instant exposure to dozens of stocks within each country. Our portfolios are usually better diversified than portfolios of active stock pickers (e.g. active mutual funds) that often invest in just one or two stocks per country, often ignoring smaller countries whatsoever. We are not trying to find these one or two winners in each country as many active stock picking managers do. We understand how difficult it is to do it even in one country. It is much more difficult to do it in 45 countries. Our exposure to at least dozens of stocks per country instead of one or two reduces the risk of our country positions as they are not dependent on risks related to just one or two companies.
2. ETF Portfolios Have Better Exposure to Small and Medium Countries than Broad Global Equity Indices: We often invest sizable percentages of client portfolios (5-10% of total portfolio) in ETFs of medium and small countries. It allows us to have differentiated returns compared to widely-followed global indices. We choose country weights in our portfolios based on such factors as the attractiveness of each individual market and its correlations with other countries rather on the countries’ weights in the MSCI All Country World + Frontier Markets Index (MSCI ACWI + FM Index) and other broad global equity indices. With 2,573 companies, the MSCI ACWI + FM index, which serves as a benchmark for our portfolios, covers approximately 85% of the global equity investment opportunity set in 70 developed, emerging and frontier countries.[1] However, by investing in the index, it is impossible to get a meaningful exposure to medium and small countries. The weight of the US in the index is close to 50%, while the weight of the top five countries (US, Japan, UK, Canada and France) is close to 72%. It means that remaining 65 countries represent only 28% of the index’s weight.
3. Number of Single-Country ETFs Exceeds That of Closed-End Country Funds: The number of single-country ETFs is much higher than the number of closed-end country funds. Also, closed-end funds charge their investors higher fees and are less tax efficient.
[1] Source: MSCI, MSCI ACWI + Frontier Markets Index Profile, August 29, 2014.