New Ways to Construct Portfolios - Maybe

Oct.29.08 | About: iShares TIPS (TIP)

Is this the future of portfolio construction? Well, maybe.

IndexUniverse.com had an article about Bank of NY (NYSE:BK) creating a bunch of GDR indexes (similar to ADRs but traded in the UK) for quite a few countries and a couple of broad based indexes too.

The list:

  • Bahrain
  • Croatia
  • Egypt
  • Estonia
  • Georgia
  • Hungary
  • India
  • Israel
  • Kazakhstan
  • Kuwait
  • Lebanon
  • Netherlands
  • Nigeria
  • Oman
  • Pakistan
  • Poland
  • Romania
  • Russia
  • South Korea
  • Taiwan
  • Turkey
  • UAE
  • Ukraine
  • Eastern Europe
  • Easter Europe ex-Russia
  • MENA
  • Middle East
  • Africa
  • Emerging Markets

It is a good bet that these indexes are being created in the hope that someone will license them into some sort of investment product like an ETF.

I've long been of the opinion that portfolio construction is in the middle of a rather swift evolution and have expected/hoped that the world of investment products would generally keep up with that need. Accessing individual stocks from these countries is very difficult and even if they were easily accessible the task of stock picking would be difficult too. (Click chart to enlarge.)



Chances are that when things get healthier in Poland, just owning the WIG 20, or something close, would be sufficient for a US based investor.

The gang at Fistful of Euros spell out the problems Poland might be having these days and it does not look good, but Poland, or any other country in trouble, will become attractive at some point.

If the US is like Japan in any way, it could be that returns in our domestic market will be below normal (long running theme) so US based investors will have to find another solution besides 75% in domestic equities.

Perhaps the answer will have to be something like one of the do-it-yourself hedge funds (but heed this warning from Mebane Faber) that gets written about sometimes. I've written about this before, of course, but some weighting to absolute (I have my favorites), a heavier weighting to TIPS products (after asset deflation ends we could be in for some nasty inflation), a little something in commodities, another little something in currencies, a small weight in maybe two countries from the above list, a small weight in a couple of bigger emerging countries and a slightly larger weight in four or five developed countries could add up to 70% of a portfolio before getting to domestic equities and maybe something to hedge a little bit of all that foreign currency exposure.

I've written a couple of hundred posts over the years about having a plan for defense, having thought a bear market less severe than we've actually had was a real possibility. Now I'm writing a lot about figuring out what to do in case the US continues to offer subpar returns, because I think that is a real possibility.

There have been comments left of late along the lines of the stock market not working or whatever, and while I'm not here to try to talk anyone out of anything, we all need to save for our futures and do something effective with what we save. The issue seems to be that what do something effective means might be changing. I don't know if it is changing, but it might be, and I feel it is important to figure something out.