Seeking Safety and Alpha at the Same Time

High risk and high return are generally understood to go together, but are there exceptions? Are there ways to find a higher return with a lower risk? The strategy described here is to select countries based upon a positive current account as a percentage of the countries own GDP.

Those countries with the highest current account are those countries most likely to weather the storm should world economies take a turn for the worst, because these are the countries with the most investment assets under their own control. If there is a market downturn, these will decline along with everything else, but if we start to see soverign defaults, I think these are the countries least likely to fail.

Notice that an investment in these countries over the past few months produced a much higher return than the average world return of +6.0%.

Country	Symbol	Curr-Acct	GDP	Mkt YTD
Singapore	EWS	+14.9	-10.1	+28.2
Malaysia	EWM	+12.3	-6.2	+18.2
Taiwan	EWT	+9.6	-10.2	+38.8
Hong Kong	EWH	+7.7	-7.8	+24.4
Switzerland	EWL	+7.6	-2.4	-3.4
China	FXI	+7.4	+6.1	+33.3
Sweden	EWD	+7.3	-6.5	+19.4
Netherlands	EWN	+5.9	-4.5	+4.5
Thailand	THD	+5.3	-7.1	+31.8
Germany	EWG	+4.4	-6.9	+1.5
South Korea	EWY	+2.9	-4.2	+19.0
Austria	EWO	+1.7	-3.5	+17.6
Japan	EWJ	+1.7	-8.8	+2.9
Russia	RSX	+0.9	-9.5	+51.8
Indonesia	IDX	+0.9	+4.4	+55.1

These statistics were all found in the Economist dated June 27th. FXI is not a very good proxy for China, but it is the one that I use.

In the final selection process, I consider a weighted average of current account, GDP and the inverse of CPI. This results in an asset allocation model that includes almost all of these plus India, because it still has a positive GDP, and I own Brazil even though the model doesn't select it.

Comments

[Graham and ...:]

David Swensen (at Yale) demonstrated that if you push out the "efficient frontier," you CAN get higher returns with lower risk (recent results notwithstanding). International markets is just one example of this.

Jun 30 10:30 AM

[Larry House:]

I just don't think I would commit money to any of these right now. I don't care for the "they will hold up" philosophy. I have taken profits on a China fund, and I am just going to watch for a while before jumping back in.

Jun 30 04:25 PM