As we continue to look for investment ideas to measure, our interest was snagged by the title of this article written for the Motley Fool by Andrew Tonner. We have reviewed approaches that focus on different types of company and some have hinted at diverse markets to aid diversification. Andrew's approach is to look for value in both the asset class and the individual equities acquired.
Index & Geography
Net Income Margin (%)
Return on Equity (%)
12 Month Return
Real GDP Growth
|Shanghai Stock Exchange||11.9||10.3%||17.6%||(17.9%)||9.1%*|
|Brazil IBOVESPA Index||8.1||17.1%||18.4%||(24.9%)||3.1%**|
|Bombay Stock Exchange Sensex Index||15.0||12.6%||18.6%||(15.4%)||8.8%***|
Source: S&P Capital IQ.
*For quarter ended Sept. 30.
**For quarter ending June 30.
***For full year 2010.
The argument goes that these are good markets in which to invest. The most direct way is to buy into one of the many funds that concentrate on specific countries or regions.
One example is to use ETF's. Andrew selected:
FTSE China 25 Index (AMEX: FXI)
MSCI Brazil Index (AMEX: EWZ)
These funds give direct and diversified access to the markets. We will add SPY to represent the US market.
Another way is to directly owning shares in some international stocks that trade on American exchanges. These companies all have the same direct exposure to a specific emerging market and pretty compelling characteristics.
P/ LTM Diluted EPS Before Extra Items
Net Income Margin
Return on Equity
|China Mobile Limited (NYSE: CHL)||China||10.3x||24.4%||21.5%||4.2%|
|Vale S.A. (NYSE: VALE)||Brazil||4.9x||42%||34.2%||4.3%|
|Petroleo Brasileiro (NYSE: PBR)||Brazil||5.6x||18.2%||16.7%||4.2%|
|Sterlite Industries India (NYSE: SLT)||India||7.2x||16.6%||14.5%||0.9%|
|Yum! Brands (NYSE: YUM)||US.-.based with huge global exposure, particularly in China||20.1x||10.2%||67.4%||2.2%|
This approach selects individual stocks and may suffer from poor execution but is another way of gaining access to international stocks but in a safe way based on US trading.
It will be interesting to compare these funds, the equities and our ETF benchmark of a balanced portfolio of Dividend producing ETFs and we will see how prescient she has been.
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors)|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond)|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF)|
|US EQUITY||DVY (iShares Dow Jones Select Dividend Index)|
|US EQUITY||VIG (Vanguard Dividend Appreciation ETF)|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx)|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd)|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond)|
- 5 Best Bet Equities for Today`s Investment Landscape -- Total of $10K invested equally in each fund
- 4 Best Bet Funds for Today`s Investment Landscape -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||-4%||-35%||10%||76%||8%||58%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-1%||-15%||13%||59%||3%||12%|
|4 Best Bet Funds for Today`s Investment Landscape||-16%||-65%||18%||54%|
|5 Best Bet Equities for Today`s Investment Landscape||-13%||-52%||19%||53%|
We can see from the chart that the selection based on strong markets have not been faring well over the short term but have done better over the longer term. Unfortunately we don't have enough history to fully explore the longer time horizon and gain insight from longevity.
I think that this approach is instructive in the sense that you can see that focusing on a restricted number of asset classes (essentially US and emerging markets) you don't achieve the returns of the more diversified portfolio. It is interesting that the equities and ETFs track but that the ETFs are more stable which is what you would expect.
I suggest that this hybrid is not the best approach -- either go for a fully diversified portfolio that you buy and hold or use a momentum approach whereby you switch in the asset classes that are performing best but in either case, don't restrict yourself to just a couple of asset classes.
Disclosure: We do not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.