Seeking Alpha
Profile| Send Message|
( followers)

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

Price-to-Earnings (LTM)

Net Income Margin (%)

Return on Equity (%)

12 Month Return

Real GDP Growth

S&P 500 14.3 8.7% 14.9% 2.1% 1.6%**
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)

Wisdom Tree India Earnings ETF (AMEX: EPI) , or the closed-end India Fund (AMEX: IFN)

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.

Company Name

Home Country

P/ LTM Diluted EPS Before Extra Items

Net Income Margin

Return on Equity

Dividend Yield

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)
CASH CASH
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)

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.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

The more detailed analysis and graphs give you a visual view of the volatility.

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.

Source: The Best Bets For Today's Investment Landscape