Geoff Considine

Do Emerging Market ETFs Really Help You Diversify?

I get a correlation of 0.75 between EEM (emerging markets) and IVV (S&P500) over the past three years using monthly total return data. This is not a low correlation. I find it a bit odd that so many people are talking about how decoupling was wrong only now--after we have seen some major declines in emerging markets. The evidence for strongly coupled returns between foreign markets and the S&P500 has been around for a long time. See for example this article from Jan 06:

seekingalpha.com/artic...

Judging Fund Performance: Part 2

You are right about how hard it is to judge a manager. This is part of the challenge for investors in active funds. If you can start by demonstrating that the risk/return level are consistent with a static asset allocation, that is an important data point. You are correct that the thumbprint of skill could be the ability to rotate sectors--but how do we convince ourselves of this? One way is to look at past asset allocations and how that have changed vs. broader market and index performance. This is a major undertaking and I find it harder than just analyzing investments.

Investing In a Greenhouse Gas-Regulated World

Jeffrey Lin has just written a related article on energy efficiency:

energy.seekingalpha.co...

This is a good article.

Investing In a Greenhouse Gas-Regulated World

Honeywell is promoting its activities in Climate change mitigation:

biz.yahoo.com/prnews/0...

Preparing for a ‘Volatility Shock’

For a great example of incredibly ill-informed advice on this issue, see the following article on The Motley Fool:

www.fool.com/investing...

The author says that the idea that high Beta stocks are risky is silly because he has a list of high Beta stocks that have done really well over the last five years!!! Really. This is the kind of thinking that will cause people a great deal of pain when volatility reverts.

Investing In a Greenhouse Gas-Regulated World

Consider this article on AA as an 'ethical company'---

biz.yahoo.com/bw/07051...

Investing In a Greenhouse Gas-Regulated World

More companies signing on support GHG regulation:

GM has signed on, believe it or not, in calling for regulation of GHG's:

biz.yahoo.com/ap/07050...

Citigroup has just announced a $50 billion initiative:

www.marketwatch.com/ne...;dist=TQP_Mod_mktwN

Preparing for a ‘Volatility Shock’

Also, Jeremy Siegel is making his case for stocks:

finance.yahoo.com/expe...

He suggests that perhaps market volatility is somewhat permanently suppressed due to several factors. Hmm. I do not believe that the world has changed that much since the early 2000's when volatility was far higher than it is today. Also, it is worth noting that Dr. Siegel also wrote an article in March warning that we are likely to see higher volatility in the future:

finance.yahoo.com/expe...

These are not necessarily contradictory because his statements are so qualitative in terms of magnitude and horizon.

Preparing for a ‘Volatility Shock’

Good question. Investors will, in general, be far better off managing volatility via asset allocation than trying to trade volatility directly--IMHO. Sadly, most investors have not concrete idea how volatile their portfolios are or how they would respond to a volatility shock.

Investing In a Greenhouse Gas-Regulated World

Germany has just announced plans to make major reductions in GHG's by 2020:

www.environmental-fina...

Financial Screens and Fund Performance Measurement

JonD:

This is the key issue, isn't it. The question of whether the portfolio managers can take credit for good rotation of allocations is important. You could be right, here. My main point is that the screens miss this issue altogether. The screens were originally just to find the top large-cap, mid-cap, etc. To even get to the issue that you are asking requires investors to do the kind of analysis I did here. Part of the answer comes down to the 'policy allocations' in the fund. If the fund dictates certain allocations, it is not skill. As yet, we cannot answer this issue. The situation is actually even more extreme than I showed. I am working on a follow up and noticed that UMVEX, the top-screened mid-cap fund has 15% of the portfolio in foreign stocks. Thus, I even under-estimated the foreign exposure in my analysis:


quicktake.morningstar....;Symbol=umvex&...

My next few articles will look at this topic in more depth--very important.

Financial Screens and Fund Performance Measurement

Two tables above refer to the portfolio of funds as being due to Forbes--this is wrong. The portfolio of screened funds is from the Fortune article. sorry for the typo.

All-ETF Portfolios vs. Strategic Mix of Stocks

Dear John (yes, this is a 'dear John' letter):

In the spirit of productive debate, why don't you email me (or simply post) a very diversified ETF portolio to start with that meets your criteria. If my supposition is correct, I will be able to find a variety of individual stocks that will improve the risk/return profile of this portfolio. Granted, such a test will be anecdotal but lets give it a shot. You will have the chance to demonstrate what you feel to be a 'best in breed' ETF portfolio. for simplicity, lets make it one with at least three years of historical data.

To make this work, I would ask that you refrain from pejorative name calling and the like. I believe that the other readers anc contributors to Seeking Alpha might feel the same.

All-ETF Portfolios vs. Strategic Mix of Stocks

To John Doe:

Apparently you have just not read my paper. I specifically state and have reiterated that the article is designed to show one thing: how individual equities can have better diversification properties than a fund that is already asymptotically close to its maximum diversification.

As an aside, I will note that you are apparently the only person who has read this who felt that it is "intellectually dishonest" or in any way misleading. I write articles on topics that I find interesting. QPP is intended to help investors and their advisors make better allocation decisions and we get regular feedback that it is doing just that.

Of course you are correct that I want people to buy our software--that is the nature of business.

All-ETF Portfolios vs. Strategic Mix of Stocks

Oh--one other thought. A company like EXC is NOT the an ideal way to get exposure to commodities. Utilities such as EXC provide some exposure to commodities but their fundamental exposure is the spark spread in commodities. The spark spread is the difference between the cost of generating electricity and the price at which you can sell it. The spark spread is widely traded in commodities markets and has its own long-term dynamics. I am personally rather bullish on having long-term exposure to the spark spread. That said, utilities also do have exposure to the direction of energy commodities, but you invest in utilities because you want exposure to the spark spread and commodities. For a direct commodity play, it is better to look elsewhere.