Successful Investing Will Mean Understanding International Destinations

Includes: EFA, GNAT
by: Roger Nusbaum

I found an interesting post from Jim Wiandt in the IndexUniverse blog section about iShares MSCI EAFE Fund (NYSEARCA:EFA). He was at some sort of ETF conference and he remarked about the buzz created when Steven Schoenfeld said that EAFE was obsolete - so by extension I take that to mean he thinks EFA is obsolete.

Um, I've kind of been saying the same thing for a couple of years now. The first instance I found in the archives of writing EFA was not a great way to capture foreign diversification was June 28, 2005. There have been many other instances here and once or twice for I doubt Jim reads my stuff and I further doubt Steven has ever heard of me, but still...

More people have become aware of foreign investing in the last few years and I believe it will become more important as time goes on. But to paraphrase Nassim Teleb, "diversification used to work - when no one knew about it."

I have never been a fan of EFA. I have preferred stocks mostly or occasionally a country fund and I do use the Wisdom Tree International Energy Fund (DKA) for most clients. The problem as I see it with broad based products is that the benefits of most of the countries get blended away when lumped in with the huge weightings in Japan and the UK.

Certain individual countries, because of their economies, offer the chance for better diversification than others. To the extent there is a fund for a country like that, great - but you may need to be open to the idea of individual stocks as well.

Success in the future will depend on exploring new products and learning about new (to you) destinations. While understanding and accessing Botswana is outside the realm for most folks, there are countries that should be in the realm if you are going to manage your own portfolio.

Another aspect of this that I have written about a lot is, from the country level, understanding the differences between the various countries owned. A blend of different countries with different attributes provides a chance for diversification without getting crushed if some sort of event happens.

For example, owning a surplus country and a deficit country is probably a good idea. Or thought of a little differently, a carry trade destination country and a funding destination. To be clear, I am not saying limit yourself to two countries, but I do want to point out some of the differences in countries.