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Reply to @Crash: I don't know if he is correct that the sell off will continue or not. If it does and EM equities become compelling, I will buy however.
So far the Fed is winning The Great Currency War. When that ends EM will likely be cheap. At least that's my investment thesis.
"The sky is falling!" is great for generating attention.
William Blair EM Small Cap, on which I'm working now, is yellow and up 12% in 12 months. Seafarer is blue, down 0.7%. Amana is green, down 3.2%. The E T F he mentions is orange, down 7.5%. Mr. Foster makes the argument that the MSCI index is structurally flawed because its liquidity requirements, which are designed to make it easy for large firms to execute large trades, systematically exclude many firms with attractive profiles and considerable diversification appeal.
That's all pretty specific and on-point. Thank you. It seems to me the younger (and growing) populations in Asia must be a positive factor for years to come, all by itself. More internal consumer spending, less export-driven stuff, all across the board. There's lots to read all about that, everywhere in the media, these days.
The reality, as always, is somewhere between "sky is falling" and "invest as usual".
Tactically, I have gone net short EM this week primarily on technicals. The following thinking is my assessment of this asset class but not what determined my short position, so not talking the book, so to speak!
I think EM has significant headwinds to overcome for the same reason it became very popular over the last decade, money chasing performance. Prior to 2008, EM assets gave magnified returns over DM creating a significant amount of money chasing these stocks. If you see the diversified portfolio recommendations over the last decade, you will see a growth in EM allocation. What used to be 0-2% allocation grew to 5-10% and some people were wondering whether it even made sense to hold DM anymore. After all, EM was where the future economies were right? Rationalizations for money flow induced growth.
Everything changed in 2013. Why? 2008 and 2011 gave a double punch for EM where people finally got the magnification consequences in losses and DM started attracting money away from EM. And the flow itself increased the performance difference between DM and EM resulting in a snowballing effect.
So what does that imply for EM investing? Don't wait for a reversion to mean based on fundamentals in EM. The rationalizations made earlier in it have not become invalid. Opposite rationalization is now being made. As long as DM and US in particular markets are doing well, money is not going to flow into EM, which means EM is not going to outperform DM consequently prolonging that underperformance. It will only change if DM stagnates (not go into correction which would just pull the money out) and money starts to look for performance elsewhere. For a tactical allocation, that would be the time to go long. If you are a passive buy and hold investor, have a reasonable 3-5% allocation at most since you cannot time when to get back in or find a global allocation fund that will decide for you.
I remain invested in Jardine Matheson, Hutchison Whampoa and a few other odds/ends. I was in some Brazil stocks for a bit. I am actively looking for other EM options, although I have considered adding to Jardine.
I am intrigued by your interest in Jardine. It seems pretty solid, and I recall that you mentioned it several times already, saying that it is a bit expensive (but now it is less so). Do you know why it was not present in any Matthews funds? I believe that only recently it prominently appeared in their new fund Matthews Asia Focus Institutional, MIFSX. They are among the best experts in Asia, so if it is a great stock why they did not notice it earlier? Or maybe they invested in some of its parts separately?
Reply to @finder: (From Morningstar:) MACSX bought into Jardine on 30/06/2012. I did not look beyond that. And of course, I'm looking at a list of top 25 holdings in the fund. The other Matthews funds might hold it, below that level.
With thanks to ibartman for pointing out IEMG (and the MSCI index that tracks the "full" EM, including smaller stocks - MSCI EM Investable Market Index), here's an updated graph. The new red line is IEMG. As M* wrote in its analysis, the small caps are only 6% of the index, so you don't see much spread between the red and the orange. But that spread would appear to be what Mr. Foster is talking about.
There are times when passive works, but not very often with EMs. As others have pointed out, there are a number of good managers who have positive numbers over the last month. And Matthews continues to excel with a number of their diversified funds. Even though they are diversified Asia in many cases, they are certainly doing better than the EM Index.
Reply to @finder: Jardine is a rather giant company with holdings in Mandarin Oriental Hotels, Dairy Farm, holding company Jardine Strategic (which is the majority owner of the parent), Jardine Cycle (which is the majority owner of huge conglomerate Astra International) and more.
I haven't looked at the Matthews funds holdings in a while, but they may hold both Jardine (as Crash notes below) or parts of Jardine, as the subsidiaries are also separately traded. Dairy Farm is held by a lot of various EM funds, in particular some of the Templeton funds.
Jardine did get a little overdone to the upside at one point over the last year, but even at that point, the company was still not that technically expensive. It is now trading again at about book value and did correct rather significantly.
Hutchison, Swire and a few other Asian conglomerates continue to trade around book value or less, although Jardine has been the most consistent over time. Hutchison has been inconsistent, but holds some tremendous assets - it is one of the top port operators in the world and holds the massive AS Watson health and beauty chain, which was the largest such chain in the world until the Walgreens merger with Alliance Boots a year or so ago. Hutchison is run by Li Ka-Shing, considered the richest person in Asia. (http://en.wikipedia.org/wiki/Li_Ka-shing)
It is not without volatility, but it is sort of an Asian "blue chip" and the company has been around since the 1800's. It is a giant company, but I find a lot to like about it and the parent company pays a very decent dividend (and, given that it is Singapore-listed, there is no foreign withholding tax on dividends.) The whole Singapore no withholding tax on dividends is - I think - a nice little feature. I also own Singapore Telecom.
People who are interested should do their own DD and be aware of the risks, but personally, Jardine remains a long-term holding.
Dairy Farm is also the only way to publicly invest in IKEA (they own IKEA stores in Hong Kong, Taiwan and soon Indonesia.) Dairy Farm is a 50% holder in large restaurant company Maxim's, which owns the rights to Starbucks in Macau and Hong Kong. Maxim's got 100% of the equity in those markets in 2011. BUT, there is so much to Jardine that this is a small portion of the larger whole.
Jardine Strategic (the holding company) is the other main option, although it provides less of a dividend.
Jardine Strategic can make specific strategic investments in other companies, and continues to have an investment with the Rothschilds (it was a key holder in private Rothschilds Continuation Holdings, but with the change in structure that happened with that, Jardine Strategic had shares in the public holding company Paris Orleans and I believe a good portion of that was sold in 2012. "In June 2012, consequent on the restructuring of the Rothschild group, the Company exchanged its 21% interest in Rothschilds Continuation Holdings for a 12% interest in Paris Orléans, the listed French holding company of the enlarged group. Subsequently, the Company sold part of its holding, leaving an interest of some 6%. As a result, this holding is no longer equity accounted. ")
Reply to @BobC: But it's still tricky though as the EM recommendations seem to rotate.
T. Rowe Price EM Fund (PRMSX) has been highly recommended the past 5-7+ years but yet it has just matched the EM index fund over the past 10 years. If we go back a bit further to the start of 2000 until today --- PRMSX has basically matched the EM index (and in actuality slightly underperformed it). This wasn't your average obscure EM fund - it was a well-recognized and highly recommended EM fund in numerous investing forums.
Columbia Emerging Markets fund was once recommended by some whereby the fund was backed by a smart manager. Out of that we got 10-year performance matching that of the index dead-on.
Acadian Emerging Markets fund several years ago was appealing quite some time ago and it actually had to close for a bit because it got too hot with new money. This fund has shown some decent long-term outperformance and that looks great when we're looking at 10+ year perf numbers but the reality is this --- who stuck around to hold this fund after exhibiting extreme volatility? It showed more volality in the late 90's and in 2008 than the EM index.
Plus it's gotten more complicated as now you have various flavors of EM "indexes" such as the Dividend weighted ones, Low-Volatility and Value weighted ones. I also like TLTE - which is basically a value + small overweight/leaning index.
So an investor who may have liked PRMX or the Columbia or the Acadian or heaven's forbid Fidelity EM fund in the past may have already rotated to something else where the grass is greener --- As an example - the Virtus EM Fund lately over the past couple of years has started to attract attention.
Comments
Regards,
Ted
So far the Fed is winning The Great Currency War. When that ends EM will likely be cheap. At least that's my investment thesis.
I am always invested in emerging markets.
William Blair EM Small Cap, on which I'm working now, is yellow and up 12% in 12 months. Seafarer is blue, down 0.7%. Amana is green, down 3.2%. The E T F he mentions is orange, down 7.5%. Mr. Foster makes the argument that the MSCI index is structurally flawed because its liquidity requirements, which are designed to make it easy for large firms to execute large trades, systematically exclude many firms with attractive profiles and considerable diversification appeal.
For what it's worth,
David
Tactically, I have gone net short EM this week primarily on technicals. The following thinking is my assessment of this asset class but not what determined my short position, so not talking the book, so to speak!
I think EM has significant headwinds to overcome for the same reason it became very popular over the last decade, money chasing performance. Prior to 2008, EM assets gave magnified returns over DM creating a significant amount of money chasing these stocks. If you see the diversified portfolio recommendations over the last decade, you will see a growth in EM allocation. What used to be 0-2% allocation grew to 5-10% and some people were wondering whether it even made sense to hold DM anymore. After all, EM was where the future economies were right? Rationalizations for money flow induced growth.
Everything changed in 2013. Why? 2008 and 2011 gave a double punch for EM where people finally got the magnification consequences in losses and DM started attracting money away from EM. And the flow itself increased the performance difference between DM and EM resulting in a snowballing effect.
So what does that imply for EM investing? Don't wait for a reversion to mean based on fundamentals in EM. The rationalizations made earlier in it have not become invalid. Opposite rationalization is now being made. As long as DM and US in particular markets are doing well, money is not going to flow into EM, which means EM is not going to outperform DM consequently prolonging that underperformance. It will only change if DM stagnates (not go into correction which would just pull the money out) and money starts to look for performance elsewhere. For a tactical allocation, that would be the time to go long. If you are a passive buy and hold investor, have a reasonable 3-5% allocation at most since you cannot time when to get back in or find a global allocation fund that will decide for you.
I am intrigued by your interest in Jardine. It seems pretty solid, and I recall that you mentioned it several times already, saying that it is a bit expensive (but now it is less so). Do you know why it was not present in any Matthews funds? I believe that only recently it prominently appeared in their new fund Matthews Asia Focus Institutional, MIFSX. They are among the best experts in Asia, so if it is a great stock why they did not notice it earlier? Or maybe they invested in some of its parts separately?
I haven't looked at the Matthews funds holdings in a while, but they may hold both Jardine (as Crash notes below) or parts of Jardine, as the subsidiaries are also separately traded. Dairy Farm is held by a lot of various EM funds, in particular some of the Templeton funds.
Jardine did get a little overdone to the upside at one point over the last year, but even at that point, the company was still not that technically expensive. It is now trading again at about book value and did correct rather significantly.
Hutchison, Swire and a few other Asian conglomerates continue to trade around book value or less, although Jardine has been the most consistent over time. Hutchison has been inconsistent, but holds some tremendous assets - it is one of the top port operators in the world and holds the massive AS Watson health and beauty chain, which was the largest such chain in the world until the Walgreens merger with Alliance Boots a year or so ago. Hutchison is run by Li Ka-Shing, considered the richest person in Asia. (http://en.wikipedia.org/wiki/Li_Ka-shing)
It is not without volatility, but it is sort of an Asian "blue chip" and the company has been around since the 1800's. It is a giant company, but I find a lot to like about it and the parent company pays a very decent dividend (and, given that it is Singapore-listed, there is no foreign withholding tax on dividends.) The whole Singapore no withholding tax on dividends is - I think - a nice little feature. I also own Singapore Telecom.
People who are interested should do their own DD and be aware of the risks, but personally, Jardine remains a long-term holding.
Dairy Farm is also the only way to publicly invest in IKEA (they own IKEA stores in Hong Kong, Taiwan and soon Indonesia.) Dairy Farm is a 50% holder in large restaurant company Maxim's, which owns the rights to Starbucks in Macau and Hong Kong. Maxim's got 100% of the equity in those markets in 2011. BUT, there is so much to Jardine that this is a small portion of the larger whole.
Jardine Strategic (the holding company) is the other main option, although it provides less of a dividend.
Jardine Strategic can make specific strategic investments in other companies, and continues to have an investment with the Rothschilds (it was a key holder in private Rothschilds Continuation Holdings, but with the change in structure that happened with that, Jardine Strategic had shares in the public holding company Paris Orleans and I believe a good portion of that was sold in 2012. "In June 2012, consequent on the restructuring of the Rothschild group, the Company
exchanged its 21% interest in Rothschilds Continuation Holdings for a 12% interest in Paris
Orléans, the listed French holding company of the enlarged group. Subsequently, the
Company sold part of its holding, leaving an interest of some 6%. As a result, this holding is
no longer equity accounted.
")
T. Rowe Price EM Fund (PRMSX) has been highly recommended the past 5-7+ years but yet it has just matched the EM index fund over the past 10 years. If we go back a bit further to the start of 2000 until today --- PRMSX has basically matched the EM index (and in actuality slightly underperformed it). This wasn't your average obscure EM fund - it was a well-recognized and highly recommended EM fund in numerous investing forums.
Columbia Emerging Markets fund was once recommended by some whereby the fund was backed by a smart manager. Out of that we got 10-year performance matching that of the index dead-on.
Acadian Emerging Markets fund several years ago was appealing quite some time ago and it actually had to close for a bit because it got too hot with new money. This fund has shown some decent long-term outperformance and that looks great when we're looking at 10+ year perf numbers but the reality is this --- who stuck around to hold this fund after exhibiting extreme volatility? It showed more volality in the late 90's and in 2008 than the EM index.
Plus it's gotten more complicated as now you have various flavors of EM "indexes" such as the Dividend weighted ones, Low-Volatility and Value weighted ones. I also like TLTE - which is basically a value + small overweight/leaning index.
So an investor who may have liked PRMX or the Columbia or the Acadian or heaven's forbid Fidelity EM fund in the past may have already rotated to something else where the grass is greener --- As an example - the Virtus EM Fund lately over the past couple of years has started to attract attention.
Another example EEM vs ODMAX
http://screencast.com/t/iJCl2V38ARHV