Apr

22

Caught a discussion of the benefits/drawbacks of international diversification for US investors, so I had to do at least some basic counting and found that over the last 10 years, using weekly % changes, SPY and VXUS (Vanguard ex-US ETF) have a correlation of +0.85. But SPY provided twice the return (155% vs 74%).

If you want an uncorrelated asset, EEM (MSCI Emerging Markets ETF) had about a zero correlation with SPY or VXUS…but a return of about -10%!

Hernan Avella responds:

This is a rather unsophisticated way to look at the issue of diversification. How about you extend the lookback period, run some simulations, perhaps including a withdrawal rate. Anyways, to some extent I agree with the idea that US investors might be ok with a bit less international diversification vs investors from other countries. 20-30% should be ok. I believe all cap funds for international might not be optimal, I prefer to use cheap multifactor funds. Mother Vanguard is recommending 40+% in foreign.

Starting period is a bit unfair to US equities, but it's the longest overlapping period of the 4 funds. Since Jan 1999, cagr and correlation:

S&P 500 +6.97%
International value (DFIVX) +6.02% cagr .82 corr
Emerging value (DEMSX) 10.52% cagr .75corr
China (MCHFX) 10.79% .53 corr

The framework on a forward basis should be robust/agnostic to globalization - deglobalization, war, currencies crisis. Passive, Cap weighted is a good starting point.

Big Al replies:

Yes, different lookback periods and different funds give you different results. My point is that it's hard to sell people on diversification given the last 10 years.

John Floyd adds:

How do we best consider this on a forward looking basis?

1. What about a reversion given massive US outperformance vs ROW past 10 years plus led by tech mega caps?
2. What about massive reshoring to NA (Canada, Mexico, US) of US and non-US firms given COVID, geopolitics, etc.
3. China had one of the greatest credit booms in history with the speed and size (beyond Japan in 80s, US in 2000s, etc.), that game is over.

H. Humbert writes:

The Sage has Japan in his sights:

Warren Buffett’s trip to Tokyo is seen as a ‘stamp of approval’ for investing in Japan

“For Japanese institutional investors, this really is now the stamp of approval that Japan can deliver superior returns,” Monex Group’s Jesper Koll told CNBC’s Street Signs Asia.

BTW, I had owned exactly one Japanese stock in my life prior to last year, and obscure bra maker, and it hasn't gone anywhere, literally. But in the beginning of last year to me Japan started appearing really attractive, especially for dividend-paying value stocks which is the only kind I buy, so I bought two stocks: TAK, at the beginning of the year which so far has provided a 24% return not including the 4% dividend and KNBWY a year ago which provided an 11% return not including a 3% dividend (both are documented online at the time of purchase). Nothing to write home about but better than the market. If you consider that they are one of the largest pharma companies and beverage companies in the world selling for peanuts, you couldn't find anything of comparable value and safety profile in the US at the time.

Hernan Avella asks:

Mr Humbert, what % of your portfolio did you put in 2 stocks?

H. Humbert replies:

1% for the first one and 0.5% for the second one. Since I own over 200 stocks that's my typical purchase size for something I don't have any particular conviction about. I don't believe in concentrated portfolios since (a) I don't trust my own judgment THAT much (b) I never sell other than in rare cases for tax loss purposes, so this way regardless of what the stock does it never becomes a critical part of my portfolio so I have to trim it and pay taxes.

I also bought four British stocks, so pretty soon you run out of percentage points this way, but way over half of my purchases last year were in foreign stocks. I found much better values abroad, but the European stocks had different reasons to be more attractive than the Japanese ones.


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