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Frequent Contributor

Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

I have traditionally tried to hold a percentage of my Equity allocation in International as well as Emerging Markets, believing that it offers some degree of benefit with diversification, etc. However, in the process of evaluating my portfolios recent performance, International and EM have performed AWFULLY during this Covid19 “selloff”. Some of my worst positions have been International/ EM mutual funds. Reading the article by John Reckenthaler this AM reinforces this view. Vanguard constantly tells me that I need to ADD additional International to my equities (30-50%!), but I’m really beginning to question this. 

Who else is still holding “positions” In International and Emerging Markets, what percentages, and why (or why not)???

Win
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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

There is simply no need to hold international or emerging markets funds.  Bogle was correct in his thinking.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

I hold the world less US. I hate it unless it has a good year. I think it is worth 10% or less of my portfolio. It might work this year if business rebounds in the world faster than the US.


@Win1177 wrote:

I have traditionally tried to hold a percentage of my Equity allocation in International as well as Emerging Markets, believing that it offers some degree of benefit with diversification, etc. However, in the process of evaluating my portfolios recent performance, International and EM have performed AWFULLY during this Covid19 “selloff”. Some of my worst positions have been International/ EM mutual funds. Reading the article by John Reckenthaler this AM reinforces this view. Vanguard constantly tells me that I need to ADD additional International to my equities (30-50%!), but I’m really beginning to question this. 

Who else is still holding “positions” In International and Emerging Markets, what percentages, and why (or why not)???


 

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Isn't the 3 fund strategy US, world and bonds?


@cegibbs wrote:

There is simply no need to hold international or emerging markets funds.  Bogle was correct in his thinking.


 

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Frequent Contributor

Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Look at global funds, VG VMVFX/VMNVX, etc.

With EMs, combine EM stocks with EM bonds for DIY EM-balanced allocation. When risks are high, debt can provide equity-like returns.

Small/mid-cap and value have been crushed too, in fact more than EM/international. 

Fido FLPSX may be a good bet for several beaten down areas as it is now a global small/mid value - kind of all-in-one for beaten down stuff.

YBB
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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

I have been skeptical of Int'l for some time.  Besides the pure foreign funds, I would never even advise anyone to own VG Target Date Retirement or LifeStrategy funds due to their holding significant foreign equities AND bonds.  That "diversification" probably makes owners feel good, and despite years of under-performance, VG analysts are still maintaining that foreign is good, because of fairer valuations vs US, and that they are "overdue" to outperform US.  I don't buy these reasons.  I also think I've seen that Fido's Freedom (target retirement funds) hold quite a lot of foreign.

Many EM countries are not all that stable politically or economically, and over-dependent on their energy sectors.  As far as developed countries, we are primarily talking Europe.  And they have changing demographics (not for the better), all the draconian EU regulations on business and every facet of life, plus their central banks face various challenges.

I'll stick with US equities and bonds, thank you very much.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?


@bigsteve wrote:

I have been skeptical of Int'l for some time.  Besides the pure foreign funds, I would never even advise anyone to own VG Target Date Retirement or LifeStrategy funds due to their holding significant foreign equities AND bonds.  That "diversification" probably makes owners feel good, and despite years of under-performance, VG analysts are still maintaining that foreign is good, because of fairer valuations vs US, and that they are "overdue" to outperform US.  I don't buy these reasons.  I also think I've seen that Fido's Freedom (target retirement funds) hold quite a lot of foreign.

Many EM countries are not all that stable politically or economically, and over-dependent on their energy sectors.  As far as developed countries, we are primarily talking Europe.  And they have changing demographics (not for the better), all the draconian EU regulations on business and every facet of life, plus their central banks face various challenges.

I'll stick with US equities and bonds, thank you very much.


Steve, I will agree, holding a high percentage of international in some of the target date funds, may not be best for some investors. I think, especially for an older investor, holding what now appears to be the recommended percentage of foreign equity, is disadvantageous for an investor with a short time horizon. Many of the large companies headquartered in the USA conduct international business. I hold an ETF, IEMG for some emerging market coverage and only smaller percentages of developed foreign markets.

I do think Fidelity Low-Priced Stock (FLPSX) is a good hold and it has mid-cap and international holdings. Funds like this, along with a simple emerging markets fund gives me the diversity without being over twenty percent in foreign stocks.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

I am overweight international at the moment because I believe the risk/reward favors international for the next decade, there seems to be a cycle of sorts that plays out.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Just did a comparison of FLPSX to the 500 Index going back 10 years.  In terms of returns they were pretty much neck-and-neck until 2016, at which time 500 Index took and remains well ahead.  FLPSX doesn't have a terrible ER at .52, but 500 Index is pretty sweet at .05 or so, whether Fido or VG.

The addition of some small/mid, combined with some foreign, all in one fund, seems like a good idea in theory.  This is why I added some VMVFX (as mentioned by YBB) over a year ago.  During the bull it was doing just what you'd expect of a low-volatility fund, on any given day falling somewhere in-between my 500 index and 40/60 Wellesley.  Since we've entered this bear, correction, whatever folks want to call it,  I haven't been too happy with its failure to moderate volatility.  It's my worst performing fund, which I assume is due to the foreign holdings and outsized allocation to RE.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?


Yes the 3 fund portfolio is a combination of US total stock, International stock, and US Total Bond.  But I don’t follow that strategy and I don’t see any value in owning a separate international or emerging markets fund.  John Rekenthaler wrote a good article today that addresses the subject.  Whatever international I get comes from what David Giroux includes in PRWCX and Don Kilbride in VDIGX.  And remember approximately 40% of the S&P500’s (which I also own) revenues comes from sales outside the U.S.
@Gary1952 wrote:

Isn't the 3 fund strategy US, world and bonds?


@cegibbs wrote:

There is simply no need to hold international or emerging markets funds.  Bogle was correct in his thinking.


 


 

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

 

Our world equity port tilts to EM and smaller. 

About 10% of our equity allocation is in China. 3% in India and 2% in Taiwan. In short.

44% USA + 30% non USA dev + 26% EM.

68% LC + 30% MC + 11% SC.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Thanks for the post Win!

I use an hourly advisor occasionally for specific issues and for bouncing ideas around. His advice for int'l allocation was about the same as the target date funds use, around 30-35% to international. He split it 50/50 E/M/developed markets. I never agreed with the approach and used around 15-20% until the virus hit.

Once I saw how much worse they were falling, I reduced exposure there to my current 7% level. I kept the  managed funds in my Roth/IRA accounts (ARTYX and MFAPX), since they held up much better than IXUS/EEM. 

I agree that at some point international may "revert to the mean" and perform better, I just prefer to wait until they show more strength and/or momentum. 

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

I’ve felt like SteadyEddy for years, the lower valuations of International and Emerging Markets have led me to believe that “sooner or later” there would be a reversion to the mean, and Intl./ EM would outperform. So far, that has NOT happened. But I’m still thinking I will keep my positions there- just err on the side of 15-20% of Equity, instead of the 30-50% that Vanguard keeps “advising” me to hold.

Win
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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Hi Win ....    I am a Virgo who thrives on detail and structure.  I have traditionally always had int'l funds since my early jobs.  I have 23% Developed (LCV, LCG, MCG and SCB) and 8% EM (LCV, LCG (India) and MCB).  Maybe not better TR but returns come in at different times so give me more non-correlated returns.  I don't think the US companies I invest in would give me the same level of Mid and Sm cap international.  If we get a weakening USD, that will help foreign investments in local currency.  Also, have you seen the Gundlach chart of 4 major markets that he has shown several times?  Starts with Japan market going gangbusters in late '80s, recession in early '90s and after 30 years never got back to high.  Followed by Europe going gangbusters in late '90s, recession in early '00s and after 20 years never got back to high.  Followed by EM (China was world beater) then recession and never got back.  Finally, US ...  world beater up to 2019, now recession ....  do we get back to high and when?  Do other markets beat us back to their high?  

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

 

When I used M* X-Ray about a month ago, foreign stocks comprised 31% of my total equity allocation. I don't currently own a dedicated EM fund but do get EM exposure via a foreign large growth mutual fund. There is no denying that domestic stocks have outperformed foreign stocks over recent years. However, the relationship between these two assets has been mean-reverting in the past. My current 401k contributions are directed towards a foreign stock fund. I have no plans to make any significant changes to my portfolio's foreign stock allocation in the near future.

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

 

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Back in about 2006-7, EM stocks had crushed US stocks for the previous five years. Broad international stocks had significantly outperformed US. I don't recall many posts back then about how EM or international diversification wasn't important. 

tempphoto2.png

Now it is the opposite, with many posts saying US only is the way to go. 

It's just the way people are. They buy what has done well in the recent past. If they're shifting between asset classes in that way, they're sure to at least partially miss out on the very runs up that they're basing their decisions on. 

It's not unreasonable to stick with a US only stock allocation through thick and thin - i.e for decades. But I wonder how many people really do that. 

Personally, I'm sticking with roughly 50/50 US/foreign stocks, with an overweight on EM and especially Asia EM.  

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Some of the factors which have driven US stock outperformance are likely to soon head into reverse. One is that US government policy has been very corporate-friendly relative to the rest of the world. Low barriers to trade, low regulation, low barriers to industry consolidation, corporate-friendly Supreme Court decisions, corporate-friendly 2008 bailout, corporate tax cuts, union-busting measures,... This has juiced US corporate profitability to very high levels relative to history and relative to the rest of the world. At the same time, workers have gained very little over the past few decades. They've had enough. Coronavirus is adding greatly to the pressure. The situation is ripe for a populist reversal of corporate-friendly policies, which would drive US corporate profitability back down.  You already see strong signs of this happening in US politics. 

Also, US P/Es have expanded to significantly higher levels than the rest of the world. This P/E expansion is an important part of the reason for US outperformance, but it is a one-time factor that won't be repeated. That too is ripe for a reversal, which would again favor international stocks. 

The US still has its strengths, and that is why I'm sticking with 50% US. But I think the risks of US underperformance going forward are quite substantial, and that is the reason for sticking with the other 50% in foreign stocks. 

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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Great post Academic! And thanks to everyone else for their comments. I agree with Academic, it seems like people who are avoiding International and Emerging Markets may be displaying “recency bias”, buying what has outperformed in the recent past. I have traditionally always held positions in Foreign/ EM, and it seems like the last 10 years or so I have been adding periodically to them, due to domestic outperformance. Then we get this Covid19 selloff, and my foreign/ EM are down MORE than my domestic. 

I’m now reviewing my portfolio to gradually rebalance it, and I am again “low” on Foreign/ EM equity. I am going to start adding slowly to these areas, as I believe long term in the concept of “reversion to the mean”. I’m NOT going as high as 30-50% International/ EM, probably staying closer to 15% International and 4% Emerging markets. My International includes a 4% mid/ small component, as they tend to perform differently and (I believe) offer some degree of diversification benefit. 

Win
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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Agree with your second post too Academic! I’m not going as high as 50% International, staying closer to ~20% range. But I do think US “outperformance” may have run it’s course, and we are due (overdue?) for reversion to the mean and below average performance in the future. 

International and EM are priced MUCH lower than US equities, and I believe offer better opportunities going forward. I’m just not going to tilt that way too strongly, I still have a degree of “home country” bias. After all I still buy stuff with dollars, not yen, euros, rubles, etc. 

Win
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Re: Value of International and Emerging Markets in Asset Allocation? Does it help/ hurt?

Win, I agree a 15-20% foreign allocation is entirely reasonable. 

I've had a roughly 50% foreign allocation for the past few years. So far that has hurt results, not helped. 

But I've learned to be patient. Over the long haul my approach has worked well for me. 

BTW I should add that I have a roughly 50% total allocation to stocks, i.e. I have roughly 25% of total portfolio in foreign stocks and roughly 25% in US stocks. 

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