I have been thinking about adding some geographic diversification to my portfolio.
I know we have discussed that the “market” being pricey doesn’t really impact our investments as long as our choices reflect good tradeoff between ‘valuation’ and ‘growth rates’. Additionally, many of the companies we hold have significant international exposure, so in that sense almost any decently diversified portfolio will have some depth of international exposure.
With the above considered, I 'm still considering adding some international exposure, for the following reasons:
o The stocks I have are almost exclusively US-based companies. The only exception is Yandex. I would like to have some exposure to Europe-based and Emerging market companies.
o There are quite a few high-quality European stocks that trade on various stock exchanges and these might benefit from the European central bank’s recently announced QE policy. Europe is launching QE while the US is bringing QE to closure, so I wonder if the QE money from Europe is going to drive European stock performance in the coming years.
o I have zero direct exposure to high growth emerging economies. While the burgeoning middle class in Asia and Latin America does benefit companies in the US and Europe, without exposure to these markets we miss out on the developments in the financial services, local information tech, and local consumer discretionary markets. These markets expand rapidly in growing economies.
Now, I can’t see myself studying individual companies, so I have been essentially looking at getting market performance via ETFs. I like the Wisdom Tree approach of weighing growth and dividends, although their expense ratios are higher than those of straight up ETFs that are based on market capitalisation. Over the past few days, I have looked at the following:
- Europe Dividend Growth Fund (EUDG)
The top holdings for this ETF are Novartis, Nestle, BP, Roche, Shell, Glaxo, Siemens etc. The fund has 201 holdings.
Based on the data (12/31/2014) for the underlying index, EUDG trades for
P/E of 15.6
P/Cash Flow of 9.6
- Emerging Market Dividend Growth Fund (DGRE)
I can’t really tell much by looking at the top holdings of this fund! I don’t really know the names (Astra Int., MTN Group, Sasol, …, I know Taiwan Semiconductors!).
Based in the fund fact sheet data from 12/31/2014, the underlying index trades for
P/E of 14.4
P/Cash Flow of 10.7
- With respect to valuation, both seem similar. I compared these with two US funds, the US Dividend Growth Fund (DGRW) and the Madcap Dividend Fund (DON).
The underlying index data for DGRW suggests the following valuation metrics:
P/E of 18.1
P/Cash Flow of 12.6
The underlying index data for DON suggests the following valuation metrics:
P/E of 20.5
P/cash Flow of 10.2
On a ‘market’ basis, it is indeed appears that the US market is pricier compared to the European or the Emerging Markets. This sort of makes sense. After all, the US economy has been able to crawl it’s way nicely out of the 2008 financial crisis. The unemployment numbers are down and the businesses have been doing well. The emerging markets has to take it in their chin in the aftermath of the financial crisis with funds moving out of ‘riskier’ assets. Europe is still a mess, especially with all the problems in the Euro zone.
An investment in the Europe dividend growth fund or the Emerging markets dividend growth fund would be a bet that high-quality companies in these economies will eventually be able to command the richer valuation commanded by their US counterparts. The European companies might benefit from the weaker Euro and European QE; may be they will be able to resolve some of their economic woes that divide the rich and poor countries in the Euro zone. Similarly, I think a stronger US economy will help the emerging economies. India has a growth focussed government, one that wants to build even stronger ties with the US. If I do buy any of these ETFs, I would buy with the idea of holding them for a while, say 5 - 10 years, and selling when their relative valuation is rich versus say the US market.
Anyways, so I tried to post this out to lay out some of my rambling thoughts. Writing it out helps me think better. I 'm hoping there will be some pearls of wisdom from the board members.