Author Topic: Million $ question...rotate out of high CAPE countries during annual rebalance?  (Read 4967 times)

Midabistew

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I'm Fire'ing in 26 days and have taken a more active approach to how best to work my Asset Allocation.  It seems if I can prudently improve my AA to generate an additional 1% out of my return over my expected lifetime, it means a tremendous increase to one's portfolio valuation over that time frame...so probably worth considering :)

Please point me to an existing thread if this has already been discussed, did a search but couldn't find.

Based on Analysis like these two, and others:
http://www.starcapital.de/docs/2014_02_CAPE_Predicting_Stock_Market_Returns.pdf
http://www.researchaffiliates.com/Our%20Ideas/Insights/Fundamentals/Pages/440_Are_Stocks_Overvalued_A_Survey_of_Equity_Valuation_Models.aspx
 
and with the US CAPE at a lofty 26.4 today:
http://www.multpl.com/shiller-pe/

it seems like it would make sense, at least during one's annual rebalancing, to rotate to some extent out of high CAPE countries and into low CAPE countries.  GVAL is an ETF I'm considering to accomplish this increased exposure to low CAPE countries.

I realize there is currency risk, but based on where the dollar is today:
http://www.tradingeconomics.com/united-states/currency
...at least relative to the last 10 years, it appears there would be more long term devaluation pressure relative to other currencies, vs. upward valuation pressure.

I'm currently at an AA of:
32% US Stocks
18% Foreign Stocks

Was thinking of performing a rotation as discussed above to something more like:
26% US Stocks
26% Foreign Stocks

Does this methodology warrant consideration, or am I off base?

Thanks!

matchewed

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If your plan is rock solid enough for you without this then why would you want this?

AdrianC

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If your plan is rock solid enough for you without this then why would you want this?

Rock solid at a 4% SWR? Then I totally understand the concern.

AdrianC

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it seems like it would make sense, at least during one's annual rebalancing, to rotate to some extent out of high CAPE countries and into low CAPE countries.  GVAL is an ETF I'm considering to accomplish this increased exposure to low CAPE countries.

I agree that international should have a large allocation. Your reasoning is good. But GVAL? Why?

Have you looked at PXF/PXH/PDN?

Midabistew

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it seems like it would make sense, at least during one's annual rebalancing, to rotate to some extent out of high CAPE countries and into low CAPE countries.  GVAL is an ETF I'm considering to accomplish this increased exposure to low CAPE countries.

I agree that international should have a large allocation. Your reasoning is good. But GVAL? Why?

Have you looked at PXF/PXH/PDN?

PXF/PXH/PDN look solid for typical international exposure.  GVAL takes it one step further and targets value stocks in "Undervalued Markets".  From their prospectus:
"Under normal market conditions, the Fund will invest at least 80% of its total assets in the components of the Underlying Index. The Underlying Index is comprised of equity securities of issuers located in developed and emerging countries, as well as exchange-traded funds composed of issuers located in such countries.  To be eligible for inclusion in the Underlying Index, an issuer must be domiciled, trade in or have exposure to a market that is undervalued, according to various valuation metrics including the cyclically adjusted price-to-earnings ratio, commonly known as the “CAPE Shiller P/E ratio.” "

AdrianC

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PXF/PXH/PDN look solid for typical international exposure.  GVAL takes it one step further and targets value stocks in "Undervalued Markets".

Just as long as you understand that you're betting on a small, unproven actively managed fund. It's very small - only $68M. And is down 24% since inception 18 months ago.

If you want active management at reasonable cost you might consider Vanguard International Value VTRIX.

zz_marcello

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Hi!
Long time reader and active/passive investor here
but just registered.

I have similar thoughts for myself.
Having accumulated sufficient assets for a 4%WR but because of the historically very high valuation of the US stock- (CAPE26) and bond market (historically low yield) Im still actively earning money outside the investment world. Besides 1996 where the US stock market climbed for four more years, during all other historical examples (1902, 1929, 1965/1966 and also 2007) saw huge drops and under average (devastating) returns in the years afterwards. 

So I was looking for international diversification too. Better then just putting money in one international ETF which has exposure to countries like Russia, Brasil or Japan, where I dont want to put my life savings into I was looking for countries that are still growing strong/stronger than the US, can continue this growth with a high probability and also are not dependent on commodity prices but on free enterprise. My personal candidates for that next to China are India Singapore and especially Hong Kong.

- Hong Kong Hang Seng Index (HSI) currently has a historically low valuation of PE~9 and CAPE of ~14.
- The Hong Kong Dollar is pegged to the US, so there are very likely no surprises from devaluations for US Investors.
- From my observation the HSI CAPE was never below ~10, because Hong Kong was growing so strong in the last 50 years.
- The dividend yield of the Hang Seng Index currently is ~4.1! So the 4% safe withdrawal rate would be really 100% safe
and there is no need to sell any shares.
- There is a low fee (0.1%) Hong Kong based HSI Tracker Fund (2800:hk) which unfortunately is taxed very unfavorable in the US.
- The best alternative that I found is the US based Ishares Hong Kong Tracker (EWH) with a 0.48% expense ratio (maybe someone knows a better alternative)

So personally I made up my mind that I will put ~10-15% of my equity into a HSI Tracker Fund at current valuation.

Have a nice day!
Marcel
« Last Edit: December 08, 2015, 09:32:19 PM by zz_marcello »

use2betrix

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Hi!
Long time reader and active/passive investor here
but just registered.

I have similar thoughts for myself.
Having accumulated sufficient assets for a 4%WR but because of the historically very high valuation of the US stock- (CAPE26) and bond market (historically low yield) Im still actively earning money outside the investment world. Besides 1996 where the US stock market climbed for four more years, during all other historical examples (1902, 1929, 1965/1966 and also 2007) saw huge drops and under average (devastating) returns in the years afterwards. 

So I was looking for international diversification too. Better then just putting money in one international ETF which has exposure to countries like Russia, Brasil or Japan, where I dont want to put my life savings into I was looking for countries that are still growing strong/stronger than the US, can continue this growth with a high probability and also are not dependent on commodity prices but on free enterprise. My personal candidates for that next to China are India Singapore and especially Hong Kong.

- Hong Kong Hang Seng Index (HSI) currently has a historically low valuation of PE~9 and CAPE of ~14.
- The Hong Kong Dollar is pegged to the US, so there are very likely no surprises from devaluations for US Investors.
- From my observation the HSI CAPE was never below 12, because Hong Kong was growing so strong in the last 50 years.
- The dividend yield of the Hang Seng Index currently is ~4.1! So the 4% safe withdrawal rate would be really 100% safe
and there is no need to sell any shares.
- There is a low fee (0.1%) Hong Kong based HSI Tracker Fund (2800:hk) which is unfortunately taxed very unfavorable in the US.
- The best alternative that I found is the US based Ishares Hong Kong Tracker (EFH) with a 0.48 expense ratio (maybe someone will find a better alternative which I would like to know)

So personally I made up my mind that I will put ~10-15% of my equity into a HSI Tracker Fund at current valuation.

Have a nice day!
Marcel

I don't have much to comment here, but welcome to the site! This is a wonderful first post!

aspiringnomad

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Hi!
Long time reader and active/passive investor here
but just registered.

I have similar thoughts for myself.
Having accumulated sufficient assets for a 4%WR but because of the historically very high valuation of the US stock- (CAPE26) and bond market (historically low yield) Im still actively earning money outside the investment world. Besides 1996 where the US stock market climbed for four more years, during all other historical examples (1902, 1929, 1965/1966 and also 2007) saw huge drops and under average (devastating) returns in the years afterwards. 

So I was looking for international diversification too. Better then just putting money in one international ETF which has exposure to countries like Russia, Brasil or Japan, where I dont want to put my life savings into I was looking for countries that are still growing strong/stronger than the US, can continue this growth with a high probability and also are not dependent on commodity prices but on free enterprise. My personal candidates for that next to China are India Singapore and especially Hong Kong.

- Hong Kong Hang Seng Index (HSI) currently has a historically low valuation of PE~9 and CAPE of ~14.
- The Hong Kong Dollar is pegged to the US, so there are very likely no surprises from devaluations for US Investors.
- From my observation the HSI CAPE was never below 12, because Hong Kong was growing so strong in the last 50 years.
- The dividend yield of the Hang Seng Index currently is ~4.1! So the 4% safe withdrawal rate would be really 100% safe
and there is no need to sell any shares.
- There is a low fee (0.1%) Hong Kong based HSI Tracker Fund (2800:hk) which is unfortunately taxed very unfavorable in the US.
- The best alternative that I found is the US based Ishares Hong Kong Tracker (EFH) with a 0.48 expense ratio (maybe someone will find a better alternative which I would like to know)

So personally I made up my mind that I will put ~10-15% of my equity into a HSI Tracker Fund at current valuation.

Have a nice day!
Marcel

Nice post. You mean EWH not EFH for the HK etf. Also, AAXJ would give you better exposure to the other countries you seek to invest in, but with a heavy dose of South Korea and a higher ER of 0.72. Curious: Where are you getting your CAPE info?

zz_marcello

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Nice post. You mean EWH not EFH for the HK etf. Also, AAXJ would give you better exposure to the other countries you seek to invest in, but with a heavy dose of South Korea and a higher ER of 0.72. Curious: Where are you getting your CAPE info?
Thank you for the catch. I corrected that.

As a general overview for worldwide CAPE I look here:
http://www.starcapital.de/research/stockmarketvaluation
They are sometimes a bit off (delayed data plus something else that I did not find out yet).
Hong Kong is there still with a CAPE of 15.8 but the data is 5 weeks old and the market is ~5% lower now; that would make it a 15,1.
The Hong Kong Exchange itself has some decent historic data on their page:
http://www.hsi.com.hk/HSI-Net/HSI-Net
I was crunching some numbers; comparing and I came to a CAPE~14.
You can see also that the PE itself is pretty low (currently ~8.9) (HSI data) (Starcapital data again a bit higher but I trust more the official Stock exchange data).
That means earnings are still rising. (not like in peripheral Europe, Brazil, Russia... where earnings collapsed)

About 17% of the HSI valuation are Chinese (Government owned) banks where some people are suspicious what they have hidden in their balance sheet. (but being scared is a big part of the reason of a low valuation. 1982 everybody was convinced that US equity was dead (CAPE7)...

Have a nice day!
« Last Edit: December 08, 2015, 09:26:47 PM by zz_marcello »

zz_marcello

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I don't have much to comment here, but welcome to the site! This is a wonderful first post!

Thank you very much! What a nice place.

Scandium

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So I was looking for international diversification too.

So you want to put 15% of your portfolio into one tiny city-state, which as far as I know is extremely heavy in financials? That's one heavy bet! Not sure I'd call that diversification. But knock yourself out. Good luck

Ok, I checked morningstar. EWH is 36% financials, 37% real estate, and 12% utilities. Wow that's some narrow focus.

zz_marcello

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Hong Kong Stock exchange is the sixth biggest stock exchange in the world; bigger than Euronext and double market cap as German DAX.
https://en.wikipedia.org/wiki/List_of_stock_exchanges

This "tiny city state" is pretty powerful, because its the economically most free unit in the world, together with Shanghai they are asias biggest stock exchanges.
http://www.heritage.org/index/ranking

Have a nice day!
« Last Edit: December 09, 2015, 07:49:11 AM by zz_marcello »

econberkeley

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I moved all my investments to cash and short term bonds and waiting for the bear market. Once the next bull starts (use the 12 month moving average) I am thinking about diversifying across the world (developed, emerging...). Once you take out troubled Europe and countries rely on commodity prices, there are not many decent countries left to invest. Also, it is very hard to find country etfs with reasonable expense ratios and liquidity. Do you have suggestions on what to do?

Heckler

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Annual rebalancing does not mean tipping the scales back and forth.  It means lavelling the scales to where you had intended them to be. 


Thats all I got. KISS

farangster

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sounds like you would be interested in meb faber's book global value (he founded the gval etf) or in a momentum and/or gtaa strategy- check out faber's, andrew clare's and antonacci's white papers at papers.ssrn.com (free).  I like the idea of combining global value with momentum to avoid value traps.  cape and tobin's q definitely look bad for the u.s. currently long edv and iau per momentum rebalanced monthly but momentum might push me back in global equities if this correction does not continue.  also check this good article http://investingforaliving.us/2013/06/15/quantitative-investing-trending-value-strategy/

that article does a great job debunking trend following with momentum.

farangster

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sorry here is the article I meant http://investingforaliving.us/?s=gtaa

Woody Viet

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I actually use this strategy for my own portfolio. I identify countries with the highest country-wide risk premia, value premia and small cap premia and invest in the assets with the best returns (they also have to meet profitability and anti-dilution screens). Right now I'm in around 150 assets spread across 15 different countries.

Let me say first that while I think this is a great investment approach it is still as scary as hell. You can be behind the market for years and pull yourself out at the worst possible moment. It's all well and good being an index investor in a bear market, you know you're going to climb back up. Yet a strategy that relies on things like the value premia, however well founded and valid you believe it to be, has no such guarantee. It defies in many ways some of the most intuitively powerful theories in finance. So how could it work?

Personally I think value premia will always exist but will slowly decline over time as the market gets better at identifying such systematic mispricings. Human nature will always provide rich pickings, but one day there will be too many people at the table. Right now the discount that the 'value segment' of the market trades at relative to the market as a whole is pretty much bang on its historic average. This to me is strong evidence that systematic mispricing remains. The whole idea behind the value premia disappearing relies on people responding to the research that unearthed it and then buying into the strategy until it no longer works. This clearly hasn't happened yet so I see no empirical basis to say the premia no longer exists. You can make qualitative arguments of course, but I'm not sure I have much to say on that.

As for countries the limits to arbitrage are enormous. The home country bias, restrictions on capital flows, withholding taxes that punish foreign investors, rules on international exposure for regulated companies (think pensions) and agency costs for investment companies all prevent it from happening. Not to mention the sheer sums of money involved. I think there's much to be said from pricing rather than timing the market and a relatively easy way to do that is to invest in cheap countries. It won't always pay off but current data suggests it does, and does so very well indeed.

As to VUKE, it's extremely expensive for what it does. Not to mention very high turnover (costs, taxes). I would stay away. Why don't you just run it yourself? My costs per annum right now are 0.1% of assets at Interactive Brokers by investing directly in the companies. That's lower than many index fund owners, although I do like to sit on my ass.

Hope this helps. If you want to chat about this it feel free to PM me