You have probably heard of emerging markets. But do you know what they are?
These are economies in nations that are rapidly growing and maturing. They are characterized by stable governments, established mechanisms for trading goods and services, a stable currency, controlled levels of inflation, and liquid securities markets. They are typically in a state of growth. Many will eventually become “developed” countries.
As of May 2010, Dow Jones classified the following 35 countries as emerging markets:
Argentina
Bahrain
Brazil
Bulgaria
Chile
China
Colombia
Czech Republic
Egypt
Estonia
Hungary
India
Indonesia
Jordan
Kuwait
Latvia
Lithuania
Malaysia
Mauritius
Mexico
Morocco
Oman
Pakistan
Peru
Philippines
Poland
Qatar
Romania
Russia
Slovakia
South Africa
Sri Lanka
Thailand
Turkey
United Arab Emirates
Why should investors care about these countries? Because investing in these countries offers the potential for relatively rapid capital appreciation. The companies in these countries are likely to grow at a faster rate than companies in developed markets like the US, Canada, Japan, and Western Europe.
In addition, investments in these countries are likely to have a relatively lower correlation with developed markets. This means that the values of investments in these countries will not move in lock-step with investments in developed markets.
Emerging markets belong in a low-cost, passively managed portfolio.
Friday, October 29, 2010
What are Emerging Markets?
You have probably heard of emerging markets. But do you know what they are?
These are economies in nations that are rapidly growing and maturing. They are characterized by stable governments, established mechanisms for trading goods and services, a stable currency, controlled levels of inflation, and liquid securities markets. They are typically in a state of growth. Many will eventually become “developed” countries.
As of May 2010, Dow Jones classified 35 countries as emerging markets.
Why should investors care about these countries? Because investing in these countries offers the potential for relatively rapid capital appreciation. The companies in these countries are likely to grow at a faster rate than companies in developed markets like the US, Canada, Japan, and Western Europe.
In addition, investments in these countries are likely to have a relatively lower correlation than with those in developed markets. This means that the values of these investments in these countries will not move in lock-step with investments in developed markets.
These are economies in nations that are rapidly growing and maturing. They are characterized by stable governments, established mechanisms for trading goods and services, a stable currency, controlled levels of inflation, and liquid securities markets. They are typically in a state of growth. Many will eventually become “developed” countries.
As of May 2010, Dow Jones classified 35 countries as emerging markets.
Why should investors care about these countries? Because investing in these countries offers the potential for relatively rapid capital appreciation. The companies in these countries are likely to grow at a faster rate than companies in developed markets like the US, Canada, Japan, and Western Europe.
In addition, investments in these countries are likely to have a relatively lower correlation than with those in developed markets. This means that the values of these investments in these countries will not move in lock-step with investments in developed markets.
Friday, October 22, 2010
Emerging Market Bonds?
There has been a significant flow of capital into emerging market equities over the past several months. Some of this is “hot money” chasing what speculators consider as the next asset class to provide outsized short term profits. But some of this investment flow is coming from long term investors looking for diversification, income and long term capital gains.
So, what about emerging market bonds? Do they belong in a well-diversified, low cost, passive portfolio? Perhaps. These debt instruments may offer income that is less correlated to the bond markets in the developed markets. However, according to Morningstar, this asset class carries with it risk from currency fluctuations, foreign taxation, economic risk, political risk and differences in accounting and financial standards.
Right now there few ways to invest passively in emerging market debt. However, this will undoubtedly change. One option is the iShares JPMorgan Emerging Market Bond Fund (EMB). http://us.ishares.com/product_info/fund/overview/EMB.htm
I’ll have more to offer on this asset class when research companies (e.g. Morningstar) provide information about the investment characteristics of the funds in this asset class. What is correlation? What are fund expenses? What is the risk? What are the returns?
So, what about emerging market bonds? Do they belong in a well-diversified, low cost, passive portfolio? Perhaps. These debt instruments may offer income that is less correlated to the bond markets in the developed markets. However, according to Morningstar, this asset class carries with it risk from currency fluctuations, foreign taxation, economic risk, political risk and differences in accounting and financial standards.
Right now there few ways to invest passively in emerging market debt. However, this will undoubtedly change. One option is the iShares JPMorgan Emerging Market Bond Fund (EMB). http://us.ishares.com/product_info/fund/overview/EMB.htm
I’ll have more to offer on this asset class when research companies (e.g. Morningstar) provide information about the investment characteristics of the funds in this asset class. What is correlation? What are fund expenses? What is the risk? What are the returns?
Thursday, October 14, 2010
The Fiduciary Standard
The Financial Planning Association (FPA) ran a two full page advertisement in The Wall Street Journal on Tuesday (October 12, 2010). It promoted the value of working with a financial planner who is a member of the FPA. One of the reasons cited is that members are required to adhere to a Fiduciary Standard of Care.
The section included several questions and answers. One of the questions addressed the fiduciary issue. It states, “A financial planner who upholds a fiduciary standard of care makes five promises to clients. They are required by law to (1) put your best interests above all, (2) act with due care and utmost good faith, (3) be transparent an disclose all facts, including the cost of services and recommended investment and insurance products, (4) avoid conflicts of interest, and (5) not mislead you.”
Smart consumers only work with financial planners who adhere to this standard. Unfortunately, it is not readily apparent to the consumer who does and who does not. So, I recommend simply asking.
The section included several questions and answers. One of the questions addressed the fiduciary issue. It states, “A financial planner who upholds a fiduciary standard of care makes five promises to clients. They are required by law to (1) put your best interests above all, (2) act with due care and utmost good faith, (3) be transparent an disclose all facts, including the cost of services and recommended investment and insurance products, (4) avoid conflicts of interest, and (5) not mislead you.”
Smart consumers only work with financial planners who adhere to this standard. Unfortunately, it is not readily apparent to the consumer who does and who does not. So, I recommend simply asking.
Friday, October 1, 2010
Yale Endowment Falters
Yet another large university endowment has indicated that it suffered significant losses during the recent economic storm. An article in The Wall Street Journal (September 25/26, 2010) indicates Yale’s endowment fell from $22.9 billion in June 2008 to $16.3 billion in June 2009. It has since recovered to $16.7 billion as of June of 2010.
The endowment earned 8.9% for the 12 months ending June 30, 2010. According to Wilshire Associates, this lagged the 13.33% median return for large endowments, pension funds, and foundations. The Dow Jones Industrial Average returned 18.9% for the same period.
The results at Yale are particularly interesting. I am a big fan of David Swensen who is the Chief Investment Officer at Yale. I’ve read Swensen’s book, Unconventional Success which advocates a passive investment strategy for individual investors. Swensen believes only large institutions with significant resources for in depth analysis and research should invest in areas such as private equity, real estate and hedge funds. As it turns out, these are the areas where Yale incurred its big losses.
The lesson for the individual investor is that a low cost, passive approach to investing will result in optimum long term results.
The endowment earned 8.9% for the 12 months ending June 30, 2010. According to Wilshire Associates, this lagged the 13.33% median return for large endowments, pension funds, and foundations. The Dow Jones Industrial Average returned 18.9% for the same period.
The results at Yale are particularly interesting. I am a big fan of David Swensen who is the Chief Investment Officer at Yale. I’ve read Swensen’s book, Unconventional Success which advocates a passive investment strategy for individual investors. Swensen believes only large institutions with significant resources for in depth analysis and research should invest in areas such as private equity, real estate and hedge funds. As it turns out, these are the areas where Yale incurred its big losses.
The lesson for the individual investor is that a low cost, passive approach to investing will result in optimum long term results.
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