Some times I just toss some “theme” into a “race” and see if it ‘speaks to me’ in some way. Today on CNBC was mention of a “small cap emerging market ETF”. I’m fond of Exchange Traded Funds as you get a variety of good things ‘for free’. Professional screening to keep the worst stocks out of the fund (and hopefully some of the best in and not too much screwing up by the sin of hubris… just some good ‘meat and potatoes’ quality screening…)
Individual company risk is reduced. (If one out of 2 dozen stocks has a “perp walk” of the CFO the impact on the basket is much less. If the ETF manager is any good, they will have avoided that kind of stock anyway, or gotten out at the first whiff of bad news.) Sector risk is usually reduced, unless you chose a sector fund, so an ETF of broad type will have some of several sectors represented. If Sovereign Risk dumps a new tax on Mining, the impact will be reduced on the basket as the variety of non-mining stocks mute the impact.
So, all in all, ETFs are an easy way to get a broadly diversified “basket” and put some of the workload of managing it on someone else.
OK, but what ETF? They come in many sizes, colors, and flavors…
So, often, I’ll see a new ETF “ticker” somewhere and do some searching on similar themes. Then “race” them to see if anything interesting comes to the top. Today it was “emerging market small cap”. I did a web search on that phrase, picked up some tickers, and made a graph. (This is the kind of thing I do when the market is going down, if I don’t feel like playing the ‘short’ side. As I have a second interview in a couple of days, I’m prepping for it and not wanting the ‘stress’ of a large short position to think about. Instead I’m doing the ‘relaxing’ thing of a bit of R&D into novel tickers…)
BRXX - Brazil Infrastructure Index Fund INDXX GLD - Gold Fund (fear / value benchmark) SPY - S&P 500 (basic economic and stock benchmark) EEM - Emerging Market Index broad basket EWX - Emerging Markets Small Cap basket BRF - Brazil Small Cap basket DGS - Wisdom Tree Emerging Markets Small Cap Dividend Fund EWZ - iShares MSCI Brazil Index Fund TAO - China Real Estate ETF FXI - iShares FTSE China 25 Index Fund
There are many other funds with modest variations on this theme. A complete analysis would involve looking at each of them, making various races, maybe even looking inside the fund to see what it holds (though that is often just a number for foreign small caps… and takes more research to find out what it is). After a while you learn which companies offering funds are more “diligent” and tend to just accept that, for example, a “Wisdom Tree” fund is pretty well selected for “no junk” and “good financials”. (It can still have a theme that is ‘out of favor’ so dropping in market price – like China or India at the moment. But the stuff inside tends to be good quality.)
I will often use the iShares Index funds if I have not more specific theme. These invest in instruments to duplicate the movement of some index or other in each country. Generally a broader ‘mix’ in the basket and with good tracking of the index.
OK, so what do we see on this graph?
First off, it’s a bit ‘busy’ with 10 “tickers” on it. So you could run them in ‘pairs’ on your own graph at Bigcharts to get a clearer view. For now, click on the graph to make it bigger for easier reading (Mac users can hold down “control” while clicking on it and choose ‘open in new window’).
Notice, first, that bright blue benchmark line of SPY. Most of the other lines are below it. This is a “risk off” world right now, and folks pull money from the places they think are ‘more risky’ first. Rightly or wrongly, the USA is still thought of as ‘less risky’; so we see much of the emerging markets dropping faster than the USA. At the very far right edge, we see that gold colored GLD line at the top. Folks run to gold when scared. In “good times” and in a “risk on” world; that order inverts.
Now notice that FXI is the bottom ticker of the stack. That browning line has underperformed everything else all year. China was winning the race back before the crash in our “risk on” world, not now, and not after rumors of overbuilt real estate and accounting scandal hit the press. Fear of an area in a “risk off” time is just lethal. Never mind that much of the economy in China may be growing at 9%+ per year. In an ‘accounting irregularities’ world, folks where the “MAY be” and walk away… only in a “risk on” world do they hear the “9%”… Hard to see, but that light grey China Real Estate line ends the graph just one or two lines up (dancing with the green EWZ line), yet last November (near that peak at the start of the graph) it was dancing with the darker DGS line for second place. As the “real estate accounting questions” news hit, it plunged…
EWZ was, for years, one of my absolute favorite ETFs to own. Made me a fair amount of money. Then Brazil started to “play games” with differential taxation and “money policy” for foreign investors. When things turn from worry about return ON my money to return OF my money, well, folks leave town. You can see that in the dramatic underperformance of EWZ over the last year. Just barely beating China (accounting scandal and all). This is why I spend so much time on Sovereign Risk and the nature of Socialism (creeping or blatant). It is simply essential to avoid any country with a strong “socialist agenda” and where the respect of property rights is small. (As a “polish point” – it’s really the first derivative that matters. Which way are they headed? A communist country, like China, headed toward MORE capitalism will have great growth and huge returns. A purely capitalist country that starts to add a little “Social Justice” will falter fast. So it isn’t the absolute level of Socialism that matters – as it is already factored into market prices – but the direction of change of the degree of Socialism that drives “socialism deflator” applied to the stock values…)
OK, next up, notice that dark DGS line and the bright yellow BRF line. Both hold up very well compared to all the rest. More volatile than the SPY but about the same overall performance. (BRF in particular could be a good trade vehicle as it really shoots up in good times, but watch out for those sickening plunges if you time the entry wrong…) What are these?
BRF is a small cap Brazil fund. Not driven as much by large institutional traders and investors. Better growth in small firms just starting out (when compared to things like the large telcos or electric utilities in the larger cap funds).
Looking inside the fund at http://finance.yahoo.com/q/hl?s=BRF+Holdings
Isn’t all that enlightening if you are not well steeped in Brazilian companies:
Top 10 Holdings (53.31% of Total Assets) Company Symbol % Assets LOJAS RENNER-ON NM LREN3.SA 7.52 DASA -ON NM DASA3.SA 6.76 CETIP -ON NM CTIP3.SA 6.03 CETIP -ON NM CTIP3.SA 5.22 GAFISA -ON NM GFSA3.SA 5.18 BR MALLS PARTICIPACOES SA COM N BRML3.SA 5.13 CIA HERING -ON NM HGTX3.SA 4.78 LLXL3 4.43 GFA.SA 4.13 Anhanguera Educacional Participacoes SA N/A 4.13
GFA I recognize as a Brazilian homebuilder “Gafisa”, whose stock is presently in near free fall, so I’d wonder when they bought it. (It has a PE of 7.48 so is making money… perhaps a time to bottom fish there? But a bit more digging needed…) There looks to be a bit of a Mall REIT and the others say nothing to me. But clearly something is going up in that basket…
That is what you frequently run into when looking “inside” small and / or foreign funds. Something that does not speak to you. That’s why I often will depend on the reputation of the fund manager. Sometimes I’ll “dig in” to particular tickers, looking for what’s interesting or questionable. Looking for “ideas”.
What about DGS?
In a way, less helpful, but in another way, very much help. Notice that the “top 10″ holdings are only 15% of total assets? No one position over 2%. A VERY broad diversification. That’s good. Harder to find ‘what is best in what they hold’, but far less likely that one stinker will sink the fund.
Top 10 Holdings (15.48% of Total Assets) Company Symbol % Assets Ford Otomotiv Sanayi AS N/A 2.06 8046 1.95 Discount Investment Corp N/A 1.90 AES TIETE -ON GETI3.SA 1.51 Corpbanca N/A 1.48 Corpbanca ADR N/A 1.38 AES TIETE -ON GETI3.SA 1.36 Unipetrol A.S. N/A 1.33 2301 1.26 WisdomTree India Earnings N/A 1.25
“Ford” is a name I know. So they are sticking with experienced companies, at least for some of the larger holdings, with dividends. “Unipetrol” I’ve heard of before, but I don’t remember the details (a minor ‘dig here’? to refresh?) and then we have that some of the global exposure comes from funds that are themselves diversified baskets “India Earnings”.
So I could, IFF I wished, do a ‘India Earnings’ vis DGS race and see if India was better, or worse. Or I can just admire that I’m getting a broad exposure to India in one tiny slice of this fund.
All in all, looking well diversified with detailed management.
Equity Holdings Ratio DGS Average Price/Earnings 10.72 Average Price/Book 1.56 Average Price/Sales 0.70 Average Price/Cashflow 6.21
PE of about 10 is nice value investing. Price to Book under 2 is good too (“deep value” starting at about 1:1 price book, so this is ‘modest value’). Nice low price/sales and decent price to cashflow.
There is also a sector weighting graph on that Yahoo! page which shows a good sector diversification ( with peaks in Consumer Cyclical and Industrial – that are likely to do well coming out of a recession – again an indication of a decent asset manager doing smart asset allocation. Tech, Basic Materials, and Financial round out the top 5 sectors. That’s a nice ‘recovery’ mix.)
OK, what’s left? EEM and EWX. A broad “emerging markets index” and a small cap emerging markets. EWX is just above the green EWZ Brazil line. Probably has some China in it pulling it down. EEM is doing better. Above the SPY until Nov then turns into a ‘flat roller’ and ends slightly below the SPY.
Looking inside EWX is not very helpful:
Top 10 Holdings (15.63% of Total Assets) Company Symbol % Assets Msci Taiwan Index Futures May10 Xsim N/A 4.58 Msci Taiwan Index Futures Aug10 Xses N/A 2.17 Msci Taiwan Index Futures Oct10 Xses N/A 1.45 Charoen Pokphand Foods Public Co Ltd N/A 1.23 TOTS3 1.11 LREN3 1.05 Focus Morningstar Small Cap Ind FOS 1.04 Focus Morningstar Small Cap Ind FOS 1.00 DASA3 1.00 03898 1.00
The big bet on Taiwan and using Futures contracts to do it makes me worried. Leveraged bets can be very risky… All in all, not seeing a reason to “embrace” this fund. Vanguard is the fund manager, and historically they were a value and detailed oriented company, but the “look of things” at a first glance is not encouraging.
EEM is interesting in the way what looks “broadly diversified” over the whole globe has some significant concentration in it:
Top 10 Holdings (19.31% of Total Assets) Company Symbol % Assets SMSN.KS 2.47 SSNLF.KS 2.18 Petroleo Brasileiro Sa - Petrobras N/A 1.94 Petroleo Brasileiro Sa - Petrobras( PFD) N/A 1.94 POSCO Common Stock PKX 1.93 Gazprom O A O 144A N/A 1.92 OGZPY 1.83 PETROBRAS -PN PETR4.SA 1.81 OGZPY 1.65 Chunghwa Telecom Co Ltd America CHT 1.64
Top Ten holdings are nearly 20% of total holdings? Fair concentration in gas and oil (Petrobras and Gazprom). Could use some ‘digging’ into the other tickers… is this fund making a big bet on “energy” and being more of an ‘energy sector’ fund than a ‘broad emerging markets’ fund? IFF the Fund Manager has a ‘hot hand’ that can be very good, if not, very bad. If you think you are buying a ‘broad emerging market diversified basket’ and you are getting a ‘volatile energy fund with swing trading managers’, well, you have a ‘style conflict’…
That the last entry is a Telco gives some hope of broad diversification, but I’d really want to look at a longer list of holdings before making a commitment based on a fund name implied style that may not be present…
On the other hand, that it has held up so well while both Brazil and China funds have sunk under it, implies the managers did a better job than just sitting in a broad mix of Brazil and China and watching it sink.
This is an example of taking an “idea” (a single ticker advert or story on a financial show) and turning it into a “sector race”; then digging inside a bit for some insight on making a choice. All up, it takes about a half hour. (A lot less time than making this ‘write up’). Then comes the hard part: Making a decision about the future. Will the past be prologue?
I’d put DGS at the top of my “interesting to watch” list from this study along with BRXX. BRF just behind them. Even just camping out in gold has some charm. China and EWZ “Broad Big Brazil” go onto a “bottoming watch list” for a turn around and Brazil in general gets a “watch for political change of climate” flag.
Overall, the rise at the start of the chart shows how the Emerging Market stocks can out perform in a ‘risk on’ market, even while the time since December shows how fast they can drop in a ‘risk off’ world.
So when feeling uneasy, leave the Emerging Markets. When everything is turning newly rosy, hop in. And when it’s been a great ride and everyone is talking about how great things are, start checking out where the emergency exits are located…
Here is a live chart for watching how things move over time: