NoFeeBoards.com!

No Fees! No Ads! No Spam!

Log in Register FAQ Memberlist Search NoFeeBoards.com! Forum Index

Typical global asset allocation, it is wrongheaded thinking?

 
Post new topic   Reply to topic    NoFeeBoards.com! Forum Index » FIRE Board
View previous topic :: View next topic  
Author Message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Fri Sep 05, 2003 9:16 am    Post subject: Typical global asset allocation, it is wrongheaded thinking? Reply with quote

British people tend to diversify more than Americans, investing across Europe and the US.

The trend is to invest a large percentage in the UK, 70% lets say, and some invested in Europe excluding UK and some in the US. Another approach is to balance evenly the percentages so you have 33% in UK, 33% in the rest of Europe, 33% in the US. The thinking on the UK vs Europe excluding the UK is that at home we have no currency risk but investing in Europe as a whole carries similar currency risk as investing in the US. It is also next to impossible to forecast how your European investments might perform because they comprise of so many countries. In the last decade, USA did best, followed by Europe, followed by UK but there wasn't much in it. The yearly differences in performance was the thing. Pacific Rim did 3% growth for the last decade in total with a 1% annual mgmt fee for the indexers <smirk>.

My question is whether it really makes sense to split evenly, leaving yourself with 66% in Europe and 33% in the USA. Forgetting the currency risk issue, you are heavily invested in Europe which doesn't seem smart to me. It is worth noting that people here don't buy a Europe as a whole index fund like Americans do, nor do we think of Europe as a whole with investing to that end. We buy a UK index fund and a Europe excl UK index fund. The seperation is partly due to currency issues where seperating it out is helpful for conversion back to GBP.

Global asset allocation is where we have the most flexibility as we do not have value/growth style selection options nor small-cap index funds for the UK, mid-cap is limited (1.23% with 4$ sales load or cheaper but with 3% annual tracking error!) and no option to invest by cap or style globally like US investors do via Vanguard/Barra. The only way presently to break markets down by cap/style is to pay 1-1.5% annual mgmt fee plus 4-5% loads in order to buy actively managed funds targetting by cap/style. Despite the possible benefits of more careful slicing and dicing both in the UK or abroad, I'm not convinced that a negative 0.5%-1% fee disadvantage right out of the gate (let alone sale loads) is worth the possible benefits.

Imagine for a second that you were born in the UK, knowing what you know, how do you think you would assess these kind of interesting issues?

Petey


Back to top
View user's profile Send private message
bpp
** Regular


Joined: 26 Nov 2002
Posts: 98
Location: Japan

PostPosted: Fri Sep 05, 2003 6:56 pm    Post subject: Reply with quote

Hi Petey,

Overweighting the home country for currency reasons makes sense to me in general. After that, I agree that I don't see a particular reason to overweight Europe-ex-UK relative to the rest of the world. I also don't see a particular reason to omit the rest of the world beyond Europe and the US.

I am talking from general principles here. If you are using valuations or recent performance or something to over-/underweight regions, then do whatever your model tells you, I guess.

Cheers,
Bpp


Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Fri Sep 05, 2003 10:48 pm    Post subject: Reply with quote

Hi bpp,

Given the paragraph below and not wishing to overweight Europe, how would you go about allocating that on a percentage basis? You cannot overweight the UK without overweighting Europe when you add a European investment. One precludes the other surely?

Petey
bpp wrote:
Hi Petey,

Overweighting the home country for currency reasons makes sense to me in general. After that, I agree that I don't see a particular reason to overweight Europe-ex-UK relative to the rest of the world. I also don't see a particular reason to omit the rest of the world beyond Europe and the US.

Cheers,
Bpp


Back to top
View user's profile Send private message
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Sat Sep 06, 2003 1:32 am    Post subject: Reply with quote

historically us and uk markets have been more correlated than us and other countries (except canada) so a us investor gets more diversification by investing in german/french markets than uk

I don't know how past correlations would look from a uk perspective but if available such information would be interesting

I have no idea of the best allocation (market cap, historical correlation based) so I would be unable to suggest that any particular approach would be better than the "conventional" allocation

ataloss
realizing that this post contains 0% practical investment information



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Sat Sep 06, 2003 9:59 am    Post subject: Reply with quote

While the year on year has varied, the last decade showed almost identical results for Europe exc UK, UK and USA. Roughly 100% return, ie 10%. Shows the benefits of a long term approach too, given people moaning about the past 5 years and ignoring how great the previous 5 were to that and the 10% average.

Asia / Pacific Rim and Emerging Markets were abysmal. 3% return for 10 years before investment costs here of 1% per annum. So a net loss there of 7%+. Lovely! Often the approach to emerging markets here in the UK is that if you put you money in them, the cash will never emerge again! Smile

Petey
ataloss wrote:
historically us and uk markets have been more correlated than us and other countries (except canada) so a us investor gets more diversification by investing in german/french markets than uk

I don't know how past correlations would look from a uk perspective but if available such information would be interesting

I have no idea of the best allocation (market cap, historical correlation based) so I would be unable to suggest that any particular approach would be better than the "conventional" allocation

ataloss
realizing that this post contains 0% practical investment information


Back to top
View user's profile Send private message
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Sat Sep 06, 2003 2:25 pm    Post subject: Reply with quote

Quote:
Lovely! Often the approach to emerging markets here in the UK is that if you put you money in them, the cash will never emerge again!


Laughing veiex is doing well this year but since inception it doesn't look great. I think patience will be rewarded (and an etf share class is coming!)



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
wanderer
*** Veteran


Joined: 26 Nov 2002
Posts: 363
Location: anytown, usa

PostPosted: Sat Sep 06, 2003 6:49 pm    Post subject: Reply with quote

http://cbs.marketwatch.com/tools/quotes/intchart.asp?symb=VEIEX&intflavor=advanced

Pretty lackluster but note that the S&P outperformance was 240% and now is 100% (and raddr and I and Smithers think the S&P is 40% overvalued).

IIRC, Bogle and Sauter believe all equity returns will regress to one mean. I think this narrowing of performance differences is part of that. And the weight of large numbers on developed markets.

But, rest assured, veiex will put me through more grief before we reach that glorious day. Wink



_________________
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
Back to top
View user's profile Send private message
bpp
** Regular


Joined: 26 Nov 2002
Posts: 98
Location: Japan

PostPosted: Sat Sep 06, 2003 9:38 pm    Post subject: Reply with quote

Hi Petey,
Quote:
Given the paragraph below and not wishing to overweight Europe, how would you go about allocating that on a percentage basis? You cannot overweight the UK without overweighting Europe when you add a European investment. One precludes the other surely?

Petey

bpp wrote:
Quote:
Hi Petey,

Overweighting the home country for currency reasons makes sense to me in general. After that, I agree that I don't see a particular reason to overweight Europe-ex-UK relative to the rest of the world. I also don't see a particular reason to omit the rest of the world beyond Europe and the US.



I may have been unclear. By "Europe-ex-UK" I meant Europe-excluding-the-UK. (I.e., everything in Europe but the UK.) In other words, consider the UK and the rest of Europe separately.

As another of course, if the UK joins the EMU, you might then have a good reason to overweight Europe-ex-UK as well (or at least those parts of it that are in the EMU, if there are funds/ETFs in that category available; I believe I've seen at least one "Eurozone" ETF somewhere). You might even want to do this if you anticipate the UK joining the EMU any time soon...

Anyway, just a thought, not to be confused with actual advice. Wink

Cheers,
Bpp


Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Sun Sep 07, 2003 4:25 am    Post subject: Reply with quote

What is your reasoning for planning asset allocations seperately for Europe exc UK vs Europe as a whole?

Is it because the currencies are presently different and therefore does represent diversification? Could you flesh out your reasoning some more as I think it has gotten lost in broken-up replies!

Petey
bpp wrote:
I may have been unclear. By "Europe-ex-UK" I meant Europe-excluding-the-UK. (I.e., everything in Europe but the UK.) In other words, consider the UK and the rest of Europe separately.

As another of course, if the UK joins the EMU, you might then have a good reason to overweight Europe-ex-UK as well (or at least those parts of it that are in the EMU, if there are funds/ETFs in that category available; I believe I've seen at least one "Eurozone" ETF somewhere). You might even want to do this if you anticipate the UK joining the EMU any time soon...

Anyway, just a thought, not to be confused with actual advice. Wink

Cheers,
Bpp


Back to top
View user's profile Send private message
bpp
** Regular


Joined: 26 Nov 2002
Posts: 98
Location: Japan

PostPosted: Sun Sep 07, 2003 3:22 pm    Post subject: Reply with quote

Hi Petey,
Quote:
What is your reasoning for planning asset allocations seperately for Europe exc UK vs Europe as a whole?

Is it because the currencies are presently different[...]


Yes, basically. My basic thinking goes like this: all developed markets have about the same expected return. However, those that are not denominated in the "home" currency (or the target currency, meaning the future expected home currency, if that is different from the current home currency) have additional volatility added due to currency fluctuations. Generally this means that the optimal (efficient) weighting for the foreign market will go down. Of course the currency fluctuations also reduce the correlations with the home market a bit, but from what I've played around with, and from published studies that I have heard of, the net result is that you still would want to overweight the domestic market somewhat for the optimum risk/return ratio.

So since the UK does not currently share a common currency with the rest of Europe, then a UK investor has no reason to overweight Europe-ex-UK relative to the-rest-of-the-world-ex-UK.

If the UK joins the EMU, then all of the Eurozone stocks effectively become domestic stocks for the UK investor, at least as far as currency issues go, so the UK investor would then want to consider all Eurozone-including-UK stocks as one category for weighting purposes.

Then again, it occurs to me that there may be some taxation and expense ratio issues for non-UK stocks, which might lower the expected return for Eurozone-ex-UK relative to UK stocks even if the UK joins the EMU. I have no idea about that, though, and imagine you're familiar with any relevant issues there.

Make any sense?

Cheers,
Bpp


Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Sun Sep 07, 2003 10:49 pm    Post subject: Reply with quote

Hey bpp,

A complicated but fair answer. Thank you.

My European low cost options are either a European index fund by our largest index fund providers costing 0.8-0.9% or an iShare FTSE Euro 100 which covers the top 100 companies in Europe exc UK (bit like the S&P 500) for 0.55%. The index fund is cap weighted but will grab some of the small and mid cap in the mix much like other index funds do elsewhere. At the moment I would consider a little of both to reduce the overall expense ratio and mitigate some of the lack of federal protection on the ETF investment as it is based in Ireland (cuts trading costs but loses FDIC-type protection - Barclays ETFs).

P.S. Not all of Europe is using the Euro, so the case is not quite as simple as everyone using the domestic currency. There will still be able half the countries not using the Euro, although I do think the ones cap weighted in an index fund will more commonly be the more developed economies and have joined the EMU (though I have not checked into that yet).

Petey
bpp wrote:


Yes, basically. My basic thinking goes like this: all developed markets have about the same expected return. However, those that are not denominated in the "home" currency (or the target currency, meaning the future expected home currency, if that is different from the current home currency) have additional volatility added due to currency fluctuations. Generally this means that the optimal (efficient) weighting for the foreign market will go down. Of course the currency fluctuations also reduce the correlations with the home market a bit, but from what I've played around with, and from published studies that I have heard of, the net result is that you still would want to overweight the domestic market somewhat for the optimum risk/return ratio.

So since the UK does not currently share a common currency with the rest of Europe, then a UK investor has no reason to overweight Europe-ex-UK relative to the-rest-of-the-world-ex-UK.

If the UK joins the EMU, then all of the Eurozone stocks effectively become domestic stocks for the UK investor, at least as far as currency issues go, so the UK investor would then want to consider all Eurozone-including-UK stocks as one category for weighting purposes.

Then again, it occurs to me that there may be some taxation and expense ratio issues for non-UK stocks, which might lower the expected return for Eurozone-ex-UK relative to UK stocks even if the UK joins the EMU. I have no idea about that, though, and imagine you're familiar with any relevant issues there.

Make any sense?

Cheers,
Bpp


Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic    NoFeeBoards.com! Forum Index » FIRE Board All times are GMT - 9 Hours
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by phpBB © 2001- 2004 phpBB Group
Designed for Trushkin.net | Styles Database