David Garff Discusses Q4 Investor Updates

In this video, David Garff discusses the following:

-Notable changes to the country rankings in Q3

-Key country risks

-Talking to clients about investing internationally

-Q4 developments to watch out for

If you have any questions for Dave as we approach our 1Q15 Update, please leave them in the comments section!

What Countries are Hot: What should a momentum investor be looking at now?

In a previous whitepaper, we looked at using Momentum as a factor when investing across countries, and found it to be effective in generating outperformance vs. the benchmark. The full text can be found here.

As investors who are biased towards factor tilts, we thought it would be interesting to look at the relative performance of the 32 countries in our universe based on 3 basic criteria: Trailing 30 Day Return, Trailing 90 Day Return and Trailing 12 months Minus the Recent 30 Day Return. All returns are measured in Local Currency of the respective index.

The table below includes rankings of each country based on each individual factor, as well as a composite rank that is the average of the 3 factor ranks. In addition, just for the sake of completeness, we included the actual measure of trailing 90 Day Return so that readers could see how recent political events are affecting relative returns. This data is as of 8/4/14, and as such, reflects the increasing divergence of returns at a country level.

hot.momentum

Over the past 90 days, Egypt is the best performing index, up 10.78%, and Portugal is the worst performing index, down -20.91%. That is a maximum/minimum range of 31.7%. Based on the composite rank, Egypt is the hottest market in the world, followed by India, Turkey, South Africa, Brazil and China. The worst performing markets are Germany, Russia, the Netherlands, Portugal and Austria. Turkey, China and Hong Kong have an interesting profile, with very strong returns in the last 90 days, but terrible longer-term performance. Greece, Italy and Germany show the exact opposite, with very strong longer-term performance, but very poor near-term returns. The US is now in the middle of the pack, after a 5 year run at the top of the performance table. The majority of the countries with high ranks are part of the emerging markets. That said, we also see countries like Russia, Chile, Poland, and Greece diverging significantly to the downside.

Currently, momentum investors should be looking at single-country ETFs that invest in Egypt (EGPT), India (INDY), Turkey (TUR), South Africa (EZA), and China (MCHI).

 

Disclosures: This article was compiled by David Garff, a Portfolio Manager at Accuvest Global Advisors. This article is strictly informational and should be used for research use only. It should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Charts and information are sourced from Bloomberg, unless otherwise noted. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

 

Can a Tactical ETF Strategy be used as a Liquid Alternative?

This blog post doesn’t have anything to do with country-focused or factor-based investing, so hopefully you’ll stay with me. I recently attended the Investment Management Consultant’s Association annual conference in Boston. It was two days of (mostly) strong content, and gave me several ideas for new lines of research. As part of the conference, I had the opportunity to moderate a panel entitled “Liquid Alternatives and Tactical Allocation – Two Sides To The Same Coin?” In the panel discussion, we talked about the rise of tactical asset allocators (also known as ETF strategists, ETF asset managers, ETF model providers, etc.) and how the use of dynamic beta exposure management had increased substantially since 2008. We discussed the different levels of tactical management, including a spectrum of managers who range from Core/Satellite (not a lot of tactical swings) to managers who will go from 100% invested to 100% cash. We also reviewed the current availability of alternative strategies in 40 Act wrappers, discussing the pros and cons of each type of strategy and whether some were more fit than others for transparent, liquid vehicles. As we talked, it occurred to me that at the moment we were missing some good old-fashioned quantitative data on the question.

The idea of this post is to answer a simple question: Can investors use a tactical allocator instead of an “alternative” strategy to benefit the balanced portfolio of a traditional investor? What follows here is NOT an exhaustive review of the subject, and we are well aware of the difficulties in defining and analyzing alternative strategies versus traditional asset classes. We are also aware of the short-term nature of many of the tactical track records (although some are over 10 years at this point) as well as the small universe of tactical managers with a sufficient track record for the analysis.

We looked at data going back to the end of 2006, chose a comparison universe comprised of 3 tactical managers (one or two of which everyone would know), 2 balanced funds (also well-known), 3 traditional asset class benchmarks, and 7 different alternative benchmarks. The names of the tactical managers and funds have been hidden, as the specifics of which managers we are looking at are less relevant. So here is the list.

tactical managers 1

All performance in our analysis is sourced from Morningstar Direct, and covers the time period from 12/31/2006 to 3/31/2014.

Our first look was at the absolute and risk-adjusted performance of the strategies.

Table 1

tactical managers 2In Table 1, both the tactical and balanced portfolio groups compared favorably to the alternative indexed from a return perspective, but definitely had significantly higher standard deviation than all of the alternatives except for managed futures. Each had positive alpha to the 45/45/10 benchmark, with betas higher than 1. The R2 of the multi-strategy alternatives ranged between 0.57 and 0.79, which was somewhat similar to those of the tactical managers ranging from 0.32 to 0.86. The balanced funds R2 were much higher, on the order of 0.88 to 0.92. In addition, the sharpe ratios of the multi-strat alternative indexes were in the 0.5-0.68 range, which was similar to the range of 0.38 to 0.75 for tactical and balanced managers. At least from this first cut, it looked like the tactical managers were in the same neighborhood as the alternative benchmarks.

Next we looked at the information and capture ratios for the strategies.

Table 2

tactical managers 3In Table 2, all of the tactical and balanced strategies had strong information ratios vs. the benchmark, while the alternatives indexes struggled in that same area. The worst performers were the HFRI FoF: Diversified index, as well as the liquid alternatives fund 1. The Up/Down capture ratios, however, told a different story. In all cases, the tactical and balanced managers had higher up and down capture ratios than the benchmark, while the alternatives indexes all showed up/down capture ratios of 45%-75%. This was not a great surprise given the realized volatility differentials that we saw in Table 1. We decided to continue this line of research by looking at some of the downside statistics in Table 3.

Table 3

tactical managers 4The theme of higher downside risk and drawdowns continued in our analysis of Table 3. The worst month for the tactical and balanced managers was similar to that of the benchmark, but higher than any of the alternative indexes. The differential was less when looking at the worst quarter, but still was slightly higher for tactical and balanced managers. The max drawdown was similar in magnitude for all of the indexes and managers, and the max drawdown valley date for all of the investments was within 3 months of each other(with the exception of managed futures that has a 9/30/13 date – but that is a subject for another blog post).

Up to this point, we had seen that tactical managers are generally more volatile than both the benchmark as well as the alternative universe. This might imply that they in fact, are not good substitutes for more traditional alternatives investments. However, the astute reader will rightly recognize that no analysis of the contribution of an investment to the overall portfolio is complete without a correlation analysis. Tables 4-6 include a correlation analysis of 3 time periods: Table 4 analyzes the time period from 12/06 – 3/09, Table 5 the time period from 3/09 to 3/14, and Table 6 the entire time period from 12/06-3/14. The reason for breaking up the time periods is to see how the strategies performed in both up and down trending markets.

Table 4 – Correlations from 12/06–3/09

tactical managers table 4

Table 5 – Correlations from 4/09–314

tactical managers table 5

Table 6 – Correlations from 12/06–3/14

tactical managers table 6

Since there are so many numbers on these charts, it is important to note that the alternative universe includes investments #7 through #13. As we look at the correlations on Table 4, it is not a great surprise to see that most of the assets are correlated to the benchmark, and to each other. This makes sense in the context of the high inter-asset correlations that were commonplace in 2007 and 2008 during the crisis. The notable exceptions are tactical manager 2, managed futures, and bonds. Table 5, surprisingly, tells a similar story. So we moved on to Table 6 to see if we could draw some conclusions. It is clear from the tables that the investments with the lowest correlation to the 45/45/10 benchmark, and the rest of the universe are tactical manager 2, managed futures, and bonds. The alternatives universe (ex-managed futures) had correlations to the benchmark of between 0.75 and 0.89. Frankly, those aren’t great numbers in a portfolio construction sense. The balanced funds had correlations of 0.94 and 0.96, which essentially are the same as the benchmark. The tactical managers ranged between 0.57 and 0.93 correlations.

So what is the bottom line on all of this? How do tactical managers stack up to alternatives? Are they a viable element in portfolio construction? When compared to alternative benchmarks, we noted that tactical managers have the following characteristics:

  • Higher average returns with higher volatility
  • Similar downside characteristics
  • Similar correlation characteristics

Can tactical managers perform the same function as some alternative strategies? I believe they can. As always, the trick is to figure out how to best use them in a client portfolio. Allocating a portion of the client’s “alternative” investments to tactical managers may be a good place to start.

 

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Disclosures

This brochure is strictly informational and should be used for research use only. This brochure should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Charts and information are sourced from Accuvest Global Advisors and the MSCI, unless otherwise noted. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

Quality Factor Goes Global

Global multi-factor investing is a passion of ours, and as such, we like to pay attention to what others are writing on the subject. In a recent blog post on ETF.com, Larry Swedroe provided a nice summary of a couple of papers that show that Quality is another factor that explains returns in global equity markets. His comments can be found here.

In particular, the paper by Kozlov and Petajisto was interesting to us, as it makes three key points. First, Quality works in global markets. Second, Quality pairs nicely with Value to create diversification benefits for investors. Third, using multiple measures of Quality is superior to using a single factor. The original paper can be found here.

This analysis is done on Developed Markets, and is based on regional groupings of North America, Europe, Japan and Asia Pacific. Of course, we would have loved to see how the analysis played out at a cross-country level, but the geographic groupings was a nice enhancement from traditional analyses that only look at stocks within a particular country.

The bottom line is that this is a nice validation of the use of multiple quality (fundamental) factors in our country model. We look forward to more research that includes Emerging Markets in addition to Developed Markets, and further work on cross-country factor effects.

 

 

Disclosures

This brochure is strictly informational and should be used for research use only. This brochure should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Charts and information are sourced from Accuvest Global Advisors and the MSCI, unless otherwise noted. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

What Countries are Hot? What Should a Momentum Investor Buy Now?

This is the second commentary in a series about the relative attractiveness of different country stock markets. In a previous whitepaper, we looked at using Momentum as a factor when investing across countries, and found it to be effective in generating outperformance vs. the benchmark. The full text can be found here.

Ranking Returns

As investors who are biased towards factor tilts, we thought it would be interesting to look at the relative performance of the 32 countries in our universe based on 3 basic criteria:  Trailing 30 Day Return, Trailing 90 Day Return and Trailing 12 months Minus the Recent 30 Day Return.  All returns are measured in Local Currency of the respective index.

The table below includes rankings of each country based on each individual factor, as well as a composite rank that is the average of the 3 factor ranks.  In addition, just for the sake of completeness, we included the actual measure of trailing 90 Day Return so that readers could see how recent political events are affecting relative returns.  This data is as of 3/9/14, and as such, reflects the most recent weakness in Emerging Markets.

What Countries are HotOver the past 90 days, Israel is the best performing index, up 20.6%, and Turkey is the worst performing index, down -16.8%.  That is a maximum/minimum range of 37.4%.  Based on the composite rank, Italy is the hottest market in the world, followed by the US, South Africa, Israel, Canada and Spain.  The worst performing markets are Turkey, Brazil, Mexico, Russia and Peru.  Indonesia’s profile is quite interesting, with very strong returns in the last 90 days, but terrible longer-term performance.  Japan shows the exact opposite, with very strong longer-term performance, but very poor near-term returns.

Final Thoughts

Currently, momentum investors should be looking at single-country ETFs that invest in the US (SPY), (IVV), South Africa (EZA), Israel (EIS), Canada (EWC), and Spain (EWP).  With the exception of South Africa and Israel, the rest of the countries on this list are relatively expensive.  It seems like investors are now being forced to choose between buying countries that have good relative value and poor momentum, or countries with strong momentum that are have more expensive valuations.  For the moment, the countries with strong momentum continue to outperform.  How long that will last is anyone’s guess.

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Disclosures: The opinions expressed in this report are those of the author. The materials and commentary are strictly informational and should be used for research use only. This bulletin is not intended to provide investing or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions that comply with matters addressed in this report. Charts and information used in this report are sourced from Accuvest Global Advisors, unless otherwise noted. Past performance is not indicative of future results. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. Investment risks are born solely by the investor and not by AGA.

What Countries Are Cheap? What Should a Value Investor Buy Now?

This is the first commentary in a series about the relative attractiveness of different country stock markets. With everything that has been going on in the Ukraine and Russia over the past several days, much has been written about the opportunity (or lack thereof) that comes as a result of these types of geopolitical events. Most of the commentary surrounds the fact that Russia is now very cheap relative to other regions and countries, and thus represents a good opportunity. In a previous whitepaper, we looked at using Value as a factor when investing across countries, and found it to be effective in generating outperformance vs. the benchmark. The full text can be found here.

As investors who are biased towards factor tilts, we thought it would be interesting to look at the valuation of the 32 countries in our universe based on 3 basic criteria: Forward Price/Earnings Ratio, Trailing 5 Year Price/Earnings Ratio, and Price/Book Ratio.

The table below includes rankings of each country based on each individual factor, as well as a composite rank that is the average of the 3 factor ranks. In addition, just for the sake of completeness, we included the actual measure of forward P/E so that readers could identify and measure any significant differences in valuation between countries. This data is as of 2/28/14, and is prior to the flare-up in the Ukraine.

What Countries Are Cheap Chart

As you can see, based on the composite rank, Russia is the cheapest country, followed by Turkey, Korea, Brazil, China and Austria. The most expensive countries are Mexico, Switzerland, US, Sweden, Canada and Malaysia.

At first blush, it might seem that Emerging Markets are relatively inexpensive, and therefore represent a good place to allocate capital. The truth is, value is only to be had in certain of the EM countries. In fact, 5 of the 10 most expensive country markets are EM countries (Mexico, Malaysia, India, Chile and South Africa).

So, in answer to the question posed at the beginning of the commentary, a value investor should be looking at single-country ETFs that invest in Russia (ERUS, RSX, RBL), Turkey (TUR), Korea (EWY), Brazil (EWZ), China (MCHI, FXI, GXC, YAO, FCHI, KBA) and Austria (EWO).

The next installment in our series will look at ideas for building a portfolio of high momentum countries. That list will look quite a bit different than this one.

 

Disclosure: The opinions expressed in this report are those of the author. The materials and commentary are strictly informational and should be used for research use only. This bulletin is not intended to provide investing or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions that comply with matters addressed in this report. Charts and information used in this report are sourced from Accuvest Global Advisors, unless otherwise noted. Past performance is not indicative of future results. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. Investment risks are born solely by the investor and not by AGA.

 

Our Newest Whitepaper: Multi-Style Global Equity Investing

Today we are excited to offer our latest whitepaper, “Multi-Style Global Equity Investing: A Study on Combining Fundamentals, Momentum, Risk and Valuation for Improved Performance“.

PDF imageMulti-Style Global Equity Investing

This is the first paper of its kind to look at the performance of a multi-factor approach to investing in equities across countries, and not just within countries.  Some of the key study highlights include:

  • Factor exposures exhibit alpha across countries, not just within countries
  • Momentum and valuation factors generate the greatest outperformance
  • Factors exhibit low correlations to each other, creating valuable diversification opportunities for portfolio managers
  • Long-only multi-style portfolio, using fundamental, momentum, risk and valuation factors, significantly improves absolute- and risk-adjusted performance
  • Long/short multi-style portfolio substantially outperforms long-only benchmark on a risk-adjusted basis

Our previous whitepaper, “Do Countries Still Matter?” is also available by clicking here. The piece won the Stephen L. Kessler Writing Award, with Honorable Distinction, and was picked up by IMCA in 2012.

We hope that you find our research valuable and informative. We ask that you leave your name and contact information if you would like more information on Accuvest, our portfolios and strategies, or this whitepaper. We will also be hosting a webinar on my Multi-Style Global Equity Investing findings, so please let us know if you would like an invitation to attend.