Emerging Markets Value funds

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Lucky C
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Emerging Markets Value funds

Post by Lucky C » Thu Aug 22, 2019 6:00 pm

GMO updated their 7-year asset return forecasts and Emerging Value is expected to crush everything else, including vanilla Emerging Markets, with close to 10% real returns. OK, great, let me invest in emerging value... where is the fund for that?

Unfortunately Vanguard only offers regular emerging markets and an emerging markets "select" fund, but the select does not equate to value. Their international value fund is mostly Europe.

I assume GMO's 7-year projection is based on the MSCI Emerging Value Index? Looks like a sensible portfolio, so why is nobody copying it as a fund? Maybe because it is only a subset of its Emerging Markets parent index?

After a Google search there are a few Emerging Value funds out there, with the cheapest one being Dimensional's DFEVX at a 0.54% net expense ratio. Other emerging value funds are too expensive with >1% expense ratios (though that would be worth it if the returns match GMO's prediction). Comparing the Dimensional fund to the MSCI index, only 4 out of the top 10 holdings match (and not in the same order), so it doesn't seem like a great match but it could correlate well enough.

So on the one hand I don't want to be stuck with tech companies like Tencent and Alibaba dominating my emerging markets performance if value is expected to outperform, on the other hand I don't have much faith in a more expensive non-Vanguard fund that may or may not be a good representation of the emerging market value index. Anyone have a good solution for this?

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unemployable
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Re: Emerging Markets Value funds

Post by unemployable » Sat Aug 24, 2019 10:09 pm

No one has answered you so I'll provide some thoughts.

VEMAX costs 14 bps, so you're really only paying an extra 40 bps. And 54 bps is still a decent deal for a fund that invests in markets with lower liquidity and higher structural costs and requires a fair amount of active management. Consider it takes a fair amount of analysis to decide what counts as "value" (accounting methods differing by country), what stocks qualify this quarter and when and how to trade in and out of them, much more that you have for a straight market-cap based index.

One idea is to determine what level of fees you believe is fair, then allocate to VEMAX and DFEVX in a proportion that results in that overall fee level.

If you're sold on what GMO is saying, that 40 bps will seem cheap. We regarded GMO very highly at my old shop; I knew several of the higher-ups pretty well including Jeremy, upon whom we basically bestowed sainthood. Trying to be more measured, my experience is the more time you give them the more likely they will be right... BUT... they are quite often right in a general sense (asset class A outperforms asset class B) but not necessarily a specific sense (subclass A1 will outperform subclass A2 with a margin of X%). And they will tell you they spend a long time being wrong while waiting to become right eventually. The way I'd apply this here is to fade towards non-US and especially emerging but NOT let it guide a specific percentage mix or ring the alarm bells that you have to rebalance right now.

SImilarly I'm not sure why you have such a strong preference for Vanguard. They don't own the concept of indexing and other people have good funds too. They annoy me often as a putative investor-owner. Dimensional's a fine shop, I think they're in Monterey, would love to work for them.

Some of those big-cap Chinese stocks may actually count as "value", as AAPL did for many years. I don't know and am too lazy to look it up for you for free.

If you think China is headed for trouble or don't like the emphasis on China in VEMAX -- both fair criticisms -- there are emerging-ex-China funds and etfs out there. Note you're making a country call here rather than a growth/value call.

Lucky C
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Re: Emerging Markets Value funds

Post by Lucky C » Sun Aug 25, 2019 5:58 am

Thanks for the reply. Basically I was looking to Vanguard first because that's where my money is, their fees are very low, and because "emerging value" seems like it would be a general enough asset class/factor that they could have a fund for it. Also if I have $X invested in Vanguard's own funds I unlock the additional benefits or lower fees at certain asset levels. I do own some Vanguard Emerging (VWO ETF, same as VEMAX fund) but the top 3 holdings are Tencent, Alibaba, and Taiwan Semiconductor, whereas MSCI index top holdings are China Construction, Ping An Insurance, and Samsung.

So I would think emerging markets value vs. broad emerging markets would deliver very different returns, but then again the performance has been nearly identical since 2004 according to the MSCI chart so I don't know if GMO's 4.6% outperformance estimate is realistic. Or if it's even based on the MSCI index. https://www.msci.com/documents/10199/2e ... e1fb2d1f06

The MSCI Emerging index also holds 32% Chinese stocks vs. VEMAX's 34%. The biggest country difference is that the MSCI index's 2nd biggest country holding is South Korea at 12% whereas VEMAX has no South Korea holdings.

For a no-fee option, some of the emerging value stocks can be traded in the U.S. (INFY, VALE, CHL, ITUB) but then I would be hit with commissions and not have much diversification if limiting myself to only a few individual stocks.

zocab
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Re: Emerging Markets Value funds

Post by zocab » Sun Aug 25, 2019 7:47 am

I can see EMVL tracking this index, which sounds good enough for most of the world (except possibly for US investors, I hear they have some odd restrictions across the pond).

But I've also seen a number of people recommending FNDE (Schwab Fundamental Emerging), which is constructed differently yet has a lot of similarities to Emerging Value. US-dom and hence potentially an alternative to those who aren't free to buy IE funds.

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Re: Emerging Markets Value funds

Post by unemployable » Sun Aug 25, 2019 9:54 am

Lucky C wrote:
Sun Aug 25, 2019 5:58 am
Thanks for the reply. Basically I was looking to Vanguard first because... "emerging value" seems like it would be a general enough asset class/factor that they could have a fund for it.
Like I said, Vanguard isn't all rainbows jumping over unicorns. That's a level or two of sophistication higher than Vanguard's target market.
Also if I have $X invested in Vanguard's own funds I unlock the additional benefits or lower fees at certain asset levels.
Do you mean the fee break you get at $500k in total assets with them? Nowadays basically everyone above the level of "how am I gonna pay the rent next month" qualifies for admiral shares, and if you qualify for institutional shares you have better places to be than here. (Like, I'd be calling GMO directly to ask what their minimums are. They're nice people; I can give you some names.) If you look over what you really get at $500k it's not that big a deal especially for ERE-type people who don't need an adviser on call. I grant if you can put $500k with them, you should, but can't you just hold third-party mutual funds in a Vanguard brokerage account?

I wouldn't be penny-wise and pound-foolish. Fees are like taxes; the goal is not to minimize them above all, the goal is to maximize net return.

Also, I know I swapped "rainbows" and "unicorns" above.

samirol
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Re: Emerging Markets Value funds

Post by samirol » Sun Aug 25, 2019 10:34 am

Wisdomtree has some popular ETFs with their Emerging Market Small Cap High Dividend fund (DGS) and Emerging Market High Dividend Fund (DEM), iShares Emerging Market Multifactor fund (EMGF) might be another good choice for you

If you're looking for low fee, iShares Small Cap (EEMS) returns almost all of their expense ratio through securities lending but isn't value-tilted

Seppia
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Re: Emerging Markets Value funds

Post by Seppia » Sun Aug 25, 2019 1:23 pm

Lucky C wrote:
Sun Aug 25, 2019 5:58 am
The biggest country difference is that the MSCI index's 2nd biggest country holding is South Korea at 12% whereas VEMAX has no South Korea holdings.
Vanguard doesn't consider South Korea to be an emerging market, that's the biggest difference between their index (with FTSE) and iShares (MSCI).

IIRC Vanguard also incorporated Chinese class A shares, but MSCI included them as well recently.

I had looked into this as well, and ultimately concluded that it was too complicated (so I stuck "regular" emerging), so I'm very interested in this discussion.

@unemployable: I'm far from allocating that kind of money to emerging, but are you saying that $500k or equivalent may get you into the door with GMO?
What would you think being the minimum not to be laughed at on the phone?

Thanks

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Re: Emerging Markets Value funds

Post by unemployable » Sun Aug 25, 2019 7:32 pm

Seppia wrote:
Sun Aug 25, 2019 1:23 pm
@unemployable: I'm far from allocating that kind of money to emerging, but are you saying that $500k or equivalent may get you into the door with GMO?
What would you think being the minimum not to be laughed at on the phone?
I kept some of my old meeting notes in fact. You could probably get in the door with a few million, although getting into their best asset allocation funds likely requires $10m or more by now.

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Re: Emerging Markets Value funds

Post by Seppia » Mon Aug 26, 2019 12:45 am

Thanks a lot. That’s not just a different league, it’s different sport than what I play LOL

Lucky C
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Re: Emerging Markets Value funds

Post by Lucky C » Mon Aug 26, 2019 4:28 am

@unemployable thank you for your kind offer of sharing contact info but I am also talking about the lower $500k threshold. As you said it is not an important threshold, but I'm right on the cusp of it at Vanguard. It's my understanding that I would need $500k in Vanguard funds alone to get the lower trading costs, but the stocks I own which would benefit from the lower trading cost prevent me from meeting that $500k requirement! So it's not really important especially since I don't do a lot of stock trades.

@samirol thanks for sharing those ETFs. One nice thing about Vanguard is those are probably all commission-free to trade now.

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Re: Emerging Markets Value funds

Post by unemployable » Mon Aug 26, 2019 11:01 am

Lucky C wrote:
Mon Aug 26, 2019 4:28 am
It's my understanding that I would need $500k in Vanguard funds alone to get the lower trading costs, but the stocks I own which would benefit from the lower trading cost prevent me from meeting that $500k requirement!
I had to dig down several pages to verify this -- that stocks and other non-Vanguard assets don't count -- and in fact it's correct. But it's not really clear on several of their pages that make vague statements such as "if you have $500,000 at Vanguard".

The Vanguard cult worship, not only here but elsewhere, is kind of sickening and I wish people would be a little more critical of them sometimes. I say that as someone with a couple hundred grand with them.

What do you believe is a fair fee to pay for a emerging-market value fund, considering it requires more active management and trading than something such as VEMAX, and how did you arrive at that figure? Tell me your answer and I'll give you mine.

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Re: Emerging Markets Value funds

Post by Jason » Mon Aug 26, 2019 11:36 am

At this point, how can China still be considered emerging? I mean, if anything appears to have emerged, that would seem to be the place. Who bothers with a trade war with an emerging country? That's the whole point. That they are still being treated like they are emerging but are in reality ahead of us so many things, like robotics and cars. And fucking people. Not to mention, last I looked, Mao's been fucking dead a while. And if you are interested in China, there are plenty of funds for that. Or individual stocks. I never liked emerging countries and I don't see how one can predicate that they will do well as they are usually tied to political/social issues that may or may not work out. If you take the "know what you are investing in" adage, emerging markets seems like a shit ton to learn about. At least I know how fucked up America is. I always stayed away from Latin America. Too many beaches. I don't see people being able to sustain concentration there. And India? That place seems like a big old mess. Entrenched caste system operating as a "democracy." And everyone's got their own God. Too many variables. And basically, how can you group countries as disparate Brazil/India/Russia into one bucket? I mean that's economic reductionism of geo-political complexity. Doesn't make sense to me. If you want to target a geographic area, that's one thing. I'm taking a small shot with Israel. Although they are not considered emerging.

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Re: Emerging Markets Value funds

Post by unemployable » Mon Aug 26, 2019 11:51 am

Jason wrote:
Mon Aug 26, 2019 11:36 am
At this point, how can China still be considered emerging?
GDP per capita. They're squarely in Brazil/Thailand/Iraq territory. But it sounds like you answered your own question.
And basically, how can you group countries as disparate Brazil/India/Russia into one bucket?
Same way can you group 500 US companies together and call it "investing in stocks" even when several of them are certain to be screwed up at any given time.

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Re: Emerging Markets Value funds

Post by Lucky C » Mon Aug 26, 2019 11:53 am

Great question, this is helping me to think about fees...

The problem is that I don't know how well the emerging value funds mentioned here match what GMO is calling "emerging markets value", so I don't know if any fee above what VWO charges (0.12%) is worth it. As mentioned above the MSCI Emerging Value has been nearly identical to plain old MSCI Emerging for the past 15 years even though emerging value has supposedly underperformed emerging markets in general. I am also somewhat skeptical in general about a major "value" fund being able to outperform its non-value counterpart.

So the additional fee would have to be pretty negligible. DFEVX at 0.54% is 0.42% more expensive than VWO, but again I don't have enough confidence that it will outperform VWO by that amount over the next 7 - 10 years even if emerging value is "due" to outperform. Other emerging value funds I saw are another 1%+ more expensive on top of that, and I have no confidence that they should outperform VWO or DFEVX, so I am not considering them.

If I had more time to do a deep dive into the funds and their holdings and thought that one of these funds had great selection criteria then I would be OK with paying some higher fee. However for now I am going to stick to my original strategy which does not require doing that.

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Re: Emerging Markets Value funds

Post by unemployable » Mon Aug 26, 2019 12:23 pm

You didn't answer the question, but I'll give you my answer anyway, from a couple different directions.

International value funds -- all markets, naturally weighted towards developed because that's where the big companies are -- already exist. There's EFV which charges 38 bp and IVLU which holds larger cap names, so lower trading costs and charges 30 bp.

Gee, those sound high. If only your beloved Vanguard had... wait, they do! Thirty-eight basis points, same as EFV, and no, they don't come in admiral shares. Cue sad trombone noises. The three-year track record of VTRIX is nearly identical to that of VTIAX. Over 10 years VTRIX is ahead, but most of that outperformance was pre-2014.

I held a lot of VTRIX for a long time. I dumped it mostly for VTIAX and VEMAX over the past year. Felt like a dog, although the numbers said it wasn't bad in comparison to overall international. I guess I was mentally benchmarking it to US stocks.

I'm willing to be told of substantially cheaper options, but iShares and Vanny lead the economy-of-scale race.

Anyway a value index of all international stocks is going to set you back 30+ bp to begin with. Then anything emerging will be higher than that for several necessary reasons. Including, as mentioned, paying the salaries of the people who sit in meetings debating what counts as emerging in the first place. Fact is, once you start putting words such as "value" or "small-cap" or "emerging" in front of things you're no longer indexing but taking factor bets. You know, active management. And that means the people underneath are doing active management too.

Now consider that large institutions, the people who can write checks for hundreds of millions when they want to steer towards something such as "emerging value", are happy to pay in the 20-50 bp range (that includes things such as custodial arrangements, separate account maintenance, they fly out to you on their dime, that kind of thing) depending on how specific the mandate is. For tactical/macro it's more like 50-100 bp. You don't think you can get a better deal than they do, do you?

So erring on the cheap side we could say a bargain basement emerging value fund, like something you'd pick up at Dollar Tree and of Dollar Tree quality, "should" run in the mid 40s of basis points.

DFEVX is 10 bp above that.

If you're dropping $100k into this idea, that's $100/year "over face", as we'd say in the ticket scalping market. People 20 years ago would've laughed at this.

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Re: Emerging Markets Value funds

Post by Lucky C » Mon Aug 26, 2019 12:57 pm

unemployable wrote:
Sat Aug 24, 2019 10:09 pm

SImilarly I'm not sure why you have such a strong preference for Vanguard. They don't own the concept of indexing and other people have good funds too. They annoy me often as a putative investor-owner.
unemployable wrote: I had to dig down several pages to verify this -- that stocks and other non-Vanguard assets don't count -- and in fact it's correct. But it's not really clear on several of their pages that make vague statements such as "if you have $500,000 at Vanguard".

The Vanguard cult worship, not only here but elsewhere, is kind of sickening and I wish people would be a little more critical of them sometimes. I say that as someone with a couple hundred grand with them.
unemployable wrote: You didn't answer the question, but I'll give you my answer anyway, from a couple different directions.

International value funds -- all markets, naturally weighted towards developed because that's where the big companies are -- already exist. There's EFV which charges 38 bp and IVLU which holds larger cap names, so lower trading costs and charges 30 bp.

Gee, those sound high. If only your beloved Vanguard had...
Your off-topic obsession with shitting on Vanguard every chance you get, and your tone in general, is very annoying.

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Re: Emerging Markets Value funds

Post by unemployable » Mon Aug 26, 2019 1:04 pm

Lucky C wrote:
Mon Aug 26, 2019 12:57 pm
Your off-topic obsession with shitting on Vanguard every chance you get, and your tone in general, is very annoying.
You started the thread by stating a preference for Vanguard, and are implicitly benchmarking everything else to them, so I'm not sure how it's "off-topic". I have given multiple specific criticisms of them, with evidence, and I do have more, but I'll hold off for now. You will note that my objections are not so strong that I have moved my money elsewhere.

I have also directly addressed the original topic and questioned your assumptions with support. Who's the one going off-topic?

I'm open to well-supported criticism beyond your finding what I have to say unpleasant.

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Re: Emerging Markets Value funds

Post by Lucky C » Mon Aug 26, 2019 1:17 pm

My intent was not to benchmark everything to Vanguard. In my first post I point out that Vanguard does not offer what I am looking for, so I am looking for something elsewhere. I did not want to discuss an emerging markets fund with heavy weights in fast growing tech stocks, like VWO/VEMAX has. I state that the benchmark is MSCI Emerging Markets Value, if indeed that matches what GMO means by "Emerging Markets Value". Therefore I did not want to discuss Vanguard further since they don't have an emerging value fund, but you kept bringing them up. I hope you understand what I mean.

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Re: Emerging Markets Value funds

Post by unemployable » Mon Aug 26, 2019 1:28 pm

I've sent resumes to Vanguard, OK? (Edit: And hold absolutely no animosity towards them for not getting a callback.)

Vanguard funds are a large enough portion of my net worth that I care about how they treat my money, and how they treat me. As with, say, car insurance, I am constantly reviewing whether they provide me with a competitive product. My comments, many of which are quite favorable, are based in experience.

You mentioned them in a separate context (the $500k thing), and I flat out recommended using them in that context.

Anyway I addressed the original topic before YOU came out and called me annoying.

Lucky C
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Re: Emerging Markets Value funds

Post by Lucky C » Mon Aug 26, 2019 1:50 pm

I appreciated your other comments not relating to Vanguard, so thank you for those.

Just to try and further explain my perspective, it's like if I said I was looking for a place that makes a good club sandwich for cheap. Normally I go to Jimmy's Pizza place for sandwiches since they're only $5, but they don't make club sandwiches, only hot subs. So I checked out Bob's Deli and their club sandwiches are $8, and everywhere else I found they are $10+. Does anyone know of good club sandwiches for less than $8?

Then someone responded with comments like, "Bob's Deli is good and the $8 is actually reasonable because [useful explanation]. But what is up with the cult of Jimmy's Pizza? It's not like they invented sub sandwiches. They annoy me as a putative sandwich-eater. Why is your preference Jimmy's Pizza? Their sandwiches and pizzas really aren't that much cheaper than other pizza places. Check out this other place that has pizza for the same price as your beloved pizza. However I do go to Jimmy's Pizza a lot and recommend them."

The comment and explanation related to Bob's Deli would be appreciated, and not at all annoying. The comments related to Jimmy's Pizza would not really answer the question at hand, and even if the points made were valid, they might come across as annoying because of how they are stated.

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