Mutual Funds - General Discussion

Top 654. Jan 19, 2005 7:33 PM

» Normxxx - Re: Re: Emerging Country Markets

In response to Re: Emerging Country Markets posted by bob90245:

Well for NSEIX, I use the Sify Finance site:
http://sify.com/finance/
(when you get there, click on NSE in the upper right corner)

But no, much as I'd like to claim so, I made rather little on the India move. To quote a guru:

"India is one of the most complicated countries on the planet, and that's why we have always preferred the Chinese story. China has been a country for 3,000 years and is 90% Han Chinese. India on the other hand is incredibly varied and complicated. It's really six or seven countries strung together that operate on their own methods. There is no one, true India."

(See also http://inhome.rediff.com/money/2004/oct/... for a current appaisal of that market.)

As usual, there was a reason for the crash. The Government of India unexpectedly changed from a very Western, capitalistic and globalization oriented party to one that leans socialist and is inward looking. So far, however, they have made all of the right moves and said all the right things to calm the market and everyone's nerves-- so the India market recovered and then caught a ride with our post-election market rally.

There are markets I simply would not trade. China and Russia being two of them (and both of them also have made large moves this year). In both cases, the Government may at any time do something to crater the market (like Putin simply destroying Yukos)-- they both know that most of the money in their markets is foreign, so they don't much care. Also, I believe when it suits them, China will freeze all assets in-country and prohibit repatriation of funds (the way Malaysia did). So you can't jump in willy-nilly. There are other things to worry about; such as, whether there is a suitable country fund that has reasonable liquidity. (I prefer closed-end funds, where available, trading in a U.S. market. Sometimes I look for hedged funds; sometimes, as now, I look for unhedged funds.)

I usually go with one or two diversified Emerging Market funds, such as the Matthew's Asian Growth and Income (MACSX) and wait for a general selloff, such as 1997.

But, now do you see why trading in foreign markets can be really risky for the untutored Investor, despite its value as a S & D asset class? Which is why I recommend a suitable managed fund, such as MACSX.

-- posted by Normxxx

http://finance.yahoo.com/q/bc?t=my&s=MAC...

Top 655. Jan 19, 2005 8:38 PM

» bob90245 - Re: Re: Re: Emerging Country Markets

In response to Re: Re: Emerging Country Markets posted by Normxxx:

I never had any doubt that investing in emerging country markets was risky.

I compared all the funds discussed with the S&P500:

Since a crash can happen in emerging markets at any time, I would be nervous to hold even MACSX for any length of time. How long do the rallies usually last? I would guess that holding on beyond 2 years would be on borrowed time.

-- posted by bob90245

http://quicktake.morningstar.com/Fund/Sn...

Top 656. Jan 20, 2005 2:36 AM

» litab16 - Re: Re: Re: Re: Emerging Country Markets

In response to Re: Re: Re: Emerging Country Markets posted by bob90245:

Bob,

A good way to minimize the risk of small/mid-cap investing in the international markets is to do that through a mutual fund. My favorite is Vanguard International Explorer, which has a 5 star rating from Morningstar. Here's a link to it:

Here is what Morningstar's analyst says about this fund:

"There continues to be much to like about the offering. Importantly, it has one of the largest staffs assigned specifically to international small-cap research, including 13 analysts and five portfolio managers. And they're more experienced than many of the new entrants in these markets. We think level of coverage and perspective gives the fund an advantage in looking for higher-quality small-cap companies. Further, the fund is by far the cheapest offering in its category."

-- posted by litab16

http://quicktake.morningstar.com/Fund/Sn...

Top 657. Jan 20, 2005 7:10 AM

» bob90245 - Re: MACSX

In response to Re: Re: Re: Emerging Country Markets posted by bob90245:

I guess the point about MACSX is moot. I just found out that the fund is closed to new investors.

http://www.matthewsfunds.com/asian_growt...

-- posted by bob90245

Top 658. Jan 20, 2005 8:03 AM

» Normxxx - Re: Re: Re: Re: Emerging Country Markets

In response to Re: Re: Re: Emerging Country Markets posted by bob90245:

Holding a bundle of EMs, such as MACSX, usually insulates you somewhat from the unexpected-- such as the India elections' surprise. (I actually got out earlier in March or April, just before a general EM mini-crash. It's on the board somewhere-- I posted when I got out.) The markets have mostly recovered and gone on to new heights (which I mostly missed, except for a few obvious isolated recoveries like India). If you are constantly trolling for news you see articles like the one below, which is a red flag. It never pays to outstay the competition! So, I get out early and wait. So far, I have missed many opportunities, but this is an outstanding asset class, if played prudently, and I have made out quite well.

One reason for the recent surge is that EM has been recently 'discovered' by the hedge funds-- and I usually try to avoid markets that are dominated by the hedge funds. They play the markets like a herd of 'drunken sailors.' And, if you are not careful, you will surely be trampled-- since they all exit in a rush at the same time! (They actually have computer programs that look for characteristic buying or selling patterns by other hedge funds or brokers-- no one wants to be last in or out!)

I would be nervous to hold even MACSX for any length of time.

You're right; you don't make all that much over time with a B & H strategy (unless you have one hell of a good market manager) even if you time your initial entry as I advised. Check out MACSX's record over time and you will see they usually handily beat the averages. But what it doesn't show is the wild swings up and down over any given year.

But even if you buy a good managed fund, you are not home free! You have to constantly monitor the fund for management changes, or management style changes, etc.

Flow of Capital Soars To 'Emerging' Nations
Private Investment Surge Echoes 1990s

By Paul Blustein, WP | Thursday, January 20, 2005

Private investment is pouring into developing countries at the fastest rate since just before the Asian financial crisis of the late 1990s, according to a report released yesterday by the leading international association of financial institutions. The trend has some of the features of a "bubble" that could lead to market turmoil in the future, the group's director acknowledged.

The Institute of International Finance Inc., which represents more than 300 banks, investment firms and other major financial companies, said the flow of private money to 29 "emerging market" nations reached $279 billion last year. That is more than double the 2002 level, and close to the $287 billion posted in 1997, the year that Thailand's currency collapsed, sparking a flight of capital from Asia. The record was in 1996, when $322 billion flowed into emerging markets.

The flow of capital has been especially strong in recent months to China and Russia, but was also up last year in Latin America, Eastern Europe, Asia and the Pacific, and Africa and the Middle East.

The pace will continue this year, according to the group's forecast. Net flows of private capital -- the amount of new private investment and loans less outflows and repayments -- will be $276 billion in 2005, the institute predicted.

[Normxxx Here: This is the usual straight line projection. It would take a miracle for it to be true-- a (perceived) mediocre U.S. and European markets (no crashes or unexpected surges-- the former causes panics and the latter sucks in the 'hot' money. ]

The figures are the latest evidence suggesting to some economists that global financial markets have been pumped up to dangerous heights thanks in part to the low-interest rate policy pursued by the U.S. Federal Reserve and other major central banks. The enormous amount of capital flooding into developing countries has stirred concern that the boom could turn to bust if market conditions change and investors prove as panic-prone as they did during the late 1990s. The flight of investors that began in Thailand spread through much of the developing world, and triggered recessions or sharp economic slowdowns in such countries as South Korea, Russia and Brazil.

Charles H. Dallara, the institute's managing director, said at a news conference that he doesn't like comparing the current figures to 1997's, because "we don't want to suggest we're on the precipice of a crisis. But these numbers do raise some important questions."

The surge of money into emerging markets in 2004 stemmed in part from improved policies and economic fundamentals in major countries such as Brazil and Turkey, he said. Bolstering that point, the report noted that there has been a "marked improvement" since 2001 in the average credit rating of emerging market countries that issue bonds to private investors, meaning they are considered better credit risks.

[Normxxx Here: Ha! Ha! These are the same rating agencies who still give the U.S. sovereign debt their highest rating despite the fact that we have already defaulted on 10% to 40% of our debt owed to foreigners, and who have downgraded Japanese sovereign debt, even though Japan has provided its foreign creditors with a capital gain of 10% to 20%! ]

But the flood of capital can also be attributed to "strong liquidity growth" worldwide and "relatively low returns on fixed income and equity" investments in the United States, Europe and Japan, Dallara said. The Federal Reserve has pumped large amounts of cash into the U.S. banking system in recent years, resulting in low yields on U.S. Treasury bonds and other securities. That prompted some investors eager for extra returns to accept yields on emerging-market bonds that are relatively modest in relation to the risks involved with investing in countries with less stable economies.

The report noted that the average "spread" on emerging market bonds -- the extra yield that investors demand above U.S. Treasurys -- fell to a seven-year low of 3.46 percentage points on Dec. 27.

"There could be a dimension of a bubble" in the current situation, Dallara said in response to a question. He issued similar warnings early last year, when emerging-market bond spreads plunged. The concern abated somewhat in the middle of the year, when the average spread rose as high as 5.69 percentage points, but now the spreads are very low again.

"It would be naive for us to think that the benign environment will continue in 2005," Dallara said, noting that investors will almost certainly turn more cautious once it becomes clear that the Fed is pushing U.S. rates up.

An investment surge in the fourth quarter was mainly the result of sharply increased flows into China, where investors are betting that the government will abandon its fixed exchange rate and allow the nation's currency to rise. Russia was another major recipient, because Russian banks have been borrowing abroad to speculate on a rise in the ruble, Dallara said.

On the positive side, nearly half the private money flowing into emerging markets last year consisted of direct investment -- that is, investment in plants, equipment and businesses rather than portfolio investment in stocks and bonds, said Yusuke Horiguchi, the institute's chief economist.

The report showed that the Asia-Pacific region was, as usual, the biggest recipient of private investment, with $146 billion in net capital flow. Next were the emerging markets of Europe, at $97 billion, followed by Latin America at $26 billion and Africa and the Middle East at $9.2 billion.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 659. Jan 20, 2005 11:58 AM

» TMStock - Re: Vanguard International Explorer Fund

Unfortunately VINEX is also closed to new investors. Darn!

Thinking about funds that are not emerging market funds, I am wondering about Vanguard's European Index Fund (VEURX). It seems like it would not be as risky as other international index funds, because most of its holdings are in countries like the UK, France, Germany, etc., which are more politically stable and with less corruption than countries in Asia and other parts of the world.

Would you think this might be an exception to the suggestion to avoid international index funds?

-- posted by TMStock

Top 660. Jan 20, 2005 12:55 PM

» bob90245 - Re: Re: Vanguard International Explorer Fund

In response to Re: Vanguard International Explorer Fund posted by TMStock:

VGTSX (Vanguard Total International Stock Index) invests mainly in developed markets of Europe, Australia and the Far East. Style is blend of both growth and value. So it would be both more diversified than just a European fund and the country markets are (politically) stable.

You might try going half and half if you're not too keen on all indexing. Invest half of your international allocation in VGTSX and half in a managed fund such as FDIVX.

-- posted by bob90245

Top 661. Jan 20, 2005 8:22 PM

» Normxxx - Re: Re: Vanguard International Explorer Fund

In response to Re: Vanguard International Explorer Fund posted by TMStock:

The problem is, the further you get from the EM stocks, the greater the correlation with the U.S. market, so you lose much of the value of "international stocks."

I did not suggest avoiding international stocks necessarily. But if you do, use a good managed fund and time your initial entry to just after a crash (which should occur within the next year or so). This allows you to better stomach the much greater volatility of these stocks.

The content of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 662. Jan 21, 2005 8:17 AM

» Thruhiker - Re: Re: Re: Vanguard International Explorer Fund

In response to Re: Re: Vanguard International Explorer Fund posted by bob90245:

.
Problem w/ Vanguard Total Int'l is that as a fund of funds you lose the Foriegn Tax Credit which runs around 20 basis points a year (or about a $20 direct tax credit for every $10,000 invested). It is also about 10% invested in EM which may or may not be a concern to the original poster.

-- posted by Thruhiker