A dirty secret of many 'global' funds is that they're really
the MSCI EAFE with some lip service paid to China, India and
other markets that are generating the lion's share of the world's
economic growth. Can you build a better portfolio on your
own?
Funds like the iShares
ACWI
(
quote
) are well respected in the money management industry and play a
unique role in many institutional portfolios.
ACWI in particular has built its assets to a healthy $2.6
billion.
But while the name of the fund indicates that it invests in
"All Countries World," even a casual look at the allocations
reveals that the vast majority of those countries are in North
America, Western Europe and the industrialized Pacific Rim -- the
developed countries that dominate indices like the EAFE (
EFA
,
quote
).
U.S. stocks weigh in at close to 46% of ACWI and Canada adds
another 4% of the portfolio. Right there, you've got half
the fund invested in stocks you can trade here at home.
Britain, Switzerland and the euro zone account for another 18%
or so of ACWI's holdings. Throw in Japan and Australia, and
you've got close to 80% of this "global" fund's holdings in the
developed world.
China and South Korea barely crack the list of Top 10
countries in the fund, and they do so with a scant 4% collective
weight.
In other words, ACWI is giving you about twice as much
exposure to Canada as to China, the world's second-biggest
economy and arguably one of the most vibrant markets on
earth.
Vanguard's equivalent,
VT
(
quote
), does a little better, but the core emerging markets we watch
still account for only maybe 35% of the portfolio. Once
again, the United States dominates with close to a 42%
allocation.
This would be okay if we still lived in a world where the
economies of Asia, Latin America, Eastern Europe and Africa were
still marginal players dwarfed by the industrial giants. But we
don't and they aren't.
On a pure GDP basis, the planet generates about $79 trillion
in economic activity a year. The United States and the European
Union together account for about 40% of that. Japan is way down
the list with about 5.5% of global GDP.
As such, a hypothetical portfolio weighted to true GDP would
start from a developed core of maybe 20%
SPY
(
quote
) for the U.S. market and 30%
EFA
(
quote
) to bring in everyone from the sprawling EU to the fast-evolving
New Zealand economy.
Naturally, if you choose, you can break out that allocation to
EFA by country: 5% to a Japan fund like
EWJ
(
quote
), 4% to a German fund like
EWG
(
quote
) and so on.
Emerging markets generate the other half of the world's
economic activity and so would logically need to account for half
of a global market-neutral portfolio. Again, you can simply use
EEM
(
quote
) or one of its equivalents and trust the index company to do all
the work for you.
If you want to drill down, China accounts for 15% of global
GDP -- a full $11 trillion a year -- and so would rank a 15%
slice of the portfolio. Chinese funds carry their own
controversies, so use your favorite:
YAO
(
quote
) makes the most compelling claim to accurately model the
underlying economy, while
FXI
(
quote
) is unquestionably the most liquid.
From there, allocations get small. India might rate maybe 5%
of your money -- again, use your favorite from the universe of
options.
Russia (
RSX
,
quote
) and Brazil (
EWZ
,
quote
) each earn a 4% sliver.
Mexico (
EWW
,
quote
) and South Korea (
EWY
,
quote
) each rate 3% while Indonesia (
IDX
,
quote
), Turkey (
TUR
,
quote
), Taiwan (
EWT
,
quote
), Poland (
PLND
,
quote
), Argentina (
ARGT
,
quote
), Malaysia (
EWM
,
quote
), Thailand (
THD
,
quote
), South Africa (
EZA
,
quote
), Egypt (
EGPT
,
quote
), Colombia (
GXG
,
quote
), the Philippines (
EPHE
,
quote
), Peru (
EPU
,
quote
), Vietnam (
VNM
,
quote
), Chile (
ECH
,
quote
) and Israel (
EIS
,
quote
) are all worth a generous 1% weight.
Give the last 1% to the pan-Africa fund (
AFK
,
quote
) to get some exposure to Nigeria and Morocco, which are
otherwise almost impossible to trade in the United States.
Some of these allocations are on the high side in terms of
absolute basis points. Technically, EIS, for example, would
really only merit 0.2% of the portfolio if we were going on a
strict GDP basis. But as a rough model, it's good enough.
And for most do-it-yourself investors, it's unlikely that the
difference between a 1% and a 2% weight will translate into more
than a few thousand dollars.
So how does the true market-weight portfolio hold up to AFWI
and VT?
Overwhelmingly dominated by developed stocks, AFWI is up a
healthy 9.7% year to date. So is VT.
Do all the math and the "Emerging Money" portfolio with all
emerging markets components broken out, and you're up well around
10%.
Is it worth it to do all that work for 0.3% of a percentage
point over four months?
On the surface, probably not. You'll easily burn that much in
trading fees and expenses on the relatively exotic funds holding
up the bottom of the emerging markets allocation.
But keep this in mind: the emerging markets are where all the
growth is. And even in the last four months, developed markets
have grossly outperformed everything in the BRIC.
If
BRIC comes back
and the
exotic funds keep pumping
, true global weighting may just be the way to go.
