Largest Hedge Fund Operator Ray Dalio Stricken by Emerging Markets

Investor Ray Dalio , founder of the $150 billion hedge fund Bridgewater Associates, has developed a unique view of the economy, comparing it to a machine. In March, he told CNBC that he expects stocks to perform well over the short term, but foresaw a pullback after that:

"I think what has been artificial is that there has been a lot of printing of money which has driven short-term interest rates down to make cash a terrible investment and to make bonds a terrible investment, both the printing of money and the seeking of safe returns have driven money into cash, and so with the negative real return of about 2% in cash and half a percent in bonds, that's a bad investment. As a result there's a reaching for return and that's driven other assets up, and there's a beginning of a leveraging process, and that is good for assets over the near term. So I think that assets will continue to appreciate, but there will also be a tightening ahead."

Dalio was particularly bullish on emerging market stocks. He stowed away approximately 59% of his long stock portfolio into two emerging markets ETFs as of March 31, 2013: Vanguard MSCI Emerging Markets ETF ( VWO ) and iShares MSCI Emerging Markets Indx ETF ( EEM ).

Below is Ray Dalio 's holding history with VWO:

Below is his holding history with EEM:

These two ETFs are down 13.38% and 13.69%, respectively, year to date, trailing the S&P 500's 13.15% gain. A sharp drop occurred in both the funds in June, as the Federal Reserve implied that it may quell its $85 billion monthly quantitative easing. The market reacted with a 4% drop in the S&P 500 over the next two weeks.

The same day, June 19, China announced that its monthly Purchasing Managers' Index declined to 48.3 in June, a nine-month low. Anything under 50 suggests a contraction.

EEM growth versus S&P 500:

VWO growth versus S&P 500:

Second quarter filings will reveal whether Dalio used the volatility as an opportunity to add to his emerging markets exposure or a sign to reduce exposure.

The Vanguard Emerging Markets ETF's third, fourth and fifth largest holdings are Chinese companies China Construction Bank Corp. ( CICHY ), China Mobile Ltd. ( CHL ) and Industrial and Commercial Bank of China Ltd. ( ICK ). China is the largest allocation as well, at 20% of the fund, followed by Brazil and Taiwan.

The price to earnings ratio of the ETF is 13.5x, price to book ratio is 1.8x, and the earnings growth rate is 13.4%.

The fund has returned 9.25% since inception in 2005.

China is also the top country represented in the iShares MSCI Emerging Markets ETF, at 17.67% of the fund. It is followed by nearby Asian countries South Korea and Taiwan. The fund's history shows high total-return volatility: It returned 17.32% in 2012, preceded by an 18.87% low in 2011. Similarly, it returned 71.8% in 2009, preceded by a 50% loss in 2008.

Since inception in 2004 its market price return has been 16.3%.

Together, $1.6 billion flowed out of emerging markets ETFs last week. The only country with inflows was Brazil - the only emerging market Dalio almost completely sold out of last quarter. He reduced his position in the iShares MSCI Brazil Index ETF ( EWZ ) by 99.27% last quarter, retaining just 20,869 shares.

China had the worst outflows, at $402 million.

In May, the HSBC Emerging Markets Index ( EMI ) remained at 51.4, the same level it was at in April, indicating slowing global emerging market output and was the lowest level since September 2011. China, Brazil and Russia each exhibited slowed growth, with India growing modestly driven by its service sector.

Andr� Loes, HSBC Chief Economist, LATAM, commented on the report:

"The persistent soft patch has translated into weaker pricing power. Beyond the commodity-induced reduction in manufacturers' input prices, it is worth highlighting the lowest rate of growth of input prices for service providers since June 2009, as well as a second month of falling output prices for both manufacturing and services. Commodity price weakness is good news for industrial exporting EM countries, but should affect negatively commodity exporters such as Brazil, Russia and the Middle-East countries.

"The divide between manufacturing and services increased in May, with manufacturing the weak link. Another slowdown in the pace of growth of manufacturing output in China may have negatively affected the rhythm of industrial expansion in other Asian countries. This is a reminder of the bigger impact that prolonged weakness of manufacturing in China could have on the EM space as a whole."

The balance of Dalio's long portfolio is invested in the S&P 500 ETF (SPT), up more than 13% year to date, and a diverse range of mainly U.S. stocks, spread among technology, healthcare, industrial and other sectors.

See Dalio's Bridgewater portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Ray Dalio.About GuruFocus: tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Latest Markets Videos