Real Emerging Markets

I have a large Emerging Markets allocation (18% at last count). I own broad EM ETFs and MFs. However, these broad instruments suffer from the problem of being heavily concentrated in just a few markets. For example - VWO has the following composition:

China - 18%, S. Korea 14%, Brazil 12%, Taiwan 10%, S. Africa 8%, India 7%, Mexico 5%, Russia 5%

Now, of the above, many are so well invested that they can hardly be considered "Emerging". Especially S. Korea and Taiwan seem like almost at their peak potential - already "Emerged" so to speak. These are rich countries with GDP per-capita of $31K and $38K respectively - they really should be moved to Developed Ex-US category (EFA) already.

In my view, for a country to be considered "Emerging", the country should be first, relatively less affluent so that a higher growth trajectory is feasible and second, politically and socially stable so that the higher growth trajectory is realizable. With that in mind, I propose the following heuristics

1. GDP Per-Capita below either the world average ($11.5K) or the neighborhood average
2. A minimum economy size of $300B
3. Politically and socially stable. I have ranked the countries on a scale from 1 (Unstable) to 5 (Stable)

Using the criteria above, we get the following list (ordered by the size of the economy):

#  Country   GDP ($T)  GDP Per Capita ($)  Stability Rating  ETF

1  China     12.4         8.4K                  3            FXI

2  India      4.7         3.7K                  4            EPI

3  Russia     3.0        16.7K                  3            RSX

4  Brazil     2.3        11.8K                  4            EWZ

5  Mexico     1.8        14.7K                  4            EWW

6  Indonesia  1.2         4.7K                  3            EIDO

7  Turkey     1.1        14.4K                  4            TUR

8  Iran       1.0        13.2K                  2

9  Thailand   0.6         9.4K                  3            THD

10 S. Africa  0.6        11.0K                  3            EWA

11 Egypt      0.5         6.5K                  1

13 Pakistan   0.5         2.8K                  2

14 Colombia   0.5        10.2K                  2

15 Philippines0.4         4.0K                  3            EPHE

16 Nigeria    0.4         2.6K                  3            NGR

17 Ukrain     0.3         7.2K                  3            NA

18 Peru       0.3        10.0K                  4            EPU

19 Vietnam    0.3         3.4K                  3            VNM

20 Bangladesh 0.3         1.9K                  3            NA                 

So I have a list of 20 countries - of which four are unstable and hence not a good investment target at this time. Among the rest, Ukrain and Bangladesh do not have a country ETF readily available. So that leaves 14 investable targets. My plan is to take long term positions in all of these - positions that I hold for 20+ years while these countries work through their growth pangs. I have already taken positions in all of them except THD, EPHE, EPU and VNM (the bold in table above represents a long position). My current position in NGR is tentative considering the extremely low volumes that it has.

I know that not all of the above holdings are going to work out - but I think I have a better distribution this way than the VWO folks - and hence a better shot at capturing the future growth in the emerging (or poorer, by my definition) economies shown above. Now, fingers crossed and let the long wait begin.

Today's art is my favorite part of Sistine Chapel Ceiling - The Libyan Sybil. I found these small Sybil paintings much more engrossing than the really-well-composed-but-somehow-feeling-quite-empty Creation of Adam.

Asset Allocation Update

My asset allocation has changed as a result of recent re-balancing and recent account mergers. My last asset allocation post saw a 70-30 Stock Bond split with 36% US Stocks, 21% Developed Ex-Us Stock and 12% Emerging Markets Stock. Now, the current situation:

The Other portion is mostly Real Estate. I have reduced the bond portfolio a little bit - mostly because I want to keep them in Klimt, Bernini and El Greco - they have better debt fund options - especially Klimt.

I am fine with this AA. I am quite heavy on Emerging Markets - but that is by design. I am investing for next 30-40 years - and I believe that emerging markets will outperform developed markets significantly over that long a horizon.

Consolidating Brokerage Accounts

Right now my money is distributed in 10 different accounts - surely not an ideal situation. So, to remedy, I have taken the following two steps:

1. Transfer out of Scottrade: Turner has been moved from Scottrade to Fidelity. It is a non-deductible IRA - and is better positioned with all the other IRAs in my Fidelity account.
2. Roll out old 401K to Fidelity: Durer, an old 401K account, has been merged with Monet, a Fidelity Rollover IRA as part of the rollover process. This helps me get out of stupid fees for old 401Ks. Also, IRAs have much wider investment choices. The Durer account is no more. Monet is now a fat 5 Units account - 4th largest account in the portfolio.

Now I have accounts with Fidelity, Vanguard and TD Ameritrade. Total of 9 accounts.

Today's art is also from my recent visit to Rome. Part of the ceiling of the Gesu Church - home of the Jesuits. One place in Rome where I felt like a church actually had an air of spiritual calm, despite the ostentatious decorations.

Taking Stock: April 2013

Time again for a Taking Stock post. Here is the state of affairs at the end of April 2013.

Total: 55.3 Units

Van Gogh:  14
Bernini: 13
El Greco: 12
Klimt: 5
Durer and Bruegel: 3 each
Monet and Da Vinci: 2 each
Renoir and Turner: 1 each

Change Over Last Month

The last Taking Stock had the total portfolio value at 52.2 Units - so we have a net 3.1 unit change in a month. That represents a 5.94% monthly growth including new contributions. Market has done really well last month and the portfolio reflects that. Considering that the total portfolio value at the start of the year was 46.6 Units, we have a YTM growth of 18.67%. This year is turning out well so far.

Fidelity and 457 Rebalancing Done

Just finished rebalancing of the two biggest accounts under my control. My Fidelity 403B account (Van Gogh) now has the following asset allocation:

EFA: 20%, VWO: 20%, Global Ex-US: 10%, SPY: 10%, US Medium/Small Cap: 10%, US REIT Index: 10%, Long Term Treasuries: 10%, US Long Term Corporate Bonds: 10%

The 457 account (El Greco) now has the following asset allocation:

Fidelity Contrafund: 25%, American Euro-Pacific Growth: 25%, Vanguard Wellington: 25%, Vanguard Long Term Investment Grade Bonds: 25%.

I think this rebalancing will increase my overall emerging market allocation and bond allocation. I will have concrete numbers later in the month when I feed in the new numbers into the spreadsheet. Overall I am targeting a 70-30 Stock-Bond split with a 30 US, 20 Ex-US Developed and 20 Emerging Markets  distribution for stocks.