It was just a few years back when we would ask mutual fund representatives who visited our office what investments other advisors were utilizing in their clients’ portfolios.  The answer that came back time and again was “most advisors have 40%-50% of their clients’ money in international funds with half that being in emerging markets (“EM”).”  We were the complete opposite as we had our lowest international exposure three years ago with no exposure to emerging markets.   Three years ago was a time when the media was full of stories on how the BRIC (Brazil, Russia, India and China) countries were going to overtake the United States.  Today, the world has changed (again) and many pundits are saying emerging markets are dead and forgotten.  We see it as an opportunity.  Our disciplined approach involves understanding the market fundamentals, and EM has a glaring advantage when comparing their metrics to developed markets around the globe.  This opportunity is in large part due to underperformance.  Over the previous five years, the S&P500 has been up around 90%, while the MSCI Emerging Markets Index is up 15%.  In the past three years, EM is negative!

Below is a comparison of fundamental characteristics between the S&P500 and the MSCI Emerging Markets Index.  Not only do we believe that these countries are going to be in the driver’s seat for world growth in the next five to ten years, but these individual companies have more attractive valuations.  We never would have thought we would see the day when EM had a higher dividend yield than the US market.  EM offers a great combination of higher growth, cheaper prices and higher dividend yields.

What this means for your portfolio

We have been adding to our emerging markets weighting in our client portfolios and plan on adding to this space in the near future.  The one area that gives us concern is Chinese banks.  Chinese banks have a history of excess lending and have not written off any bad loans in the last fourteen years.  Most EM funds are larger in nature and have a big exposure to these banks.  However, as a result of our due diligence, we have been able to find and invest in mutual funds that have no exposure to Chinese banks.  Emerging markets will likely have more price fluctuations (volatility) on a short term-basis, but we believe over the next five years EM will outperform US stocks.

Sincerely,

Your THOR Team