International Asian exposure in portfolio: LICs, ETFs or other

@oracle posted a solid argument for the inclusion of a specific Asian component in a portfolio: Exchange Traded Funds (ETFs)

Having lived in Asia for a lengthy period of time I tend to agree.

I don't believe the discussion belongs in the ETF thread as there are other ways to get Asian exposure apart from ETFs.

These are the current LICs and ETFs focusing on Asia:
ETF Watch - Find an ETF or LIC Fund in Australia

Here is a older comparison of two LICs, one at a decent premium to NTA, the other at a diacount:
Investment Advice, Investing Strategies and Shares Recommendations | Eureka Report

VGS has around 10% in Asia but focused in Japan and Hong Kong.

For discussion: compare LICs, ETFs and other instruments for exposure in Asia; which ones would be the best performers in the long term; and what asset allocation?

I'd say the discussion could be along the lines of Asia having the risk of many high risk companies that could be removed by using a LIC versus the statistical diversification of passive ETFs.

 

Personally, I am investing in VGS (Japan, Hong Kong exposure) and VAE (China, India, Korea, Hong Kong, Taiwan etc) exposure.

Hong Kong get's included in both but I am ok with it.

Reason for not choosing VGE because the FTSE emerging markets have no exposure to Korea and instead have Brazil, Russia and South Africa in their top 10 countries. Brazil and Russia are heavy commodity exporters (oil, gas, iron ore) which is not too different from Australia. And the largest stock in South Africa - Naspers is purely valued based on it's holding in Tencent. So would rather have more tilt towards technology sectors which I get with inclusion of Korea and Hong Kong.

Other reason is China would most likely be moved gradually to developed market so will impact emerging market weightings whereas it should have no impact on VAE which is Asia focused so will continue to hold China in it.

Cheers,
Oracle.

 

@ErYan might need some vino for this one.

 

Sounds like a plan.

Found this What is the best way to invest into Asia right now? which sits on the sidelines.

 

interesting topic,

ok few things to consider when entering Asia.

politically they are very unique and different.. many countries have what they call "democratic dictatorship" that includes countries like Singapore and Malaysia. also remember that their
idea of corruption and protectionism works very different to the "west".

same like investing in a company in au/eu/us you need to know how do them "tick"

many countries protect their real estate by preventing foreign land ownership, means you are stuck to strata properties or reit.
and their population and population growth is truly insane so property may be a good way in if u dont trust their stock markets.

if u like REITS i'll look at singapore hong kong and thailand. i personally never invested in japan or korea but seems more stable and a good idea ?

if i were to invest in stock market i look to japan, korea, singapore ,hongkong. stable more due diligence and generally because its less manipulation and political inputs.

property = malaysia, thailand, vietnam. more growth and yield ( actually insane growth and yield due to china vision)

i would include philipines and indonesia in the countries to invest but its riskier and u really got to know what you are doing.

 

What ETFs will match what you said?

 

VAE for me
Investment Products

 

I've got exposure through the Platinum listed funds PMC and PAI.

 

PAI for me too

 

Not a fan of Emerging Markets given the risks involved so I take an indirect approach. Firstly I prefer an active mgr in this asset class. Secondly I like to invest in a fund that has a strong tilt to Asia but the mandate allows the Mgr to get out if the **** hits the fan. An all Asian fund doesn’t generally have that sort of flexibility.

Hence PMC (global but with a strong tilt to Asia) fits the bill for me. You probably think I’m paranoid and probably am. And the income ain’t too bad either.

Below is the most recent update of PMC’s global exposure:

https://www.asx.com.au/asxpdf/20180115/pdf/43qtt0j4tplft1.pdf

 

I am quite torn between VAE and VGE at the moment for this reason, even though VGE has a larger number of securities, missing Korea is a big downside.

I have looked into PMC and a lot of people here are a fan, but the fees are high, premium is highish and seems vulnerable to key person risk? I am obviously missing something here given that I am still just a beginner.

 

Why not just buy a bit of both VAE and VGE
Alter the ratio
That way can get what’s you want in the long run

Both will probably be a smallish allocation to overall ratio I would imagine

 

Saw this in the FT yesterday that is related ;

Her warning is amply borne out by research from Schroders, a fund manager, which finds that the Shanghai and Shenzhen markets suffer the most extreme levels of earnings dilution among 20 emerging and developed markets surveyed. Shanghai has seen an 11.4 per cent annualised rise in its market capitalisation to price index ratio, while Shenzhen is not far behind at 7.1 per cent. The ratio measures the extent to which an increase in a market’s total capitalisation is not driven by the value of its existing shares but by new equity issuances. The next biggest diluter was Qatar at 4.4 per cent, according to the Schroders research.

My view is different to most. I don't want any direct China exposure at all. The China story in the west has been built on assumptions that China was on a path to liberalising...that was wrong. Where there are no rights of the individual, there are no property rights. The rules can be rewritten at anytime. And although this is to some degree priced in, I am more bearish than most on this.

The question for EM really has always been will GDP growth translate into domestic share market performance? This has not been borne out in the past.

I am with @Nodrog on this one, this is a space for active management, or a total pass.

 

To be honest owning PMC wasn’t originally purchased for exposure to China. Long ago it was the only decent International LIC available. It just so happens they have had a greater tilt to Asia which varies over time.

I agree with your comment privately yesterday. Equities are risky enough without adding EM into the mix.

For what it’s worth I stand by my original view posted elsewhere. When an EM country liberalises, cleans up its act with a sound regulatory environment and rule of law it will then likely be admitted to the Developed World Index. Then and only then will I be happy to own it. So nothing for me to do as a holder of VGS, it happens automatically.

Perhaps I’m just a conservative old fart and @The Falcon a younger one.

 

I tend to agree that the issues in the emerging markets point towards an active approach. In particular I have witnessed first hand completely blind speculation in the Asian markets like nowhere else - a quick demographic analysis of Casino gamblers may confirm my point. With its allocations PMC obviously feels that Asia has the strongest opportunity for growth. With VGS and PMC as my international proxies I feel underweight in Asia. This currently EAI looks the best way to increase exposure - well below NTA and a proven management team.

I'll sit on the sidelines for a while and see how it goes. Still interested in different points of view.

Not advice.

 

Blackrock's studies agree with you

Probably due to some of the shonky ways some businesses in these countries operate from the local market vendor, taxi driver on up

Asia corporate governance in charts

Not saying that a long term view and a cast iron gut wouldn't see results though

 

Lots of reasons, loose governance leads to fraud, lots of insider share issues (including connected to Govt), SOE and old economy stuff, businesses run as cashbox for management rather than shareholder returns etc etc. There is also the issue of quality businesses from the region often choosing to list in developed markets..and then the whole matter of the countries capital market structure...does the good stuff even come onto the public market? (so much great businesses in Europe remain private for example). At least with Dev markets you have a fair idea of what you are getting.

I cant help think of Howards Marks ; Asia growth (!), "Who doesnt know that?"

 

Not much activity so a couple more things.

Far more important than active vs passive etc is behavioural factors. David Swensen (a legendary investor and asset allocation authority) does an excellent job in detailing this as quoted below:

Ok you then might think I’m fine with this and still feel the need to own EM. But as often stated by authorities devoting anything less than 5% to an asset class is a waste of time. In fact even 5% is generally way too low to have any meaningful impact. 10% would seem to be a more sensible minimum allocation. Otherwise one is just adding to admin, complexity and expense for minimal meaningful benefit.

So then it comes back to how committed are you really if it means holding closer to 10% of the EM Asset Class?

It should be noted that I owned PAI early on but the behaviourial got the better of me. I got rid of it but thankfully at a profit (thanks to Options).

Finally as seen quoted by a number of the big name old wise heads “no one failed to reach their retirement goal because they did NOT own EM”.

Morning ramble, make of it what you will.

 

We are all (probably) overweight the ASX (in theory) due to home country bias. I also believe in the fundamentals of Asia whilst understanding its dangers. With the same conviction should increase allocation in Asia? As @Nodrog wisely notes, will it make any difference or is it even worth the risk?

1. Start with a parcel of CBA.
2. Why do I need more top 10 ASX blue-chips?
3. Why do I need to diversify across the ASX (VAS)?
4. Why do I need to diversify internationally (VGS/PMC/MFF)?
5. Why do I need small/mid caps (QVE)?
6. Why do I need Emerging Markets (VEU/VGE)?
7. Why do I need Bonds (VGB)?
8. Why do I need Infrastructure (ALI/IFRA)?
9. Why do I need Asia (PAI/EAI/PAF)?

Is all this tweaking adding any value? Theory is the global efficient frontier. It is all part of the journey - understanding these questions helps me feel comfortable with my decisions. It's all statistics, I may be wrong, but as long as I make reasonable decisions I should reduce any regrets.

 

He he, fair enough. Good on you. Investing is an interesting and absorbing topic.

Gotta remember I’m a retiree so my views likely reflect that.

Given the ongoing wet weather I’ve been reading countless books (Amazon one click purchase is dangerous) and hundreds of internet articles including revising old favourites. Amongst these were numerous books and articles “yet again” on asset allocation, efficient frontier, risk management and the usual related stuff. Been reading similar stuff for decades now.

Often easily missed when researching literature by some of the asset allocation authorities is that as long as you have enough wealth and are able to ignore capital volatility one of the best ways to fund retirement is through stock dividends including during the Great Depression. Even in recent interviews with Bogle he suggests investors ignore portfolio capital volatility and focus on the natural yield of the portfolio “stocks for their dividends, bonds for their interest”.

I like to periodically challenge my existing investing beliefs. So after a massive refresher on top of many years of reading investing stuff, some deep thinking / soul searching and consideration of the possibility of Labor’s proposal not much has changed my view except that it might be wise to increase the risk free allocation of our portfolio a bit more now as retirees. My weakness is I love income producing equities.

So it’s still Stocks for their dividends (including International), a massive NO to Bond Funds but enough of the safest of Risk Free assets being Government Guaranteed Cash and Term Deposits to ride out turbulent times (top up dividends) in the Share markets.

Talk about way off topic, I must have had a seizure.



Not advice.