International investing is nothing new to TGS Financial Advisors, which has been in existence for about 20 years and been doing international investing since then, according to Vincent Barbera. Although he was involved in international investing before coming to TGS some six years ago, it was “not to this degree, till I got here,” he said.
Previously, looking at international possibilities was a means of diversification and finding noncorrelated assets, Barbera said. “Because, when you think back, even when I started in the market in the late ’90s, the international and domestic markets were not as highly correlated as they are now, so it was spreading the money around.”
Of course things have changed quite a bit since then, and Barbera said that now the firm “value[s] asset classes against each other to determine what is the best buy.” Among factors they consider are the relative valuation of domestic against international markets, and “what’s trading at a premium, or at a discount.”
Because domestic equities have had such a run-up, more than foreign stocks, the international arena has offered more of a discount, with a relative valuation that’s better in comparison, according to Barbera. “A dollar is a dollar in the U.S., but maybe we can buy that dollar for 80 cents and get more of a growth opportunity for clients. Why not devote more money [to international], because it offers more back for the buck” For that reason, the firm increased its exposure to international markets when those markets were more out of favor, he said.
“We had had [exposure to emerging markets] for some time earlier this decade, but reduced it to zero in 2008–2009, because of risks and downside volatility,” Barbera said. During the height of the Greek crisis when everyone feared contagion, “we looked at our exposure to particular areas: Italy, Greece, Spain, Ireland. Mutual funds had limited exposures and they had companies that were multinational, like Nestlé. We looked at that, and were comfortable with the direction the fund managers were going, so we decided to increase our exposure to international markets, especially since the U.S. was still doing pretty well. So we saw more opportunity [in international]. More recently, we decided to reintroduce emerging markets,” he said.
Further, a lot of U.S.-based multinationals, such as Coca-Cola, were also “starting to tap back into those markets, not the normal BRICS, which were slowing to a certain degree, but more of the outliers: African, Australian to a certain degree … Emerging markets seemed to make some sense for us,” he said.
So, 12–16 months ago, the firm decided to go ahead with an increase in exposure to international markets, according to Barbera. “Even comparing us to our peers, we’re a little overweight. Even five years ago we were overweighted. Now we’re even more so,” he said.
The firm also considered, but in the end decided against, closed-end funds in countries taking a significant hit in the Mediterranean, such as Greece and Spain; there was “too much risk and not enough transparency,” Barbera said.
The firm uses mutual funds with a value tilt and international value advisors. “A couple of our more risky, if you will, foreign investments [have] a lot of exposure in China, an increase to Japan, Asia, Australia and I’m starting to see a little of Africa too,” he said. On Europe, the firm is “a little wait and see.” For emerging markets, the firm uses an index. It also has some exposure to world bonds—although, he explains, “it’s not like we’re buying Greek or Spanish bonds.”
The mutual funds offer much more downside protection, he says, and a lot of the international funds have a beta of less than one. “While we’re increasing exposure, we’re careful how much risk we take on to increase that exposure.” Less transparency in foreign funds is something to keep an eye on; “we have a lot of trust in international fund managers.” That said, he tells of the firm’s decision to move out of one fund “that was supposed to be domestic, but ended up having a large percentage in Hong Kong real estate.” That was too risky.
One particular fund the firm likes, he says, is International Value Advisors (IVA), which he says has 30% in Europe, not including the U.K., with its second largest concentration in Japan. “Then Asia, China, but they have 23% in cash as well; that leads to some downside protection. It’s different—you can’t just put all your money into some little company in Zimbabwe,” he said.
Going forward, Barbera says that frontier markets may become the new emerging markets—although right now they’re still too risky to fit the firm’s profile. “They have a little more deep Latin America, Peru, Africa, but we’re not quite comfortable going there; there’s a lack of transparency. There’s more growth opportunity, but the downside is a little too much.”
He wouldn’t be surprised, he says, if in five years frontiers are making up 5%–10% of a client portfolio as alternative investments. But for now, the firm is happy purchasing international assets at a 10–15% discount without boosting risk. “If we can participate in international markets and offer clients downside protection, but buy assets selling at a discount, we’re good to go—and that’s what we’ve been doing.”