No stranger to foreign investing, Dr. Ken Waltzer, president of Kenfield Capital Strategies, has been using global strategies to diversify his clients’ portfolios ever since working with investment guru Ken Fisher years back.
“Before I was in the business I used him as an investment manager for one of our accounts, and he was a big proponent for investing internationally,” Waltzer said. “When I construct a portfolio it’s a global one, and I use a global index as a benchmark against which I compare and choose my allocations. I’m more overseas than in the U.S. because the U.S. is less than half the global market.”
Clients are happy to be more diversified, Waltzer said. “I make the point that it’s for diversification. The only time they question things at all is when the S&P outperforms the overseas market, which it has since about 2008. [But] I explain that the U.S. doesn’t always outperform, like from 2003 to 2007, so you never know when it’s going to happen.” And that period is all too fresh in most investors’ minds to be forgotten so soon.
Regardless of client questions, the U.S. doesn’t occupy the same size spot in client portfolios that it does in the global index; Waltzer underweights the U.S. While home sweet home may be currently around 47% of the index, in Waltzer’s client portfolios, it sits at 44.5%, with overweighting in other countries making up for it
“In general, I use the market index as my benchmark and my comparison, so if I didn’t have any tilts at any particular time I’d mimic it. That being said, I do modify it pretty much all the time, based on my outlook for the next few years. Since 2009, I’ve been emphasizing more economically sensitive [countries],” he said.
So how does Waltzer choose countries? “I look at relative valuations and buy more cheap [countries ]and less expensive. I’ve been loading up on emerging markets the last few months; they’d gotten very cheap, and Japan too, and they finally decided to go up. [It's] based on what looks cheap or expensive, and whether I see economic growth or an indication of it,” he said.
Japan is overweight currently “and [we're] significantly overweight in emerging markets in general,” Waltzer said. That breaks down into “significantly more in Latin America, and eastern and emerging Europe, such as Russia and Hungary.” He’s mostly underweight in Western Europe, with the exceptions of Germany, Italy and Spain.
Regarding sectors, Waltzer is currently overweighting industrials, tech, materials, health care, utilities and telecom. “Back in 2000, I was kind of the opposite; I was much more heavily into defensive sectors.” He also likes consumer discretionary, IT and real estate.
The biggest winning sectors, he said, have been industrials and consumer discretionary in the current market cycle. “In the last one, energy and materials were winners, though they have lagged in this cycle. Financials were the biggest dog in the last cycle, but I never overweight financial; I was much more underweight a couple of years ago than I am now; pretty much equal with financials. The companies on the edge pulled out and the ones left are far stronger than they were.”
Waltzer also pointed out that, up till the last couple of years, “Brazil has been a big winner in all sectors, especially banking. But the biggest reason for diversification in international is that every country doesn’t go on the same cycle. There’s a lot of fluctuation. Brazil did great while other [countries] did [poorly], and now others are doing great while Brazil is [doing poorly].”
Waltzer doesn’t only rely on ETFs, either, though he does use them. He also uses ADRs and ordinaries—actual shares of foreign stocks—to get the exposures and sectors he wants. Sometimes the only option is to go for those stocks directly.
“Ordinaries are more difficult,” Waltzer said. Still, “I look at the costs of each, and [while] in general it’s much cheaper to buy ADRs, there are some [stocks] that are so thinly traded that it makes sense to do ordinaries instead because the spreads are so wide on ADRs. And many companies don’t have ADRs, so you have no choice.”
Overseas investing is more expensive, he said, with “higher brokerage costs and more [expenses] in markets that aren’t as open as in the U.S. Western Europe’s not a big deal, but Japan is always closed when we’re open, and vice versa. The broker has to put in a cushion in case the market opens higher or lower, so there’s a wider spread on those markets. If you’re trading ordinaries, you want to make sure the broker has a foreign desk and experience trading overseas.” For that sort of investing, Waltzer uses Fidelity.
Waltzer doesn’t hedge currencies because “the other thing to keep in mind is that you’re making currency bets whenever you buy overseas.” Some people like to “hedge out currency bets with ETFs, but you’re still making a currency bet when you hedge because you’re betting on the dollar. [So] in the end, I don’t hedge currencies. If you’re going to do the hedge, you need to do it all the time or time it, and it tends to wash out in the long run,” he said.