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Portfolio > Mutual Funds > Bond Funds

‘Value Tilt’ Key to International Investing for Advisor David Hultstrom

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David Hultstrom of Financial Architects, LLC of Woodstock, Ga., definitely keeps an eye on the bottom line as he squeezes out the advantages of foreign investing on behalf of his clients, watching everything from the expenses involved to currency hedging.

Hultstrom, who’s been using ETFs, mutual funds, bond funds and REITs to bring in exposure to ex-U.S. investments since he founded his firm 10 years ago, said that while the purpose of international diversification is, of course, to provide “diversification from the U.S. … adding international large-cap stocks doesn’t give much bang for the buck, so we use international emerging markets value [funds,] international REITs and international bond funds as a hedge…. The reason for the value tilt is to increase value [in the investments]. In markets with bubbles, if you get the value slice, you’re less likely to get sucked into bubbles.”

He’s also cautious on the other end of the spectrum, avoiding hot trends and riskier ventures.

“In general,” said Hultstrom, “anything that’s hot, be suspicious of it. If it’s a new acronym, don’t do that.” So BRICS are off his list.

While the proportion of foreign holdings in his clients’ portfolios runs about 20% to 25%, he acknowledges that that’s not exactly in line with the “academic view,” which he said is “how you invest is weighted exactly to how things are weighted in world.”

If one followed that strategy precisely, he said holdings would be “exactly market-cap-weighted to everything in the world, and the U.S. is about 50%. So that implies [holdings of] 50% U.S. and 50% the rest of the world.”

However, Hultstrom’s client portfolios are more heavily weighted toward domestic than international.

“You get most of the bang for the buck by the first slices of something different,” he said. “Most people [in the U.S. invest heavily in the U.S. And] if you’re in the U.S. and the market does well, your peers are largely U.S. investors and they will do well…. So as a hedge against [not doing as well as those] other people, you would want to invest more in the U.S. [than in international].”

Hence that 20% to 25% proportion.

While that doesn’t mean that he wouldn’t change the proportion of strategic allocations, he said, “The only time I would ever change [those allocations] is if something was ridiculously undervalued.”

In 2007, in an instance of something being out of kilter, he said that because there was “no return on fixed income,” he “sold all REITs and high-yield bonds out of the portfolio.”

All clients are in the same basic model portfolio, he said, with individual adjustments “skewed by risk preference,” but they have the same basic split between domestic and international “except for people in high tax brackets; sometimes [they’ll have] munis and for inflation exposure will have TIPS.” For fixed income, “we split both REITs and nominal fixed income (i.e., not TIPs) 50/50 between U.S. and international (currency hedged in the case of the fixed income).”

Hultstrom said he’s a “fan of DFA’s approach,” which provides exposure to less common asset classes as a diversifier, and uses DFA’s International Small Cap Value and Small Cap Emerging Market Value funds. “For an international REIT, I use SPDR’s [Dow Jones International Real Estate] ETF (RWX).”

On stock funds, Hultstrom said he doesn’t care about a currency hedge, but “with bond funds I use the new Vanguard currency hedge bond fund (BNDX). It’s perfect and cheap. Performance may come and go, but expenses are forever.”

And that’s a caveat he said advisors should be aware of when turning to international instruments.

“The one thing I would say is that expenses matter,” he said. “On a lot of international stuff, expenses can be really, really high, and the argument you hear is that active management matters because markets are not as efficient as U.S. markets. But I think that’s wrong. Transaction costs are higher, so … you’ll lose in transaction costs what you make in profit.”

Hultstrom’s cautious approach extends to clients who might want to do a little experimenting in the market themselves. He said that, in general, his clients are content to let his firm manage their money.

However, if they want to pursue something outside the model, he suggests that they “open a side account with e*Trade and do it there…. If you’re doing your job right, your client will always be just a little bit aggravated with you because you won’t let them get in at the top or get out at the bottom.”


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