Close Close

Portfolio > Portfolio Construction

Expensive U.S. Markets Highlight International Bargains

Your article was successfully shared with the contacts you provided.

Igor Tiguy at Twelve Points Wealth Management follows an investment strategy for his clients that is much more focused on international investments than the typical advisor. In fact, his whole firm pursues international diversification as a major—and vital—portion of client portfolios, and doesn’t hesitate to pursue opportunities when they present themselves.

Tiguy and David Clayman, principal and wealth advisor at the firm, talked about how important the international component is to the portfolios they design. Part of the firm’s strategy since its inception, international investing has been part of both men’s approach since their earlier work at full-service planning shops, where Tiguy said it was “part of the process of designing a portfolio. International investments were always a part, both on the equity and the fixed income sides.”

The firm’s approach to portfolio construction, Tiguy said, includes three sleeves—core, hedged and opportunistic. All three sleeves typically include international investments.

“Compared to the typical advisor, we’re significantly overweight for a number of reasons. The market cap of the U.S. stock market is anywhere from 35–40% of the world [market cap]. Why limit yourself to such a low percentage?” He added that a lot of newer mutual funds are “adopting a global mandate, instead of U.S.-only or international-only. If you’re looking at Ford, why not Toyota and BMW too? That’s the approach we’ve taken to building portfolios,” Tiguy said.

Clayman added that while the percentage of international holdings within a portfolio varies by such factors as model and risk tolerance, among others, within the core equity sleeve, “about 40% of the allocation is U.S. and about 35% is developed international. Probably another 15–20% is emerging markets, and another 5–10% is frontier—places like Africa or parts of Latin America that are not even classified as emerging markets at this time.”

Within the firm’s alternative investments, somewhere between 35–40% is international, and in fixed income they consider the U.S. market as “historically expensive.” As a result, they look elsewhere for returns—“We go places where traditional [investors] can’t, but also [where we can find] a steadier, less volatile return.”

The firm also looks at currencies as part of a portfolio. Some of that is done through fund managers that hedge against currencies as part of their portfolio, and some is done directly. The euro and the yen are currently out of favor with them, as is the British pound, but that’s not the case with some emerging market currencies.

Saying that both emerging and frontier markets are currently offering opportunities, on both the equity and fixed income sides, Tiguy and Clayman offered further insights on how they view countries other than the U.S.

Clayman“We generally agree that if you look at emerging markets, valuation is cheap right now and offers the best opportunity for the long view. If you look at valuation, PEs in the emerging world are almost in the single digits in some countries, but in the U.S., sometimes they’re 20 times trailing earnings,” Clayman said.

“Some have been scared out because of the dollar’s strength, but the oil drop [is beneficial to] China, India and Turkey. But it will hurt Venezuela or Russia. If you’re careful, you can find really good value right now because of high valuations here in the U.S.” A broad approach won’t work here, he said. “Look at managers, if it’s a fund; at countries, very selectively; at individual investments, for technical strength as well as opportunities for a particular country. [It’s a] rifle, not a shotgun, approach.”

Tiguy said, “A lot of developed and emerging markets are cheaper [than the U.S.]; they are overweight in all of our portfolios, purely based on the fact that their PEs are significantly better. And there are some catalysts happening, even with quantitative easing in Europe, that could potentially start a comeback for some of those markets, whereas the U.S. is in the last stages of a bull market and not as attractive. Our portfolios are more heavily weighted towards non-U.S. because we think it’s less risky.”

When choosing types of investments for clients, the firm also doesn’t restrict itself to mutual funds, closed-end funds or ETFs; it uses all of those, as well as ADRs, REITs, even currency. Tiguy said, “We use all of those at different times, when we find the opportunity to be right for that asset class or vehicle…. To the extent we use ETFs, we don’t like the market-weighted approach; we prefer smart beta or factor-based, and the factors we’re currently looking at are dividends. [We’re] concentrating on stocks with higher-than-average dividends, lower volatility and also currency hedged, specifically when talking about developed international countries with euro or Japanese currency; we diversify away from that currency.”

He continued, “With closed-end funds, those are typically very small parts of our portfolio in the opportunistic bucket. [We look at] temporary dislocations in a specific country or sector … maybe a sector or country like Russia. We look at the closed-end fund being discounted more than it historically has been, but would also need to like that country and think it’s cheap at that time. It starts with liking the asset class first … now that we do, we look at all available vehicles—mutual fund, ETF, closed-end fund—and look at all the choices, and then compare within those and make our decision on the best ultimate choice for the portfolio.”