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Bargains Still Exist in International Equities

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Jeff Cedarholm of Longview Financial Advisors, Inc. has been looking beyond the U.S. for investing opportunities even before he launched Cedarholm Advisors, the predecessor to his current firm, in 1999.

While the way he’s pursued those opportunities has changed, as has the global economy, he says that international equities continue to offer more affordable possibilities. While the U.S. may be “the best, the most stable” of investing environments, other countries can still offer good options.

“When we look at Europe in particular,” said Cedarholm, that’s the case at present. “The U.S. is trading at 18½–19 times earnings—[economist Robert] Shiller said at 25 times earnings—American stocks are not cheap. Europe is in the14½-15 range for good, high-quality industrialized companies like Nestle’s, equivalent to U.S. large caps.”

Presently Cedarholm, who’s the CIO for his firm, has “about 18% in Europe and 7% in Asia, which is a little off. Usually we have more in Europe and less in Asia.” But he does a “tremendous amount of research” to guide the direction of investments, and that’s led him to various moves outside the U.S.

“I’ve always used a global fund as an anchor fund, so to speak,” Cedarholm said. “Always had some international exposure, [although it can] vary—anywhere from 5%, if things were not going well, to as much as 20–25%. We’ve had specific emerging markets funds over the years, and they do well till they don’t. And then it’s not time to cut back, but to get out. Over the past 15 years, we’ve done some of that, but had at least a minor amount of international exposure.”

And that international exposure has stood his clients in good stead, even in a roaring stock market at home. “Right now we’re seeing good returns at the end of the quarter,” he said. “We’re talking about how much portfolios are up or down based on our benchmark, the S&P. I’m looking at portfolios that are up anywhere from 2.7-3% in the quarter, and the S&P is up less than half a percent. We’re happy with that. It’s due to better returns overseas than in the U.S.”

Europe and Asia are less correlated to the U.S. than they have been in the past, which also contributes to better returns. Before 2008, said Cedarholm, from about the late 1990s till 2007, “you could throw a dart and get the same returns anywhere except in emerging markets” because of globalization. Now, however, “it seems areas are doing their own things again, which is very nice for asset allocators like us.”

He points to the first quarter as an example, saying that returns in the U.S. were only 0.43%, while the EAFE was up 4.19% and the DAX was up 23%. “The U.S. is worried about the end of QE, interest rates, earnings. In Europe, there have been no earnings for quite a long time so any will be good.”

He relies on mutual funds and ETFs, primarily, including global real estate funds and bond funds. Two of the funds he uses are hedged, but he stays away from currency hedging himself and leaves it to the fund managers. There are also some alternative investments he uses that he says are doing very well because of volatility in the markets, and some managed futures in mutual fund form that are “global in scope, using currencies, debt, stocks, all kinds of things” and have provided “pretty good returns over the last six months.”

“My opinion is that the U.S. may struggle for a couple of years,” said Cedarholm. “Best case, [according to the recent literature,] a lot of mutual fund managers [and others] say anywhere from 4–5% annualized over the next 10 years. Jeremy Grantham at GMO is saying 2% annualized over the next 5 years. When you get numbers like that—some of these people have good credibility—it has to do with earnings and rising interest rates, and it’s normal that we would pivot to someplace where we felt like we were getting cheaper equities and opportunities for better returns over time.”

Among his own clients, he says, portfolios are showing returns of “anywhere from 2.7–3% in the quarter, and the S&P put us up less than half a percent.” The gain is “due to better returns overseas than in the U.S. … maybe 120 basis points [of that higher return] is because we’ve done that [looked overseas.]” Cedarholm and his clients are happy with that.


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