David Taube of Kalorama Wealth Strategies, LLC has been using international investing in his clients’ portfolio “pretty much since I began investing” because of two advantages it provides: the potential for diversification and the potential for higher returns outside of the U.S. So his use of the strategy even predates his founding of Kalorama in 2005.
Taube uses a “global diversified strategic asset allocation strategy,” in which he looks for the potential for higher returns. The fact that other countries are in different points of the economic cycle will drive returns, as will other parameters, such as “interest rates, exchange rates, the point of an economic cycle and the economic foundation of the country.”
“What is the focus of the country? [There are] different economic inputs or influences at different countries that will be different from [those in the] U.S., and the ultimate focus here is that you want to capture the returns of the best-performing markets,” Taube said.
But of course it’s not all about returns. Taube doesn’t favor any particular region or country, and in keeping with his globally diversified strategy he rebalances portfolios periodically. While his strategy is designed to capture those top performances, eventually those top performers have to be sold.
“[The strategy is to] buy based on what your target asset allocation is, and [then do] a periodic rebalancing, which essentially forces you to sell off some of the best-performing markets and buy those that are performing less well,” he said. Internationally he focuses on three different investment buckets: large-cap, small- and mid-cap considered together, and emerging markets.
Taube uses ETFs and mutual funds, “depending on the type of account, whether it’s a taxable account or a tax-deferred retirement account, and it also depends on market cap.” For taxable accounts, he uses ETFs exclusively across the board for all asset classes.
But for tax-deferred retirement accounts, “I use ETFs for tax efficiency purposes so I can control the capital gains taxable amount, because usually, if the ETF is managed correctly by the ETF provider, it should not generate capital gains, either short- or long-term capital gains.” That correct management is “a real bone of contention for some of them,” he said.