Lew Altfest: Looking for Value in International Diversification

Although, he adds, “if you do an X-ray [of the equity allocation], there may be another, say, five percent [of international] in the domestic mutual fund portfolios.” So, altogether, there’s probably 35–40% in international securities. And, considering the fixed income exposure, “Our individual selections are largely—not entirely but largely—done through the municipal bond area.”

At present, most of the international portion is concentrated in Europe. “We like it,” he said, adding that as contrarians, they’d be looking at China “if it weren’t for the fact that China artificially boosted prices—we might even look now. But we’ll wait a little bit.”

When the time is right, it’s likely that they’ll be looking at the consumer sector—but not quite yet. “The Chinese market looks as if it’s low price-to-earnings, but then if you take out the banks it’s not as low as you think,” he said. “But there are still some parts of their system that are not bank-related that have, or companies that have, low P/Es.”

China’s not the only country piquing the firm’s interest; there’s also Brazil. Although for Brazil, Altfest said, “I’d like to see some bottoming in commodities. I think it could be interesting. Perhaps a little further drop, and some time to go on, and then perhaps we’ll do some investing in commodity-related international developing market stocks. We’ve looked at them and done nothing yet, but we’ve looked at Russia,” he added. “There was a rally earlier in the year, but it’s back down even more … but that would be very aggressive for us, and would make our clients uncomfortable.” So no Russia yet.

But consumer goods in developing markets will be worth a look, as will cyclicals in Europe: “the cyclical upturns, cyclical manufacturing.” And Altfest thinks that perhaps the U.S. might not be the place to be these days. In fact, he said, “Managers who are not domestic managers … recently have been putting money in international because they see it as being an area of opportunity today. I don’t know of any global managers—not that I look at everybody’s—that are over-weighted U.S. They’re almost all over-weighted international.”

Why is this? Because of two ifs, Altfest said. “If this is the end of this correction, and if the economy isn’t going to speed up. The second quarter figures that we’ve just seen aren’t convincing that the economy has speeded up. It could speed up. But if it doesn’t, the U.S. isn’t the place to be and the correction is just being postponed. ‘It could be postponed’ doesn’t mean two weeks from now, tied to this correction but it won’t be years and years. The markets need to, in my estimation, take on a more healthy tone and not be backed up in just a few sexy names. So we’ll see.”