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Lew Altfest: Looking for Value in International Diversification

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Lew Altfest of Altfest Personal Wealth Management has always been a proponent of international investing.

He understands why people have a hard time understanding why “you can have a risky international stock and you put it into a portfolio and it reduces risk.” But that doesn’t make it any less important to diversification.

Clients can still be spooked by recent world events, though. While occasionally a client or two is well enough informed to call and “say something like, ‘Isn’t Vietnam the place that’s getting the manufacturing that’s leaving a higher-cost China?’ and we’ll pay some attention to that because it shows some intelligence and knowledge,” the opposite can be true.

“In general,” Altfest said, “people see international as being risky,” especially since events in the recent past have been worrisome. “They’ll say, ‘Why are you fooling around with that? Just put all my money into domestic,’ and we’ll develop a hard-of-hearing approach. But if they’re very firm, or say so a second time, we’ll pay attention.” But at the same time, he said, his firm will try to make them “see that the U.S. is getting closer to a peak.

“Fewer people are resisting international now than would have a few years ago,” he added, because some see opportunities. “But [some will still] say, ‘Not right now,’” although virtually everyone has international elements in their portfolio. “They just see it as risky,” although many will listen to the need for an international component if they think it’s going to raise their return.

“It’s my experience,” Altfest said, “that portfolio managers themselves who obviously are familiar with risk and return put more stress on the return end, and sometimes that works and sometimes it doesn’t. So why should I castigate my clients when portfolio managers themselves aren’t using risk/return measures as they should?”

That said, Altfest mostly sticks with mutual funds and bond funds. “We’re not averse to using ETFs,” he said, “but they would have to have a specific reason why [we’d use them], or a specific ETF. International percentages are running at about a third of the equity allocation—which makes up about 65% of the portfolio—and “maybe 5–10% of the total bond exposure” for fixed income.

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.”


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