EM-ex-China?

[chang]

I'm a believer in overweighting EM, even though it hasn't helped me much in recent history. Long term, I think China and EMs will rule the world economically. Short term, of course, who knows.

The "China Drama" thread has some excellent discussion (and thanks to those who have contributed). China is a big piece of almost all EM funds -- usually 30-40% -- as well as most international funds ever since China was included in the various benchmark indices (EAFE, Russell, etc.).

The question I'd like to explore here is whether there is interest or value in EM funds for their non-China exposure. I'm a little surprised that there are no "XXX-ex-China" funds out there, considering how many China-only funds there are. I hear and read some interesting analysis about India, but almost nothing about Asia-ex-China, Russia, Brazil, Mexico, etc. Who invests in EMs via diversified EM funds or specific regional/country funds? I remember the old M* days when PRLAX and MINDX were popular investments, among others .... you don't hear much about those anymore.

I bought APDYX (Artisan Developing World -- Lewis Kaufmann [ex-Thornburg]'s fund) about 3-4 years ago, on the strength of his record, and while it took a drubbing recently it obviously hasn't disappointed me. It's not your typical EM fund, though. I added a little FEMKX in my IRA earlier this year -- a conventional EM growth fund -- and AM sitting on a tiny gain. (The manager is new but previously established an excellent record at FSEAX.) I bought it largely because I didn't know what else to buy.

Anybody own Diversified EM together with additional China exposure, or without China exposure? Anybody prefer EM-ex-China over China-focused exposure? Or not care one way or the other? I have a hard time seeing the EM story not being dominated by China. At some point in the future, China will probably start moving from "EM" to "Developed", and then maybe "Frontier Markets" will start to emerge as the new "EM".

Just thinking aloud.

[yogibearbull]

There are a few ETFs ex-China. See EMXC (07/2017- ), XCEM (09/2015- ), FRDM (05/2019- ), KEMX (04/2019- ).

There was talk a few years ago that Federal TSP (retirement) may switch to a broad international fund from developed international fund (TSP I Fund, follows MSCI EAEF). The move was blocked in DC because of China exposure in broader index. Then the industry talk began that may be there should be international and EM indexes ex-China. These ETFs seem to be the result of that.

As for TSP, I think it decided just to stay put with the developed international (TSP I Fund) to avoid political problems. I will add its name shortly.

www.tsp.gov/funds-individual/

[mrc]

I started investing a bit in Latin America (Brazil heavy) PRLAX and Eastern Europe (Russia heavy) TREMX funds for EM diversification, as my EM fund ARTYX holds a lot in Asia and China in particular. Diversified funds do that because EM index has heavy Asia and China component. 

I also have Matthews China Smallcap fund, invested in 2019 when China Market was in correction mode at the height of US trade war with China. My thesis was if I want to invest when the sentiment was bad, why not invest in Smallcap that are expected to do better when things turnaround.

I recently sold PRLAX and bought EWZS, as I felt that best time to invest is when the sentiment is very bad, and that is the case with Brazil now.

[chang]

mrc I'm not sure whether EWZS is exactly out of favor; it is up +10% / 22% / 67% over the last 1 / 6 / 12 months.

[yogibearbull]

Often bad economy and good stock market (and vice versa) go together. April 12 issue of Barron's had this on Brazil,

EMERGING MARKETS. With things looking bleak in BRAZIL politically, economically and coronavirusly [forget spellcheck, but that fits], its stock market may be bottoming. Attractive areas include consumer, oil and tech stocks.

[mrc]

Chang,

My comment was not specifically about EWZS, but investment sentiment in Brazil.
While I am with PRLAX for the last year or so, it went no where, but EWZS went up by 10% since I invested a few months ago.

[paulr888]

Hi Chang ...  Thanks for reminder on Big Bang.  Somehow I forgot.  Just signed up.  Two of the investors I follow are also high on EM equity.  Jeffrey Gundlach and David Rosenberg.  Gundlach recently pushed S.E. Asia rather than China.  Not sure why but years ago he was concerned about aging demographics in China.  Within my equity portfolio I am 30% international:  22% Developed mutual funds and 8% EM funds.  Within EM, all have good dose of Asia.  FEDDX has less China.  MDDCX has more China.  I want to add Large Value EM so I have PZVEX with less China.  IFN is my Large Growth EM.  

[chang]

paulr888 Welcome! Funny I’d never even heard of PZVEX. The name Pzena is familiar as a subadvisor on some VG funds. With a PE < 11 and PB < 1 that is definitely a value fund! Not especially cheap, though at 1.44%. Good luck and see you around.

[mrc]

I tried to invest in Pzena International Smallcap value fund, but it is not available as NTF fund for me, so I bought OAKEX as a proxy though it falls more under International Smallcap blend category.

I did not find a good EM value fund with good track record and available in my brokerages. About 10 years ago, I owned AEMGX for a few years. It is a value leaning Quant fund.

[paulr888]

PZVEX is Investor class share.  AUM only $20M.  ER is high, 35 bps higher than PZIEX which is Institutional class share with AUM $440M but $1M min.  

[paulr888]

I also like FISMX and have over-weight there.  I also like ARTKX and have over-weight there too.  Despite Value in its name, Morningstar shows last 5 years as Large Blend.  Thanks to YBB who once provided an old Morningstar website and showed me how to add fund ticker in the URL to get historical 9 box cap matrix.  

[chang]

Jun 3, 2021 22:31:30 GMT chang said:

paulr888 Welcome! Funny I’d never even heard of PZVEX. The name Pzena is familiar as a subadvisor on some VG funds. With a PE < 11 and PB < 1 that is definitely a value fund! Not especially cheap, though at 1.44%. Good luck and see you around.

Aha, found it. VG's EM fund is co-managed by Pzena - same management team as PZVEX:
investor.vanguard.com/mutual-funds/profile/portfolio/vmmsx

A blendy but value-leaning portfolio:
www.morningstar.com/funds/xnas/vmmsx/portfolio

Not cheap (0.85%) by VG standards, but cheaper than the Pzena fund .... might be a compelling alternative.

[paulr888]

Looking at VMMSX its holdings are closer to MDDCX which I also own. Comparing those 2, MDDCX looks better. I am a box style purist. I like to hold a pure LV EM to balance my pure LG IFN.

[johntaylor]

For now, using I Fund (EAFE) and TR's Emerging Mkts Discovery

[yogibearbull]

Jun 8, 2021 13:45:57 GMT johntaylor said:

For now, using I Fund (EAFE) and TR's Emerging Mkts Discovery

Are you following controversy related to the blocked shift so far of I Fund from EAFE to All Country ex-US?

[javajoe]

I'm afraid I don't have much to add to this discussion, but two quick thoughts:

1) Given their overall sophistication and generally long-term perspective I found it interesting that Matthews has started slowly expanding mandates from Asia-focused, and Asia X-Japan funds to more general EM-mandates. They wouldn't do this if they thought their home turf was still the place to be for the long-term eg, MSMLX, MEGMX etc

2) Andrew Foster makes the case for carving out China as a separate asset class from EM in his latest commentary. Worth a quick read:
www.seafarerfunds.com/commentary/the-future-of-china-within-the-emerging-market-asset-class/


From the beginning of my career, I have understood that China was exceptional within the developing world. As such, I have always and actively questioned the merit of grouping China with other developing countries to form the “emerging market asset class.” I have long suspected that China’s scale, economic progress, and future potential would mean that it would one day stand apart from the rest and become an “asset class” unto itself – its financial and economic breadth and depth rivaling that of the United States (which likewise comprises its own single-country “asset class”). I imagined that if China’s stature ever rose to such a level, the event would mark a welcome moment in the country’s modernization and development.
I have long suspected that China’s scale, economic progress, and future potential would mean that it would one day stand apart from the rest and become an “asset class” unto itself

In 2021, much of what I imagined has come to pass. China has grown and prospered, such that it dominates the emerging market asset class. The country now serves as the central economic “hub” around which many developing nations orient their trade and economic policies (notably supplanting the U.S.’s leading role as a trading partner for the developing world). Thus it seems fitting that many investors are beginning to openly wonder whether China should be carved out from the rest of the emerging markets to receive a distinct and prominent position in a global portfolio allocation.

Increasingly, I lean towards this view – but for a decidedly mixed and unwelcome set of reasons.....

[anitya]

javajoe , Thanks for the post. Some posters on this Forum have exited or reduced their dedicated China exposure since the OP.

I was curious about the Foster's commentary that was not included above and I appreciate you including the link. 

Continued from Javajoe's post -

"Increasingly, I lean towards this view – but for a decidedly mixed and unwelcome set of reasons. The emergent scale, depth, breadth and complexity of China’s capital markets seem to favor specialist skills: to optimize China’s potential from bond markets, stock markets, venture capital and private equity markets, I recognize that it might be ideal to utilize dedicated investment capabilities trained solely on the country. But there is another, more difficult reason to prefer China as an independent asset class: the country has become fraught with legal, political, martial and moral morasses. Even as the country’s economic might has become starkly evident to all, the darker aspects of the Chinese Dream have forced many to question whether the country remains investable.  Even as some may favor a dedicated capability that might maximize the country’s investment potential, others might wish to cleave China from the rest to manage its risks more directly, and if necessary, summarily excise it from their portfolios. Frankly, it disappoints me to contemplate the latter possibility given the dream I once held for China, a nation that I will always deem exceptional among its peers. . . "  [Bolding and coloring is mine]

[jongaltiii]

I own ARTYX and FSEAX for my Div. Emerging Market exp. I sold my position in FPADX (an EM Index) and used those funds to buy the previous two mentioned. Of course, FPADX is out performing since I exchanged. Bought both ARTYX and FSEAX at the highs so I'm up just a tad YTD but I'm keeping them long term (I believe) for what has been said about China and the strength of the funds.



Have MDDCX on my watch list. My friend owns an inordinate amount of it in his portfolio and he's done very well with it.

[Deleted]

ARTYX is 36.4% USA and 35.6% China.

EM value performed well YTD, EM Growth not so much.

[chang]

Jun 16, 2021 18:14:21 GMT javajoe said:

I'm afraid I don't have much to add to this discussion, but two quick thoughts:

1) Given their overall sophistication and generally long-term perspective I found it interesting that Matthews has started slowly expanding mandates from Asia-focused, and Asia X-Japan funds to more general EM-mandates. They wouldn't do this if they thought their home turf was still the place to be for the long-term eg, MSMLX, MEGMX etc

2) Andrew Foster makes the case for carving out China as a separate asset class from EM in his latest commentary. Worth a quick read:
www.seafarerfunds.com/commentary/the-future-of-china-within-the-emerging-market-asset-class/


From the beginning of my career, I have understood that China was exceptional within the developing world. As such, I have always and actively questioned the merit of grouping China with other developing countries to form the “emerging market asset class.” I have long suspected that China’s scale, economic progress, and future potential would mean that it would one day stand apart from the rest and become an “asset class” unto itself – its financial and economic breadth and depth rivaling that of the United States (which likewise comprises its own single-country “asset class”). I imagined that if China’s stature ever rose to such a level, the event would mark a welcome moment in the country’s modernization and development.
I have long suspected that China’s scale, economic progress, and future potential would mean that it would one day stand apart from the rest and become an “asset class” unto itself

In 2021, much of what I imagined has come to pass. China has grown and prospered, such that it dominates the emerging market asset class. The country now serves as the central economic “hub” around which many developing nations orient their trade and economic policies (notably supplanting the U.S.’s leading role as a trading partner for the developing world). Thus it seems fitting that many investors are beginning to openly wonder whether China should be carved out from the rest of the emerging markets to receive a distinct and prominent position in a global portfolio allocation.

Increasingly, I lean towards this view – but for a decidedly mixed and unwelcome set of reasons.....

Belated thanks javajoe for this post and link. I read the entire letter. Foster is smart and always provides thoughtful and thought-provoking commentary. He's "thinking aloud" here and doesn't come to any firm conclusions. (Nice that he asks shareholders for their feedback!)

Personally, I don't see anything new here. When has China NOT been clouded by legal, political and moral issues? And don't we, ahem, have some legal, political and moral issues of our own in the USA that have business and investing implications?

He makes some good points about diversifying one's EM exposure outside China — which is what my OP was about. But there are no epiphanies here regarding China, as far as I see.

[Deleted]

Andrew Foster goes on to add, -

"But there is another, more difficult reason to prefer China as an independent asset class: the country has become fraught with legal, political, martial and moral morasses. Even as the country’s economic might has become starkly evident to all, the darker aspects of the Chinese Dream have forced many to question whether the country remains investable."

That we always knew, but it seems from the language of the commentary that this negative side of China is getting worse and not better.

[chang]

Jun 22, 2021 14:51:33 GMT @waffle said:

Andrew Foster goes on to add, -

"But there is another, more difficult reason to prefer China as an independent asset class: the country has become fraught with legal, political, martial and moral morasses. Even as the country’s economic might has become starkly evident to all, the darker aspects of the Chinese Dream have forced many to question whether the country remains investable."

That we always knew, but it seems from the language of the commentary that this negative side of China is getting worse and not better.

That appears to be the implication, but he has not provided details or analysis to flesh this out, nor has he made any comparisons with future scenarios applicable to the USA and Eurozone, which are also undergoing sociopolitical changes with economic implications. His commentary is interesting as far as it goes, but unactionable until he refines a case for changing one's investment approach.