Investing in Europe, cheaply and for the l-o-n-g term?

You already have a 15% allocation to Europe with the Vanguard fund.

Are you wanting to increase that allocation with a dedicated single European fund or sell out of the Lifestrategy and buy individual funds more intune with your own asset allocation?

If that's your philosphy then go for it.

Its why I'm not invested in the LS as I prefer to dictate the asset allocations myself. Personally I still see the UK and US as areas where growth is going to come from and the uncertainty in the EU makes it a high risk area for investors for the medium term in the very least and therefore a risky investment, however with risk comes potential reward.

If you are solely invested in the LS fund I'd look at increasing your emerging markets / small cap exposures rather than increasing Europe as these are areas which (again only my opinion) its underexposed and both have the potential to improve growth in your portfolio.

You're right, CAPE investing should far outperform the index over the mid-term

Here's a chart showing average CAPE ratios vs future returns



^ You can see that's an unmanaged CAPE portfolio - if you kept rebalancing the portfolio, annually, to only include low CAPE regions, you'd maintain the higher returns (they normalise as the regions grow and cheap becomes expensive)

This is a basic valuation method - it doesn't take into account growth prospects - so the way to make it work is to be diversified ... Same as buying stocks - they're usually cheap for a reason, so you'll get some big winners, and some losers

The main reason I'm turning to value investing is because the major markets look very uncertain (and overvalued)

Buying anything expensive (despite all these blogs telling you it's just "time in the market", and that passive beats anything) is still likely to lose you money ... US shares at this valuation, over history, have often produced negative 10-year returns

Even today, the fed meeting announced "global growth may never return to pre-crash levels" - global indexes are not something I'd be interested in

Likewise a European index is going to be weighted towards all the countries that have done well (with low interest and QE propping them up) and are already overvalued (Denmark, Germany)

I'm downbeat about the prospect for indexes - and if we're all looking at the last 10 years for guidance (and stats), we're making a classic investor mistake right there

Unfortunately it's very hard to buy the cheap indexes you'd need to follow a CAPE strategy in the UK (the U.S. is much better catered for ETFs), so I'm just using valuation as a general guide (the main thing it's telling me is to keep a lot in cash until the next market correction)

There are some active funds which follow the countries you'd want to be buying though ... Lazard Emerging Markets has Brazil, Russia and S.Korea in its top 3 ... Sanditon European haven't released their holdings yet, but Chris Rice (the manager) is only interested in peripheral Europe (Italy, Spain) because he knows that's where you'll get growth, and valuations are good

You can use Morningstar (portfolio tab) to look at a fund's average P/E and P/B ratios ... There are cheap regions out there to buy - some very cheap - and cheap funds ... Don't be swayed by active vs passive - the key is to be buying cheap (an extra 0.5% management charge won't be the BIG mistake people are making in these markets)

ChopperST wrote: »

I've seen quite a few posts from you Ryan where your sentiment is that the major markets are overvalued and uncertain. One thing that I'm sceptical about is CAPE's performance in the medium to long term.

I was wondering if you would care to share your thoughts in terms of your asset allocation? I certainly agree with you that emerging markets present an opportunity for the long term in view of the current world problems, particularly Russia and Africa but where else have you put your money?

I share Choppers scepticism and interests. Also, you are focusing on geographies. What about other sectorisation - size and industry?

To what extent is the alleged US overvaluation due to the rapid rise in importance of the new giant high growth technology companies where presumably the high Price arises from the expectations of medium term future Earnings? These companies are very different from the overvalued small zero earnings companies of the Tech Bubble.

ChopperST wrote: »

I've seen quite a few posts from you Ryan where your sentiment is that the major markets are overvalued and uncertain. One thing that I'm sceptical about is CAPE's performance in the medium to long term.

I was wondering if you would care to share your thoughts in terms of your asset allocation? I certainly agree with you that emerging markets present an opportunity for the long term in view of the current world problems, particularly Russia and Africa but where else have you put your money?

Linton wrote: »

I share Choppers scepticism and interests. Also, you are focusing on geographies. What about other sectorisation - size and industry?

To what extent is the alleged US overvaluation due to the rapid rise in importance of the new giant high growth technology companies where presumably the high Price arises from the expectations of medium term future Earnings? These companies are very different from the overvalued small zero earnings companies of the Tech Bubble.

Always happy to talk about market valuation (and always keen to hear criticism)

These are two useful charts in demonstrating the CAPE's influence on returns:





Two things that strike you are:

a) there is a clear trend with 15-year earnings (other research shows the trend tends to tail off after 18 years, so any value strategy would need regular rebalancing)

and b) there's still wild variation within any single CAPE region (which only tails off as valuations become very stretched - e.g. buying Japan at its peak in the 80s)

So if you want to attempt to track the trend, you need to be diversified

But you're always right to be skeptical, because the market conditions we're in today are unlike anything we've had in the past (QE and low rates make it very difficult to value markets - and with these on the way out, there are few reasons to be optimistic ... better to assume everything's more expensive than it looks)


There are criticisms of CAPE (such as misreported earnings and poor accounting practices) - so some prefer Price/Book ratios, especially for emerging markets ... Research by JP Morgan recently suggested you should aggressively buy emerging markets when the P/B ratios are below 1.5

What most value investors would probably agree on is that while each method has its flaws, you should probably be using *some* form of valuation to at least ensure you're not buying the most expensive regions

Incidentally: it's very difficult to work out whether the UK's cheap or expensive at the moment, but the US looks expensive whatever way you look at it ... Here's a range of different valuation methods combined in one chart




From my perspective, the overvaluation of US markets has been driven by QE - we've been pumping billions into markets to prop them up, while bonds have become nearly worthless, so we're in a situation where stocks look simultaneously attractive and overvalued

I'm constantly reevaluating my own asset allocation ... At the moment you could say I'm 50:50 on value and quality shares

The quality part of my portfolio is mostly dividend-paying large caps (which have tended to fare best in the rising rate environments we're moving into), and mostly UK ... These are regions, managers and investment trusts I'm happy to hold and trust

The value part I've got split between peripheral Europe, Asia and Emerging markets equally ... I've weighed CAPE, P/E, P/B, Market Cap/GDP, IMF growth forecasts against each other a million ways, and they tend to come out fairly even (Emerging is the only one that looks clearly cheap, but they could still be hit by the US, while I may lower my Asia allocation gradually)

Ideally I'd use a combination of trackers (tracking by region - an Italy index, Brazil index) and active funds to achieve this, but we've just not got the choice in the UK, so I'm having to find best-fit active funds


I'm pondering frontier markets a great deal at the moment (Africa, UAE, Saudi Arabia - some of which are technically emerging now) ... Qatar's very interesting ... But valuing and understanding these regions is difficult, while funds tracking them tend to be pricey ... So I'm being cautious and avoiding making a move until I'm more certain

That's one bit of Buffett advice that's really helped me avoid a few mistakes: don't buy what you don't understand, or that you wouldn't be willing to hold for 50 years