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Tuesday, March 3, 2015

Should You Use a Robo Advisor: Will You Really Understand What is Under the Hood?




In my first article on “robo advisors” I pointed out many shortcomings of the “robo advisor” process. I detailed all the questions which the “advisor” doesn’t ask which are essential to investment planning. I didn’t even discuss the actual allocations proposed by these services and how they are implemented.

Reviewing the allocations of the major robo advisors one finds widely divergent allocations. Investing and asset allocation are at the end of the day a mix of “art” and science. The differences among these portfolios are significant and reflect very different views on investing.

But somewhat ironically, the target market for these robo advisors is individuals who have little interest in getting deeply involved in their investment choices and are looking for a simple inexpensive way to allocate their investments. Yet the assumptions inherent in the allocations are so complex that few if any individuals in this target market” or indeed many non-professionals (and plenty of professionals too) would have difficulty carefully analyzing these portfolios.

Furthermore since there is little explanation that I have seen on the websites of the choices made in the portfolios, when or why they might make changes in the portfolios or specific risks in the portfolios Investors are often buying a portfolio they don’t really understand And since they must buy the entire portfolio they can’t remove from the portfolio any asset classes they are uncomfortable with.

And the costs of these portfolios? The fees on these programs may be low but as will be seen below that does not mean that the portfolios are really low cost

What’s Under the Hood?


Do you know what is under the hood? The various robo advisor portfolios contain some weightings and choices that are certainly subject to debate in the investing...

 Etf.com produced a great analysis going under the hood of robo advisors allocation. An in depth analysis is in this article 



I’ll just highlight some of the differences 

Some robo advisors include broad based commodity exposure, some gold, some REITS, some have a long duration bond portfolio some shorter, some include inflation protected bonds, emerging market bonds, developed market international bonds and some don’t. On the equity side the choices of instruments, type of allocation (market weight or value tilt for example) vary widely. There are robo advisors that include allocations to specific industries, 

And the differences in allocations are not a trivial matter, they are extremely significant here is one example

Here are the allocations in the 90% stock allocations for two Robo advisors

Betterment
Wealthfront
Developed International
22%
38%
Emerging International
28%
10%

In fact Betterment’s allocation to emerging markets stock is less than half that of the other major robo advisors.

Obviously this is a huge difference and just of one of dozens across all the major robo advisors

How many individuals could make a judgment among these or find a good explanation (as they should get from a good advisor) as to why the allocation is as it is, how it has performed in the past and even what long term expectations are. And of course in many cases working with an advisor they could individualize the allocation after the details of various pieces of the allocation are explained. None of this will be done by the robo advisor.

Here is the ETF.com article’s analysis of the Betterment allocation I would doubt many Betterment clients would be able to do this analysis, understand it and evaluate it compared to alternatives. And Betterment says it is thinking of adding more/different ETFs. How will the clients learn about this and when and why?

From ETF.com:


Betterment has come through on its pledge to deliver marketlike exposure with a value orientation. But its promised small-cap tilt and downside protection are not in evidence. Like Wealthfront, Betterment takes on moderately high duration and credit risk from its muni bonds.
Betterment pulls off the trick of being both marketlike and value-oriented while not tilting small by making value allocations with U.S. equities only. U.S. large-cap value funds emphasize mega-caps, so Betterment’s value tilt increases its portfolio-weighted average market cap.
If, in the future, Betterment ventures into international value funds, as Chief Executive Officer Jon Stein suggested they might if expense ratios fall, its portfolio-weighted average market cap would likely rise further, approaching the global-weighted average, since mega-cap firms dominate value funds globally

Betterment makes use exclusively of Vanguard ETFs certainly in terms of cost they are usually a good choice and the lowest cost in most categories. But there is d an expense ratio price war going on and ETFs from Schwab and Ishares now have ETFs at expense ratios very close to Vanguard’s.
 Methodologies differ, it could certainly be that the fee difference is offset by differences in strategy. To give a significant example several robo advisors use dividend oriented ETFs which have widely different methodologies. It is not transparent why these firms chose one vs another and would they explain their choices to you and if and when they might make a change.
Several robo advisors make use of industry sector funds. What are the criteria for those choices? Do they ever change? If so why? This is another set of “under the hood” issues many investors particularly the type that would use a robo advisor will likely not ask...or even understand. And how would they even ask a robo advisor and of course if the response is not satisfactory to the potential Betterment investor he would have to move to another one since all the Roboadvisors are “packages” that can’t be broken up.
Risks you may not be aware of. In my view emerging market bonds are an asset class that is not worthwhile to own given its risk/return characteristics. Others may differ, but how many of those using Betterment (to give one example) know that it owns an emerging market bond fund as 4% of their model allocation. The emerging markets bond etf from Vanguard which Betterment uses has a 10% allocation to Brazil a 9.4% allocation to Russia and a 6.3% allocation to Turkey. How many Betterment investors will be aware of this or check the holdings of each of the ETFs owned in their portfolio to find this out? Investors buy the Betterment portfolio as a package and don’t have the choices explained in depth. And the investor does not have the option that he would likely have with an advisor to simply eliminate an asset class from your portfolio after the risks are explained.
This is just one example the same could be said to one degree or another about every choice in every robo advisor portfolio. Will the investor know what particular asset class performance affected the portfolio performance and is this explained to you in any quarterly or annual reports…to the best of my knowledge there is no in depth reporting explaining results.
Will Investors Start to Chase Performance Among Robo Advisors?
Since the allocations of robo advisors differ the performances of course will differ. Will investors be tempted to check performance across robo advisors and switch based on short term performance? Certainly as these products grow there will be articles reporting on the performance of the robo advisors. I can predict Morningstar ratings on each of the robo advisors will be coming soon. Investors will doubtless make investment decisons based on the Morningstar analysis. This despite the fact that Morningstar acknowledges (but you can’t find that information very easily) that their “star’ ratings are not predictions of future performance…and they change. Instead of simplifying things for investors the growth of robo advisors will simply lead to a different level of complexity.
Changes in Response to Market Conditions
You probably would not like to work with a “non robo” advisor that make frequent changes to your allocation. But in my view there are some conditions where strategic changes in portfolios are merited.
Here is one important example: It is crystal clear that the next move in US interest rates will be up. It is also a simple fixed relationship that the longer term the bond the more its price is affected increases in interest rates. A “non robo” advisor would often choose to reduce the duration of its bond allocation under current market conditions. The robo advisors have varying durations in their bond allocations…but none of them own only or mostly short term bonds.
Thisarticle presents a very thorough analysis of the impact of rising rates on the bond market. I haven’t seen any indication that Robo advisors make adjustments to their bond portfolio in light of the near certain increase in interest rates (the only question is when…not if it will happen) Some non robo advisors will make adjustments because of this and I am sure that most will explain this decison to their investors.
 An informed consumer looking at putting their life savings with an advisor robo or other should ask how the portfolio is positioned for a rise in interest rate. If they asked a robo advisor who would answer? And of course the response to the answer was unsatisfactory the consumer would have to move on to look at another robo advisor
There are other specific categories of ETFs that are likely to be unfavorably affected by rising rates. Based on historical market performance these would include REITS and dividend stocks. How is the robo advisor positioned now in response to the near certain increase in interest rates? Why? And what changes might the robo advisor make ant why.
There is much more to say about looking “under the hood” of robo advisor portfolios. After doing due diligence an investor would likely find choices in virtually every allocation that it would prefer not to be in its portfolio.  Investors, certainly those in the target market for robo advisors who “want a simple solution to their problem of how to allocate their money may not be getting what they are looking for.
 It is unlikely they would be inclined or have the skills to do thorough analysis and due diligence in reviewing robo advisors. In fact these investors would be the least likely to have the skill or inclination to make such analysis.
To do a thorough review they would likely have to pay a “non robo” advisor to help them. And even after that review of the robo advisors many may find that picking the best solution to meet their needs is a bit like solving a Rubik’s cube in fact it is even harder if not impossible. 
Since you have to buy the “package” with a robo advisor there will almost inevitably not be a robo advisor that perfectly matches an informed client’s preference. But a good “non robo” advisor would be able to customize client portfolios rather than using what is virtually a one size fits all approach.
Trade Execution: There are more costs than just the management free.
It is unclear how the robo advisors execute the trades in their portfolios. Money will be coming in every day. Do they execute all the trades at one fixed time every day? How do they do their rebalancing trades? If the markets are particularly volatile on a particular day do they restrain from trading, do they make sure not to trade on the day or time of major economic events, what controls do they have for something like a “flash crash” or extreme moves in a particular asset class or sector they own.
I am sure the robo advisors don’t all use the same methodology. But how many robo advisor consumers would know to ask or fully understand the implications for the investor. And how many robo advisors will disclose that information?
Why is this important? Because the differences in trade execution can create unnecessary costs to the investor far in excess of the explicit robo advisors fees.
This excellent article from the WSJ explains the importance of trade execution for the individual investor
The article notes that differences in execution “could save you from trading at a price that could eat up a year’s worth of return on a stock”
Now consider the case of the robo advisor who needs to execute millions or tens of millions of dollars of purchases or sales of a particular security. Not only would it be hard to enter the trades with a “marketable limit order” as recommended in the article. The orders themselves could “move the market” making the trading price less attractive than it was when the trade was about to be executed.
Now consider the not likely scenario (in fact it has already existed) that it becomes knowledge in the market that a large robo advisor executes its rebalancing trade the 15th or every month at noon. It is not hard to figure out what the trades will be. The details of the allocation are public and the particular trades are clear. The robo advisor will be selling what has gone up and buying what has gone down. Not only are human traders savvy enough to take advantage of this there are high frequency traders whose entire business is built upon making profits because of short term activity in the market.
Trades like the one described are a big fat pitch down the middle of the plate for human and robot traders to make money at the expense of the robo advisor.
A human advisor would have far little if no “market impact” since their trades will in almost every case be far smaller than the robo advisors. And the human advisor can fine tune his execution.
And this problem will only increase over time if the robo advisors continue to gather assets. Betterment alone has close to $1 billion in assets under management is in very early stages and is just starting to gain awareness among the general public through exposure in the mass market press I am sure that few if any of the issues above are discussed in these articles.
Despite the many issues related to robo advisors virtually all of the articles in the popular press  praise the robo advisors as the “wave of the future” and praise them as the best choice for investors because of their low costs. 
This blog entry and my previous one has reviewed many and far from all of the issues and hidden costs associated with a robo advisor. Etf.com has published several articles which analyze various issues related to robo advisors. And even though the new blog articles together are fairly lengthy I have covered only a small number of the relevant issues

 Perhaps the apparent savings and utility of using a robo advisor are illusory and a one size fits all stock amd bond allocation is not the best choice. In fact perhaps it makes sense to find “non roboadvisors" to work on a consulting basis or asset management of an ETF portfolio for a reasonable fee…even if it seems higher than the ultra-low cost robo advisor

Monday, March 2, 2015

The Apple Effect


The data is very strong that over the long term large cap value stocks outperform large cap growth stocks

Below is a graph of growth of wealth of large cap value vs large cap growth and total stock market for the last 20 years.
Large cap value (red) total stock market (blue) large cap growth (green)



But that is over the long term and there are certainly periods where the opposite is the case. This is certainly the case ytd. And the gap between large cap growth and value is  attributable to a large extent  to one stock...Apple. Apple has a zero weighting in the large cap value index and a large weighting in the large cap growth and nasdaq index and even a high weighting in the S+P 500

Below I have calculated the "Apple effect" ytd by calculating the weighting of apple in each ETF and multiplying it by the Apple performance year to date. As you can see the "apple effect' explains a large part of the large cap value index underperformance.

weighting             ytd
             return
    apple      effect
vug large cap growth 7.7% 4.6% 1.29%
spy S+P 500 3.9% 2.5% 0.65%
qqq Nasdaq 15.0% 5.3% 2.52%
vtv large cap value 0.0% 1.0% 0.00%
apple 100.0% 16.8% 16.8%

This pattern has been in effect for a longer period here is a graph of VTV large value vs AAPL Apple.

Apple (brown) vs S+P 500 one year



I will leave it to others to forecast whether or not this will continue.


Thursday, February 26, 2015

Germany Euro Hedged ETFs Deserve More Love"

Above is the headline from an etf.com article about currency hedged German stock ETFs an  ETF I have written about in addition to the more well known and larger (in assets) Euro Zone hedged ETF (ticker HEDJ)

The article includes this graph of EWG, the unhedged German stock ETF and 3 hedged Germany ETFs: HEWG, DXGE and DBGR. HEWG has $845 million in assets while DXGE has $63 milllion and DBGR has $75 million meanin HEWG is  far more liquid

Israel Enters the “Currency Wars”



On February 23 the Bank of Israel surprised the financial markets by cutting its base interest (equivalent to US Fed funds) rate to an all-time low of .1% and even indicated it would consider further "easy money" policies  through “quantitative easing. Thus it has joined the group of nations in a monetary easing phase while the Federal Reserve has ended quantitative easing and is expected –at some time in the near future—to raise rates. Such policies almost always have the effect of weakening a currency against those with a lower interest rate…as we have seen in the $/Euro rate. Hence the countries in the monetary easing mode are seen by many as in a “currency war” of currency depreciation vs. the US dollar to boost exports

The market reaction would not surprise anyone who has watched as central bankers around the world have cut interest rates. The Tel Aviv stock index hit a record high --after Germany, Japan and the total World Stock Index did so during the last couple weeks-- and bond prices jumped putting the yield on the ten year government bond down to 1.75%. The Israeli shekel (NIS) weakened immediately against the dollar and at the end of local trading on the 24th was at 3.9520 /$ vs. 3.8580 the previous day (based on the Bank of Israel data).

While the market movements: central bank easing, higher stocks, higher bonds/lower yields and weaker currency have been mirrored across the world, the Bank of Israel action has a significant difference. Most interest rate cuts have been primarily in response to recessionary conditions.  The recent economic growth numbers in Israel have been very positive.  Israeli GDP growth is strong at 7.2% (annualized) in most recent data   although the 2.9% GDP growth of the last year—a period that included the Gaza war and a massive drop in tourism-- was the weakest since 2009.The January inflation rate (CPI) declined by .9% but the central bank does not forecast future number to show deflation—although it is a concern.

What sets the Bank of Israel policy apart from the rest of the world’s central banks is the explicit mention of targeting a weaker currency. Certainly the Euro has weakened due to easing policies by the European Central Bank (ECB) and the same is the case for the Bank of Japan and the Yen. But neither of those central banks has officially acknowledged that a weaker currency—which helps exporters—is a goal of policy. It is impossible to target both interest rates and exchange rates: money flows to the higher yielding currency. Hence a weaker Euro and Yen in response to central bank easing designed primarily to stimulate local economic activity whether or not it has been identified as a major policy goal.

The Bank of Israel on the other hand seems to be doing the opposite targeting the exchange rate through lowering rates even without a need to stimulate local economic activity. This is understandable given the small domestic economy and the export intensive economy. The Bank of Israel has made clear that even a short term period of dollar weakness /NIS strength is a not only a concern it is a major rationale behind the rate cut and could lead to “unconventional methods” in future monetary policy.

From the Bank of Israel press release giving the rationales for cutting interest rates:
This month, the shekel continued its appreciation, strengthening by 2.6 percent against the dollar, and by 3.3 percent in terms of the nominal effective exchange rate. After a depreciation of 10.4 percent between August and December in the effective exchange rate, there has been an appreciation of 7.6 percent since December, so that the cumulative depreciation since August has only been 2 percent. Continued appreciation is liable to weigh on growth in the tradable industries—exports and import substitutes.

And later in the press release:
The Monetary Committee is of the opinion that in view of the increased rate of appreciation, and its possible effects on activity and inflation, reducing the interest rate to 0.1 percent is the most appropriate step at this time in order to support achieving the policy targets.

The Deputy Central bank governor was even more explicit
 Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said while the central bank was "relatively comfortable" with its 2015 growth forecast of 3.2 percent "we needed to ensure that no further (dollar-shekel) depreciation takes place."
"We had concern that looking forward, without the extra push, we would not necessarily maintain our growth estimate," Baudot-Trajtenberg said in an interview with Reuters 

NIS/$ (mm/day year format)
 Looking at the graph above (dates are in European format day/month/year) of the NIS/$ rate one can see how sensitive to the exchange rate changes the central bank is. Despite the large depreciation of the shekel since August, the slight retracement of the exchange rate was enough to concern the bank
As the Israeli newspaper Haaretz reports 
. Against the dollar, the shekel ILS= weakened by 15 percent between July and late January but reversed course and gained 2.6 percent in the month since the prior rates decision. More important to the central bank, the shekel's effective exchange rate had depreciated 10.4 percent between August and December but appreciated 7.6 percent since then.


Below is the NISl/Euro exchange rate where one can see that the aggressive easing policy by the European Central Bank has caused a sharp fall in the Euro/Shekel exchange rate hitting record highs for the NIS vs, the Euro.. With the European Union Israel’s largest export market it is clear that the Bank of Israel would have an interest in slowing the Shekel’s rise against the Euro, That will be a more difficult task as the Euro has been in a period of currency weakness due to its aggressive policy of monetary easing one that is expected to continue in the foreseeable future. 

l
NIS/Euro Exchange Rate (dates in mm/dd/year format)




Interest rate differentials are often a key determinant of exchange rates. This has often been true for the NIS $ exchange rate. during the period of aggressive easing by the Fed  the NIS was far stronger than current rates. As the Federal reserve lowered rates and the interest rate differential moved in favor of the NIS money flowed in from around the world into the shekel as it became one of the favorites of traders/investors interested in the “carry trade” moving money to higher interest rate currencies Previous Bank of Israel Governor (and now US Fed Governor ) Stanley Fisher followed a policy of central bank intervention  against a stronger shekel attempting to keep the exchange rate at a 3.40 to 3.80 range level.

With the latest rate cut to .1%  and ten year government bond yield of 1.75%, there is little room for a “carry trade” to profit from an interest rate differential vs the US $. Thus one factor that would lead to a stronger NIS no longer exist. There will be next to no likelihood of any speculative capital inflows into the shekel driven by interest rate differentials.

In fact the opposite is likely to be the case. Israel seems to be on the easing side of monetary policy alongside the European central bank and has even indicated it might engage in “quantitative easing” at some point. The next move by the Federal Reserve will be to raise interest rates with many analysts looking for that to happen as early as June. There is a large inflow of $ into shekels related to development of natural gas fields and this would accelerate when/if exports begin. But the central bank has been selling $ into the market to offset these inflows for a considerable amount of time already.

The combination of an easing monetary policy in Israel, a move to raise rates by the US and the Bank of Israel;s expressed desire to keep the shekel weak would argue for the Shekel to trade at current levels or weaker in the foreseeable future. The rate has seldom held much above the NIS 4.00 rate and many analysts see a move above that as unlikely citing “resistance”. But exchange rates are notoriously difficult to forecast. They often have a strong momentum factor. And rates seen by the market as “resistance” often cause strong market reaction in the same direction of the momentum when those “resistance “levels are broken
.

Has Israel entered the currency wars?  Here are the views of two analysts 

From  Bloomberg

The rate cut comes amid “a global currency war in which Israel cannot allow itself to lose its global competitiveness,” Shlomo Maoz , chief economist at S.M. Tel Aviv Investments Ltd., one of the three economists who predicted a rate cut, said by phone after the decision. It “signals to the market that the Bank of Israel will not allow an appreciation of the shekel” until the world economy rebalances, he said.


Tamir Fishman CEO Eldad Tamir writes, "The global currency war entails substantial steps to preserve a reasonable level of growth in Israeli exports, which are the cornerstone of the Israeli economy. In our view, if the figures don't improve, there could be a further interest rate cut, and we could even see the start of a quantitative easing program."



Wednesday, February 25, 2015

Update on HYLD

Update on HYLD
Hyld will be paying its February dividend on the 27th of $.28 after $.20 in January.  I calculate that as a bit under a 7% yield the twelve month trailing yield is 9.64%.   The price has recovered (currently at around 42) but not nearly enough to recoup the losses from last year’s 12.8% fall calculated based on total return: price change +dividend). The total return is -3%   for the last 2 years and +3.3% year to date. Below is a one year total return (measured as growth of $100,000) over 12 months

The oil price has stabilized for now and it seems the “market consensus “fickle as it is has turned more favorable to high yield bonds.
From Bloomberg 



The message from the junk bond market is that the world’s biggest economy is picking up.
The securities have returned 1.7 percent in February, headed for the biggest monthly gain in a year, Bank of America Merrill Lynch index data show. Treasuries are plunging as investors dump the haven assets they turn to in times of turmoil. U.S. government securities have fallen 2.1 percent this month, the biggest decline since 2009, according to the indexes.
JPMorgan Asset Management is recommending high-yield bonds as an alternative to the slim payments investors get from sovereign debt…..
Companies that were once investment-grade rated and have since plunged into junk territory are offering some of the best returns in U.S. credit markets.
The fallen angel securities have returned about 8 percent in the past 12 months, and 3.2 percent in 2015 alone, the Bank of America data show.
Junk bonds are high-risk, high-yield securities are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.
They have an effective yield of 6.13 percent, versus 1.43 percent for Treasuries and 0.17 percent for German bunds, based on the Bank of America data.


  With the “weak hands” including many individual investors having sold their positions through ETFs and funds…the professionals are picking through the beaten down bonds to find the good values. HYLD is actively managed so they should benefit vs. an index. I don’t believe in active management in general but high yield at this point should give room for an active manager to do well.
Savvy professional longer term investors like private equity firms have been buying beaten down assets in the energy area. Blackstone group (BX) just set up a second fund to invest in this area.
My longer term expectation has been that short term high yield with its yield spread over investment grade bonds and treasury bonds and short duration should outperform the bond index over the near future and even perform well compared to relative to a highly values US stock market. Obviously that was not the case last year.
Things look better this year but certainly it is too early to say the worst is over. Oil is still a wild card risk and no one can rule out a further decline in oil prices.
Here are recent total returns
                            YTD    One year
Total US Bond    1.2          5.8
Total US stock    3.3          15.4
Hyld                     3.3         -12.8


Tuesday, February 24, 2015

Remember That "It's a Stock Pickers Market" Argument

Active managers apparently have a new excuse why their active management isnt't working...blame it on the market. I also fail to understand why performing poorly under difficult circumstances is a good excuse for a money manager.

from bloomberg

Best Stock Pickers Say Easy Money Has Made Their Job Harder


Managers say they haven’t changed, the market has. The easy money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals. At the same time, the relentless climb of prices across equity markets has left them with few chances to sniff out bargains or show what they can do in more-volatile times.
“In straight-up markets you don’t need active managers,” D’Alelio said in a telephone interview. “If the next five years are the same, there won’t be any active managers left.”
Twenty percent of mutual funds that pick U.S. stocks beat their main benchmarks in 2014, and 21 percent topped the indexes in the five years ended Dec. 31, according to data from Chicago-based Morningstar Inc. Over 10 and 15 years, the winners rise to 34 percent and 58 percent, respectively.

Of course hope springs eternal: 

, Brian Belski, chief investment strategist at BMO Capital Markets, wrote in the firm’s 2015 outlook published in December.
“From our lens, this means a prolonged period of active investing is upon us, thereby overtaking the macro or index biased ways that have engulfed investing the past 15 years,” Belski wrote.

.
Regardless of whether the trend is turning, Jeff Tjornehoj, an analyst with Denver-based fund tracker Lipper, doesn’t buy the idea that certain types of markets are tougher on stock pickers.
“It sounds like a team complaining about the rain when everyone has to play under the same weather,” Tjornehoj said in a phone interview.
Jim Rowley, a senior analyst at Vanguard Group Inc., is also dubious of high stock correlation as an explanation. In each of the last eight years, at least 70 percent of the stocks in the broad Russell 3000 Index either beat or underperformed that benchmark by 10 percentage points or more, according to Rowley, whose firm is known for championing index funds.
“That would suggest there has been ample opportunity to pick winners and losers,” Rowley said in a phone interview.

But despite all the data on active fund manager underperformance don't worry:


This is setting up as an ideal environment for stock pickers,” said Neuberger’s D’Alelio.

Monday, February 23, 2015

Another One Joins The Bandwagon...

Now that European and Japanese stocks are near all time highs the research gurus at Goldman Sachs weigh in. Via Bloomberg

Goldman Sees Value Outside of ‘Stretched’ U.S. Equities

Goldman suggests investors look abroad.

“Stocks with attractive valuation are rare in the current environment of stretched share prices,” Goldman’s chief U.S. equity strategist David Kostin and colleagues wrote in a Feb. 20 report, citing the ratio of price to estimates of future profit and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization. “The only time during the past 40 years that the index traded at a higher multiple was during the 1997-2000 Tech Bubble.”...

Investors looking for more attractive valuations need to go outside the U.S., according to Kostin’s team, provided they use currency hedges. (That seems to be a popular trade du jour, given the surging popularity of the WisdomTree Europe Hedged Equity Fund.) Goldman is forecasting 12-month, local-currency returns of 19 percent for Japan’s Topix Index, 17 percent for the Stoxx Europe 600 Index, where central bank easing is about to heat up big time, and 15 percent for an index tracking Asian nations besides Japan.