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Friday, June 11, 2010

More Not so Common Sense Advice From James Stewart

 This week James Stewart shows how not to invest in and analyze  mutual funds and etfs.

He expresses concern over the BP oil spill and the European credit crisis, and it prompts him to look under the hood of an investment he has held in his portfolio. Incredibly he,a financial journalist offering investment advice, had no idea what the holdings were in an etf he owned: My comments in blue

I don't directly own shares in BP or any European financial institutions, and I've been avoiding both while following the depressing news about the environmental disaster in the Gulf and the latest permutations of the European debt crisis, which last week segued to Hungary....

I've been avoiding European bank stocks for another reason: Who knows where the exposure to shaky sovereign debt really lies?

Stewart goes on to state that he owns a european etf
 BLDRS Europe 100 ADR Index Fund...—which has dropped recently in line with European markets. I bought it for broad-based exposure to developed Europe, part of what I consider a prudent diversification strategy 

incredibly this author of a common sense investment column didnt due the most minimal research on the etf information one could find with two clicks of a mouse

. I'd never really examined the actual securities in the fund, so I decided to see just what was in it.
You can imagine my dismay when I discovered that its biggest holding is a European bank—HSBC Holdings—and its second biggest is BP. Spain's Banco Santander is also in its top 10 holdings, and financial companies make up 21% of the portfolio. So much for my illusion that I owned no BP or European banks.

He then moves to a specious way of researching holdings of mutual funds. Although he uses the only tool possible to find fund holdings he fails to mention that the data is not current since the funds report quarterly in arrears.In fact no one has any idea in real time what an actively managed fund owns.

In his search for an alternative european holding he comes up with a strange choice given that he seeks diversification. His choice a single country fund the etf for

 Stewart winds up with an etf probably a decent choice and at least this time he checks the holdings but his reasoning is curious he picks a single country fund based on the industry breakdown, He gets better industry diversification but takes a concentrated single country exposure. It has no BP and minimal exposure to energy(although I am not sure why the BP spill would lead one to avoid all energy shares a persuasive case could easily be made for building a portfolio of energy companies ex BP at this point). I don't know that it does much for his desire to avoid european financials

The best bet for my strategy may well be a Germany ETF. The iShares MSCI Germany Index ETF is filled with big exporters like Siemens (10% of the portfolio), SAP and ThyssenKrupp. It does contain Deutsche Bank (5% of the portfolio) but no energy companies among its top 25 positions.
The simple lesson in this exercise is to look at the portfolios of your mutual funds and ETFs. They do offer diversification—but also some unwanted major holdings.

I'm not sure that diversification is a great attribute of this fund. Like many single country funds it is highly concentrated 39% of its assets are in its top 5 holdings. And it's allocation to financials is 20.1% based on ishares fact sheet  That's basically indistinguishable than the   the 21% in the bldrs europe. which he views as overweighted in financials. And as for risk even though Germany is certainly the stongest economy in Europe it doesnt mean it is better to have all one's  holdings in european financials cocnetrated solely in Germany.

In sum in terms of diversification as is often the case single country funds seldom make the grade particularly as an alternative to a broader regional portfolio,

A little more research would have yielded the conclusion that there is a better alternative in a low cost european investment that holds not shares in BP ( UK not being part of the EMU). It offers country and industry diversification much broader than the single country fund.

The ishares emu etf (EZU)  is of course geographically diversified since it invests in all of the euro zone countries. where the top 5 holdings make up only 15% of assets.This etf probably  make a better choice  for a single European investment. It's largest sector is financials at 23.4%. higher than the Germany fund but diversified across several countries.The holdings are concentrated in the stronger european economies with the notable exception of spain:

Top Countries as of 5/28/2010
France 31.22%
Germany 25.57%
Spain 11.66%
Italy 9.20%
Netherlands 9.14%
Finland 3.64%
Belgium 3.27%
Luxembourg 1.51%
Austria 1.08%


Mr. Stewart might also have been better off solving his problem with european banks BP by purchasing a broad developed market index like VEA.

In any case rather than common sense advice and analysis Mr.Stewart comes down to recommending a narrowly focused single country fund as a way to diversify internationally.

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