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M*: There's Likely More Risk (and Less Reward) In Foreign Small Caps
A confusing title/column. More risk and less reward than what? The column shows that foreign small caps have had the same risk (as measured by volatility) as foreign large caps and greater rewards. Though it argues that this may have been a statistical anomaly.
Just skimmed this article (for lack of time). But it appears to be (at surface level) a thoughtful and well documented article.
-The first part of the statement is acknowledged in probably 80% (could be 100%) of the prospectuses of funds investing in any type of foreign securities to any extent. Usually it goes something like "Investing in foreign securities carries additional risks, which include, but are not limited to ... (enumeration of several risks)". So, not much new here.
- Far as I can tell, he's basing the second half of the argument on some kind of regression to mean argument - based on some kind of foreign small cap outperformance in recent years. I too subscribe to the regression principal - though the time frames involved for it to play out often last decades. A very young writer predicting today a regression back to some (lower) mean might well have grown very old before the regression actually occurs. Additionally, he seems to view foreign small-cap markets as one market. Of course they are not.
For most long term fund investors, I think one or two good international funds is a better way to go, assuming you want international exposures. Let your manager slice and dice as to various cap sizes and particular economies in which to invest. I'm probably swimming against the current here. The fund companies profit from our willingness to buy very narrowly focused funds - usually having higher levels of risk and higher expenses. And investors' relentless pursuit of every possible extra 10-cents worth of higher return helps support them.
@msf: Thanks, I assigned the M* articles to a new intern Linkster who didn't do the job correctly. Therefore he/she is no longer with Linkster Inc. Regards, Ted
Comments
http://www.morningstar.com/articles/825339/theres-likely-more-risk-and-less-reward-in-foreign-small-caps.html
A confusing title/column. More risk and less reward than what? The column shows that foreign small caps have had the same risk (as measured by volatility) as foreign large caps and greater rewards. Though it argues that this may have been a statistical anomaly.
-The first part of the statement is acknowledged in probably 80% (could be 100%) of the prospectuses of funds investing in any type of foreign securities to any extent. Usually it goes something like "Investing in foreign securities carries additional risks, which include, but are not limited to ... (enumeration of several risks)". So, not much new here.
- Far as I can tell, he's basing the second half of the argument on some kind of regression to mean argument - based on some kind of foreign small cap outperformance in recent years. I too subscribe to the regression principal - though the time frames involved for it to play out often last decades. A very young writer predicting today a regression back to some (lower) mean might well have grown very old before the regression actually occurs. Additionally, he seems to view foreign small-cap markets as one market. Of course they are not.
For most long term fund investors, I think one or two good international funds is a better way to go, assuming you want international exposures. Let your manager slice and dice as to various cap sizes and particular economies in which to invest. I'm probably swimming against the current here. The fund companies profit from our willingness to buy very narrowly focused funds - usually having higher levels of risk and higher expenses. And investors' relentless pursuit of every possible extra 10-cents worth of higher return helps support them.
Regards,
Ted