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I’ve read the full report for DODBX and just a quick glance so far at DODEX.
DODBX: They’ve sliced 2 or 3 % off their previous near -70% allocation to equities, moving that into bonds. Equities are now at 66%. They single out what they see as opportunity in mortgages / mortgage related instruments. And they’ve got a significant hold in international equities - near 15% as I recall.
I was curious about their previous explained use of a small S&P short position. No mention of it in this year’s commentary. However, the financial accounting page lists 3 shorts. The amounts seem relatively insignificant. A bit of hedging going on.
E-Mini S&P 500 Index— Short Position Euro-Bund Future— Short Position Ultra 10 Year U.S. Treasury Note Future— Short Position
DODEX: Very interesting! Here’s a few excerpts:
”2022 was a difficult year for emerging and developed equity markets around the world. Waning economic growth, rising geopolitical tensions, disruption in global supply chains, and tightening monetary policies in the face of surging inflation, all weighed on stocks …
“From a valuation perspective, emerging markets equities continue to look compelling: the MSCI EM ended the year at 11.3 times forward earnings. Emerging markets value stocks remain attractively priced compared to growth stocks, with a wide valuation spread—nearly two standard deviations above the historical mean. The broad divergence between performance and valuation within emerging markets, coupled with a highly volatile and uncertain global economic and political backdrop, provides a potentially productive setting for (our investment approach).
“ … The Fund’s holdings, on average, trade at 9.5 times forward earnings, compared to the MSCI EM at 11.3 times. This, coupled with our long-term investment horizon, enables us to invest in companies, industries, and countries that may face significant uncertainty in the short term, but where we believe the long-term prospects are bright. An example of these principles in action is the Fund’s large overweight position in select China Internet holdings, the biggest contributor to the Fund’s outperformance last year.” (Boldface mine)
Re China - They appear to see diamonds where I see mainly refuse (based on the geopolitics). Reminiscent of the circus act of swallowing a burning torch.
Hi @hank. Yes I read the same piece on DODEX and have been intrigued by the fund. Largely because it’s the Dodge and Cox team and I value their methodology. I invested in it a few months back. But I am becoming more and more concerned about the geopolitical risks of investing in funds with much China exposure. They are aligning themselves with Russia and this is going to have major ramifications for their relationship with the West going forward. I am debating with myself about dropping the fund. Not sure if anyone else on the board owns it but if so would value your thoughts.
DODBX Annual Report: Pg 13 has details on short positions. The notional amounts seem high considering the fund AUM of $13.51 billion. Related explanations/descriptions are on pg 18.
Hi @hank. Yes I read the same piece on DODEX and have been intrigued by the fund. Largely because it’s the Dodge and Cox team and I value their methodology. I invested in it a few months back. But I am becoming more and more concerned about the geopolitical risks of investing in funds with much China exposure. They are aligning themselves with Russia and this is going to have major ramifications for their relationship with the West going forward. I am debating with myself about dropping the fund. Not sure if anyone else on the board owns it but if so would value your thoughts.
"...valueyourthoughts."
I do not own it. But I'd not buy it right now, either. A while ago, I decided against EM, and not very much international, either--- even developed economies. Geopolitics is getting complicated. Yes, to me, China is simply uninvestible currently. Their alignment with Russia is my main reason. But there's the Uyghurs and everything connected with THAT hot mess, too. Look what that regime is doing to those people! Then there is the growing threat China presents to the region. Taiwan, Philippines. South China Sea, generally.
The old East vs. West blocs are once again becoming hardened. China, Russia, Belarus, Orban in Hungary are just no good. Of course, I'm not indicting the "average Joe" in all those places. It's the political policies from on high. there are other countries I won't invest in, either. But we're talking about DODEX here.
@yogibearbull - Thanks for insights. My best attempt at those numbers (DODBX) turns up about 4.54% of total fund assets invested in short positions, spread across stocks and bonds.
I guess the significance of that 4.54% number lies in the eye of the beholder. It is not uncommon for bond funds to carry small tactical short positions on long dated treasuries - while remaining overall long the market. While many alternative type funds short equities, it’s probably quite uncommon for a “balanced” fund to do so. DODBX has always ISTM operated a bit ”out of the mold” anyway - albeit the S&P short position is a recent development.
@MikeW - Good points. Virtually every participant on this week’s WSW (linked by @Crash in a separate thread) demurred in some manner to what they view as a shifting “power block” among nations and geographic regions - with China part of that. And, generally, they did not view these developments as positive for the U.S. economy, consumers or investors. I can’t help wondering if D&C is still as exuberant over China today as they were December 22, 2022 - the date of the report.
@hank, I am looking at NOTIONAL amounts that are the total positions controlled and gains/losses experienced are (almost) on those. For options, the option-delta also comes into play. Amounts invested or current values are smaller as these are leveraged derivatives.
So, I see:
$613.73 million (notional) in short futures. $846.23 million (notional) in call options Some of these positions may offset others. Unclear about currencies as only buys and sells are shown, not net positions.
The fund AUM is $13.51 billion, so 1% is $135.1 million.
If I was looking for something like this for my personal brokerage account, I would think of it as gross 10%+ exposure to futures and options. This is just an observation, not intended to cause alarm.
Thanks - My attempt to re-create my original 4.5% number failed. Those are very big numbers to deal with. (C student in math) But I obviously wasn’t including call options in the short positions total.
I think we both will recall they initiated about a 5% short position in the S&P a year or two ago and gradually lowered that. Around 2% short the S&P is the last reference I remember reading or seeing.
I try to avoid funds that have an unknown exposure to China, so I use "Ex-China" funds if possible.
If I want to invest in China, I use KBA, Krane Shares China A shares as a pure speculation.
I have serious qualms about China's human rights record and the increasing threat to world stability, but I think the major investment risks ( other than a shooting war) are
1) I do not think you can believe their numbers and accounting, as the Government has and will continue to manipulate them and
2) The government has intervened in aggressively in companies management when it wanted to. Jack Ma disappeared for a while remember?
While owning A shares probably eliminates the risk that the Government will "decertify ADRs", they could just also decide to prevent money transfers to the US, so even if KBA sold their positions, the cash would be stuck there.
I think Vietnam and other East Asia countries are much better bets long term.
Thanks to all for your comments regarding China. Tensions are clearly rising btwn them and the U.S. and if they supply weapons to Russia all bets are off. That would overwhelm any positive news on the reopening…. It’s hard for me to justify the risks. Will prob sell DODEX
It seems difficult to even screen for emerging market funds that don't have Chinese exposure, except single country funds. I do not see a way to "exclude" a certain country in MFO screener, or M*
What’s interesting, I think, is that EM got off to a good start this year with DODEX briefly up north of 10%. That early impetus was from mainly a retreat from China’s harsh anti-covid lockdowns plus some easing by their central bank. However, the fund has fallen back to around +2-3% YTD after a near 2% drop Friday. The early good news was offset by the balloon controversy and other growing tensions between the U.S. & China.
EM has been over-hyped since I was in my 40s (long ago). Our Templeton Funds advisor shifted our workplace 403-Bs from a very fine TEMWX back then into a newer EM fund, TEGOX, (in the early 90s). Did receive our permission first. However that fund never produced and eventually closed.
Not meant as advice - but I’d be loath to second guess D&C. Sometimes the best opportunities come along when things look grimmest.
"I can’t help wondering if D&C is still as exuberant over China today as they were December 22, 2022 - the date of the report." Thanks I needed that, Derf
@sma3: you probably are aware of Matthews’ MEMX, which excludes China. How to screen for such a portfolio, I dunno. Maybe Premium guru Charles can help.
@sma3: you probably are aware of Matthews’ MEMX, which excludes China. How to screen for such a portfolio, I dunno. Maybe Premium guru Charles can help.
Good point. But, Matthews. We're all aware of their inner turmoil recently, going back a couple of years, at least.
What’s interesting, I think, is that EM got off to a good start this year with DODEX briefly up north of 10%. That early impetus was from mainly a retreat from China’s harsh anti-covid lockdowns plus some easing by their central bank. However, the fund has fallen back to around +2-3% YTD after a near 2% drop Friday. The early good news was offset by the balloon controversy and other growing tensions between the U.S. & China.
EM has been over-hyped since I was in my 40s (long ago). Our Templeton Funds advisor shifted our workplace 403-Bs from a very fine TEMWX back then into a newer EM fund, TEGOX, (in the early 90s). Did receive our permission first. However that fund never produced and eventually closed.
Not meant as advice - but I’d be loath to second guess D&C. Sometimes the best opportunities come along when things look grimmest.
It’s a good point Hank…. I remember @LewisBraham commenting about a “blood in the streets” moment in China back in October. I thought he was crazy at the time. But turns out that was the turning point in the market.
I have serious qualms about China's human rights record and the increasing threat to world stability, but I think the major investment risks ( other than a shooting war) are
1) I do not think you can believe their numbers and accounting, as the Government has and will continue to manipulate them and
2) The government has intervened in aggressively in companies management when it wanted to. Jack Ma disappeared for a while remember?
[snip]
I share your concerns. The Chinese government's aspiration to expand its global sphere of influence/dominance (Belt & Road, South China Sea activities, etc.) is also troubling. Consequently, I now deliberately avoid allocating capital to Chinese companies¹. Professor Snowball authored an informative 2021 article regarding the risks of investing in China. Link
¹ I do own a foreign large-cap growth fund which had 12.7% of its assets in China as of 01/31/2023.
That fund has an additional 2.2% in HK. Is that all in HK companies, or does some of that reflect indirect investment in mainland China? The Reuters commentary below says that mainland China companies account for 78% of HK's stock market cap. When your fund reports its allocations, is it deconstructing the holdings or reporting where the shares are issued?
Presumably the securities counted under HK don't include mainland Chinese companies listed in HK. Not that HK-based companies are completely devoid of Chinese political risk. For example, 0.9% of the fund's AUM are invested in AIA. This is a global insurance company, based in HK since 1947, but it started in Shanghai and reopened a branch there in 1992. Pretty clearly a HK company, though with some ties to mainland China. https://www.aia.com/en/about-aia/overview
FWIW, I rely on my foreign/global funds to identify appropriate emerging as well as developed markets. I don't consider myself well enough informed to do this level of managing. And if the fund manager blows it, at least I have someone else to blame
Reuters commentary:
At its core, Hong Kong’s unique selling point is that it’s China-by-proxy for investors; enterprises in the People’s Republic account for 78% of the market capitalisation of Hong Kong’s main boards. The Stock Connect scheme run by bourse operator Hong Kong Exchanges and Clearing (0388.HK) lets money move across China’s capital controls in a limited way. Officials familiar with the situation say that it handles as much as 70% of all international investment flows into stocks listed in mainland China.
”FWIW, I rely on my foreign/global funds to identify appropriate emerging as well as developed markets.”
Makes perfect sense. Sound advice. I tend to view EM in the same way I view the precious metals. A little bit goes a long way. A relatively small exposure can have a significant impact on your portfolio.
Having read the full commentary now … it’s just fascinating. I wouldn’t be able to clip any particular sentence and do it justice. While D&C has long been known as a “value” or even “deep-value” house, it’s the first time I can recall their adding to that depiction: “our … contrarian approach”. Also, they acknowledge China is fraught with problems and that many investors have labeled the country “uninvestable”. (Yet they will persevere )
If one were trying to time a particularly good buy or sell date, they might track VWO which I’ve found usually provides a pretty good indication throughout the day on how DODEX will close.
Among other "perpetual bulls" ( it seems) on EM is GMO For a very long time they have believed Emerging markets will outperform almost everything else, but I think this is almost all based on valuation.
There are a lot of moving parts to try to understand.
Some are just financial: Dollar strength vs weakness ( can be hedged away I guess) honesty of management ( perhaps identifiable by good PM), corruption ( a matter of opinion perhaps but clearly some countries have stronger rule of law protections etc than others)
Then there are the ethical issues: child labor, worker's rights etc all weaker than in US and even the US we will all admit has major problems
You now have to add Climate Change. India has done very well, until the last couple of years, but already is hitting summertime temperatures ( per Bloomberg) with only 10 % of population having air conditioning. Over the next few years this is bound to weaken economic performance unless you are 100% into Indian A/C companies
For the funds that do provide decent annual letters, a careful read can see how well a lot of these issues are addressed. But what do you do when they are not mentioned at all?
”Then there are the ethical issues: child labor, worker's rights etc all weaker than in US and even the US we will all admit has major problems”
Yes - great point. For younger long term investors I’d rate those considerations very high in mapping out a portfolio of investments. Forgive me if I tend to focus mainly on just “staying above water” and trying to exceed the return of cash at the “beyond AARP” point in life - in a very challenging environment. Thanks for tossing those considerations out there. ISTM D&C should take those into consideration and mention them in their reports.
That aside, if you want to learn the basic nuts and bolts of investing, none better to read IMHO from that respect than what these guys plus David Giroux publish.
@sma3: you probably are aware of Matthews’ MEMX, which excludes China. How to screen for such a portfolio, I dunno. Maybe Premium guru Charles can help.
Perhaps not a complete listing, but when I Google “ emerging market funds which exclude china”, it generates quite a few ideas, additional sources, and articles.
I keep reviewing my developed market funds for Chinese stock exposure, but they still have a few that required looking though the entire portfolio. I eliminated VWO several years ago as I grew uncontrollable with the Belt & Road Initiative. Seafarer is the only fund I invest today and it contains consumer staples and discretionary stocks, nothing in construction and technology.
I invested in SIGIX since its inception. Still thinking about SIVIX since it is value-oriented and focus on smaller caps.
@hank, alternatively one can invest in energy ETFs/funds and commodity futures as a indirect play on China’s reopening. The energy sector has been lagging other sectors this year.
Comments
DODBX: They’ve sliced 2 or 3 % off their previous near -70% allocation to equities, moving that into bonds. Equities are now at 66%. They single out what they see as opportunity in mortgages / mortgage related instruments. And they’ve got a significant hold in international equities - near 15% as I recall.
I was curious about their previous explained use of a small S&P short position. No mention of it in this year’s commentary. However, the financial accounting page lists 3 shorts. The amounts seem relatively insignificant. A bit of hedging going on.
E-Mini S&P 500 Index— Short Position
Euro-Bund Future— Short Position
Ultra 10 Year U.S. Treasury Note Future— Short Position
DODEX: Very interesting! Here’s a few excerpts:
”2022 was a difficult year for emerging and developed equity markets around the world. Waning economic growth, rising geopolitical tensions, disruption in global supply chains, and tightening monetary policies in the face of surging inflation, all weighed on stocks …
“From a valuation perspective, emerging markets equities continue to look compelling: the MSCI EM ended the year at 11.3 times forward earnings. Emerging markets value stocks remain attractively priced compared to growth stocks, with a wide valuation spread—nearly two standard deviations above the historical mean. The broad divergence between performance and valuation within emerging markets, coupled with a highly volatile and uncertain global economic and political backdrop, provides a potentially productive setting for (our investment approach).
“ … The Fund’s holdings, on average, trade at 9.5 times forward earnings, compared to the MSCI EM at 11.3 times. This, coupled with our long-term investment horizon, enables us to invest in companies, industries, and countries that may face significant uncertainty in the short term, but where we believe the long-term prospects are bright. An example of these principles in action is the Fund’s large overweight position in select China Internet holdings, the biggest contributor to the Fund’s outperformance last year.” (Boldface mine)
Re China - They appear to see diamonds where I see mainly refuse (based on the geopolitics). Reminiscent of the circus act of swallowing a burning torch.
I do not own it. But I'd not buy it right now, either. A while ago, I decided against EM, and not very much international, either--- even developed economies. Geopolitics is getting complicated. Yes, to me, China is simply uninvestible currently. Their alignment with Russia is my main reason. But there's the Uyghurs and everything connected with THAT hot mess, too. Look what that regime is doing to those people! Then there is the growing threat China presents to the region. Taiwan, Philippines. South China Sea, generally.
The old East vs. West blocs are once again becoming hardened. China, Russia, Belarus, Orban in Hungary are just no good. Of course, I'm not indicting the "average Joe" in all those places. It's the political policies from on high. there are other countries I won't invest in, either. But we're talking about DODEX here.
I guess the significance of that 4.54% number lies in the eye of the beholder. It is not uncommon for bond funds to carry small tactical short positions on long dated treasuries - while remaining overall long the market. While many alternative type funds short equities, it’s probably quite uncommon for a “balanced” fund to do so. DODBX has always ISTM operated a bit ”out of the mold” anyway - albeit the S&P short position is a recent development.
@MikeW - Good points. Virtually every participant on this week’s WSW (linked by @Crash in a separate thread) demurred in some manner to what they view as a shifting “power block” among nations and geographic regions - with China part of that. And, generally, they did not view these developments as positive for the U.S. economy, consumers or investors. I can’t help wondering if D&C is still as exuberant over China today as they were December 22, 2022 - the date of the report.
So, I see:
$613.73 million (notional) in short futures.
$846.23 million (notional) in call options
Some of these positions may offset others.
Unclear about currencies as only buys and sells are shown, not net positions.
The fund AUM is $13.51 billion, so 1% is $135.1 million.
If I was looking for something like this for my personal brokerage account, I would think of it as gross 10%+ exposure to futures and options. This is just an observation, not intended to cause alarm.
Thanks - My attempt to re-create my original 4.5% number failed. Those are very big numbers to deal with. (C student in math)
I think we both will recall they initiated about a 5% short position in the S&P a year or two ago and gradually lowered that. Around 2% short the S&P is the last reference I remember reading or seeing.
I try to avoid funds that have an unknown exposure to China, so I use "Ex-China" funds if possible.
If I want to invest in China, I use KBA, Krane Shares China A shares as a pure speculation.
I have serious qualms about China's human rights record and the increasing threat to world stability, but I think the major investment risks ( other than a shooting war) are
1) I do not think you can believe their numbers and accounting, as the Government has and will continue to manipulate them and
2) The government has intervened in aggressively in companies management when it wanted to. Jack Ma disappeared for a while remember?
While owning A shares probably eliminates the risk that the Government will "decertify ADRs", they could just also decide to prevent money transfers to the US, so even if KBA sold their positions, the cash would be stuck there.
I think Vietnam and other East Asia countries are much better bets long term.
Not good
https://www.seafarerfunds.com/commentary/the-transparency-problem-in-chinas-credit-markets/
It seems difficult to even screen for emerging market funds that don't have Chinese exposure, except single country funds. I do not see a way to "exclude" a certain country in MFO screener, or M*
EM has been over-hyped since I was in my 40s (long ago). Our Templeton Funds advisor shifted our workplace 403-Bs from a very fine TEMWX back then into a newer EM fund, TEGOX, (in the early 90s). Did receive our permission first. However that fund never produced and eventually closed.
Not meant as advice - but I’d be loath to second guess D&C. Sometimes the best opportunities come along when things look grimmest.
Thanks I needed that, Derf
I share your concerns.
The Chinese government's aspiration to expand its global sphere of influence/dominance
(Belt & Road, South China Sea activities, etc.) is also troubling.
Consequently, I now deliberately avoid allocating capital to Chinese companies¹.
Professor Snowball authored an informative 2021 article regarding the risks of investing in China.
Link
¹ I do own a foreign large-cap growth fund which had 12.7% of its assets in China as of 01/31/2023.
Presumably the securities counted under HK don't include mainland Chinese companies listed in HK. Not that HK-based companies are completely devoid of Chinese political risk. For example, 0.9% of the fund's AUM are invested in AIA. This is a global insurance company, based in HK since 1947, but it started in Shanghai and reopened a branch there in 1992. Pretty clearly a HK company, though with some ties to mainland China.
https://www.aia.com/en/about-aia/overview
FWIW, I rely on my foreign/global funds to identify appropriate emerging as well as developed markets. I don't consider myself well enough informed to do this level of managing. And if the fund manager blows it, at least I have someone else to blame
Reuters commentary: https://www.reuters.com/breakingviews/hong-kong-spreads-its-wings-its-bets-2023-02-23/
Makes perfect sense. Sound advice. I tend to view EM in the same way I view the precious metals. A little bit goes a long way. A relatively small exposure can have a significant impact on your portfolio.
Having read the full commentary now … it’s just fascinating. I wouldn’t be able to clip any particular sentence and do it justice. While D&C has long been known as a “value” or even “deep-value” house, it’s the first time I can recall their adding to that depiction: “our … contrarian approach”. Also, they acknowledge China is fraught with problems and that many investors have labeled the country “uninvestable”. (Yet they will persevere
If one were trying to time a particularly good buy or sell date, they might track VWO which I’ve found usually provides a pretty good indication throughout the day on how DODEX will close.
For a very long time they have believed Emerging markets will outperform almost everything else, but I think this is almost all based on valuation.
There are a lot of moving parts to try to understand.
Some are just financial: Dollar strength vs weakness ( can be hedged away I guess) honesty of management ( perhaps identifiable by good PM), corruption ( a matter of opinion perhaps but clearly some countries have stronger rule of law protections etc than others)
Then there are the ethical issues: child labor, worker's rights etc all weaker than in US and even the US we will all admit has major problems
You now have to add Climate Change. India has done very well, until the last couple of years, but already is hitting summertime temperatures ( per Bloomberg) with only 10 % of population having air conditioning. Over the next few years this is bound to weaken economic performance unless you are 100% into Indian A/C companies
For the funds that do provide decent annual letters, a careful read can see how well a lot of these issues are addressed. But what do you do when they are not mentioned at all?
Yes - great point. For younger long term investors I’d rate those considerations very high in mapping out a portfolio of investments. Forgive me if I tend to focus mainly on just “staying above water” and trying to exceed the return of cash at the “beyond AARP” point in life - in a very challenging environment. Thanks for tossing those considerations out there. ISTM D&C should take those into consideration and mention them in their reports.
That aside, if you want to learn the basic nuts and bolts of investing, none better to read IMHO from that respect than what these guys plus David Giroux publish.
Thanks for link to Professor Snowball's article on China. There he says small cap funds, are less likely to be in China
One small cap value fund, not strictly EM, that has done well over the years ( That David profiled in 2015) is QUSIX
China LT 1% here
Should help EM funds
@hank, alternatively one can invest in energy ETFs/funds and commodity futures as a indirect play on China’s reopening. The energy sector has been lagging other sectors this year.