The Global Guru: Are U.S. Markets Losing Their Edge?

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The recent sell-off in U.S. financial markets has put the fear of God into many investors. The stock market’s negative reaction to the re-election of President Obama; the uncertainty of the negotiations surrounding the U.S. fiscal cliff in Washington; and the continued economic uncertainty from Europe have helped pull the U.S. S&P 500 back to levels hit in the beginning of August.While U.S. investors are naturally focused on what is happening with U.S. markets, something unusual is happening in global financial markets.

After underperforming for a year, global stock markets are once again starting to outperform the U.S. stock market.

In fact, since the start of Q4, the broad U.S. stock market is the single-worst performing asset class in the “Ivy Plus” Investment Program” at my firm Global Guru Capital, which use a strategy that replicates the asset allocation model of the Harvard University endowment.

That doesn’t mean that global investors made money hand over fist during the past few months. But several global and “alternative” asset classes are outperforming the U.S. market for the first time in more than a year — and often by a substantial degree.

Let’s look at how five major asset classes — which together account for just under half of the assets in the “Ivy Plus” Investment Program — have fared over the past three months.

1) MSCI Emerging Markets (EEM)

For all of the talk about how emerging markets are set to dominate our economic future, this asset class is often the first one to fall out of bed once markets revert back to “risk-on” mode.

That tendency, however, seems to be changing during the current market pullback.

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In fact, the MSCI Emerging Markets Index has actually outperformed the S&P 500 over the past three months.

Although the MSCI Emerging Markets Index is up less than 1% over the past three months, it is outperforming the S&P 500 by close to 3%. Individual country bets like iShares MSCI Turkey Invest Mkt Index (TUR) and iShares MSCI Thailand Invest Mkt Index (THD) are up by much more.2) iShares MSCI EAFE Index (EFA)

The investment replicates the MSCI EAFE Index, which consists of a selection of stocks from 22 developed markets, such as Germany, Japan and Australia, but excludes those from the United States and Canada.

Developed markets are up about 2% over the past three months, beating the S&P 500 by close to 4%.

3) Vanguard Global ex-US Real Estate ETF (VNQI)This ETF tracks the S&P Global ex-U.S. Property Index, a measure of international real estate stocks in both developed and emerging markets. The index is composed of stocks of publicly traded equity real estate investment trusts (REITs) and certain real estate management and development companies. The fund has a 20% weighting in Emerging Markets, 20% in Europe and 55% in Asia.

Global real estate has continued its strong performance during the current market pullback, rising over 4% during the past three months. With a gain of 28.99% so far in 2012, it is also the single best-performing asset class in the “Ivy Plus” Investment Program, as well as a current recommendation in my investment newsletter, The Alpha Investor Letter.

4) Guggenheim Timber (CUT) This ETF investment tracks the Beacon Global Timber Index. A full 64.5% of the fund is invested in companies outside of the United States, including Japan, Brazil, Canada and Finland.

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For the past three months, timber has performed better than even global real estate, rising close to 8% even as the S&P 500 has fallen by 2%.

5) PowerShares Global Listed Private Equity (PSP)This investment replicates the Red Rocks Global Listed Private Equity Index. The underlying index is currently composed of 65 securities, ADRs and GDRs including business development companies, master limited partnerships and other vehicles. About 59% of its allocation is outside of the United States in countries like United Kingdom, France, Sweden and Canada.

Private equity has risen more than 2% over the past two months, even as the S&P 500 has pulled back for a substantial outperformance over the last three months.

The Return of Diversification?

The strong relative performance of global markets in the past three months may mark the return of diversification.One of the frustrating characteristics about financial markets over the past three years has been the high correlation among all asset classes. While both common sense and textbooks tell you that you can assemble a portfolio of assets where one asset zigs while another zags, in recent years we have been living in a “risk on,” “risk off” world. It didn’t matter what you invested in, everything either zigged or zagged — and always together.

The Harvard endowment suffered over the past year for its low allocation to the U.S. markets. The relatively weak performance of global equities and other “alternative” asset classes acted as a drag on returns. Simply investing in the S&P 500 seemed like a much better bet. But over the last three months, that seems to have changed.

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The bottom line?

After a year’s worth of strong performance in the U.S. markets, it’s time to look overseas for bigger profits in the year ahead.

Sincerely,

Nicholas A. Vardy

Editor, The Global Guru

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