Yesterday I rebalanced my Retirement Investing Today Low Charge Portfolio by moving 0.6% from cash into emerging markets equities (ie buying equities with cash). Emerging market equities are an important part of my portfolio as I explained here.
I bought into the market through an exchange traded fund (ETF) provided by db x-trackers with the ticker XMEM. I already hold this ETF and stayed with it as its Total Expense ratio (TER) is 0.65%. I also had a choice of the Lyxor emerging markets ETF however while its TER is also 0.65% it is my understanding that it is not as tax efficient as the db x-trackers ETF for the reasons I explained here. If anybody knows anything different to this please do leave a comment for all readers as fees and taxes always seem to be complicated and I may have misunderstood. Sometimes I think the financial sector and the government make these things deliberately complicated so you don’t realise by just how much you are being ‘robbed’. I also could have bought the iShares ETF however with a TER of 0.75% it had higher fees. So with this all in mind the choice was made to add to my previous ETF as it minimised fees and taxes for this investment type.
Why did I buy emerging markets equities? It was simply that the equities portion of my portfolio had moved too far from the target allocation and with my mechanical investment style I had to top up. Two main factors have caused this. Firstly (and simply) equity values have fallen meaning I have moved further from the target equity allocations. This would be the case for anyone operating a strategic style asset allocation portfolio. Secondly for my portfolio, falling stock markets around the world had resulted in falling Cyclically Adjusted PE (CAPE or PE10) ratios. As regular readers will know I vary the target allocation of my Australia, UK and international (note not emerging markets) equities based an inverse proportion relationship to this CAPE ratio. That means I hold more equities when it is low and less equities when it is high. This is the tactical part of my portfolio. If you want to read more about how I constructed my portfolio including the CAPE then start here and if you want to know more about why I use the CAPE value to adjust my target weightings then start here.
Based on the previous CAPE values reported for ASX200 and for the S&P500 plus my strategic allocations as defined here my targeted equity allocations had moved to:
- Australian equities , 20.8% of total portfolio
- UK equities, 19.1% of total portfolio
- International equities, 13.6% of total portfolio
- Emerging market equities, 5% of total portfolio
My actual allocation meant that my Australian equities were 3% too low; my UK equities were 2.2% too low; my international equities were 1.1% too low and finally my emerging market equities were 2.4% too low. Based on this I should have been buying Australian equities first however for tax reasons (dividends on my Australian funds are paid at the end of next month meaning I would have been paying tax almost immediately on part of my investment as it includes the accrued dividend year to date) I went with the next furthest from target which was the emerging market equities.
As always do your own research.