Worriers and Dreamers

How can emerging market debt play a role in my porfolio?

We spend a great deal of time conducting Meta analysis (reading respected third party researchers). One of the luminaries I enjoy following is Howard Marks. He consistently boils very complex material down into a readable format. In some of his more recent commentary he referenced the two basic camps of investing, Dreamers and Worriers.

Dreamers are important for the markets, but do not make the best money managers. We at Creekside clearly fall into the worrier camp. Our clients have entrusted us with their life savings and we spend our time worrying about how to keep this money working for them in the years ahead. We constantly find new things to worry about. Inflation, valuations, government policy, leverage, foreign policy..etc..etc.. There are always opportunities around the world but understanding the risk associated with those opportunities is a critical step in our process and implementation of a portfolio.

From our own commentary and the daily headlines we know that the US government debt load is not looking attractive these days. With an additional 1.6 trillion of new debt being issued by Uncle Sam this year we would prefer to stand back and wait for the yields to find a new home before allocating client monies into US government bonds.

An area which does not get much press is emerging markets debt. With our worrier mentality, we believe this part of the emerging markets can present opportunities if you understand how it relates to other parts of your portfolio.  The JP Morgan Emerging Local Markets Index has returned 8.45% over the last 10 years ended 12/31/09, with a standard deviation 4 times lower than emerging markets stocks while acting as a hedge if the dollar weakens. This is very appealing to a worrier.

We’ll continue to live in Worryville and look for opportunities for our clients.

Note: Standard Deviation, Sharpe Ratios are for the 10-year period ending December 31, 2009

Past performance does not guarantee future results