Forum Letters Vol 2 2002

Forum Letters Vol 2 2002 – The US stock market is expensive. Between an aggressive valuation backdrop and inflationary pressures, I suspect the US stock market is looking at a decade of poor real returns. Investors should consider biasing internationally or toward value stocks in the hope of outperforming. Vanguard’s VIGI is an excellent investment vehicle for selecting high-quality, shareholder-friendly, growth international stocks. However, its basic ingredients are highly regarded, leaving me largely neutral on the name today.

I wrote a lot on my blog and in my Seeking Alpha article recently about the unattractive forward returns on the broader US stock market from today’s prices.

Forum Letters Vol 2 2002

This is the short version: I think we are looking at about a decade of more or less flat real returns as the market works its way through current overvaluation along with a background of rising inflation. It will probably look quite similar to the past:

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While much of my personal wealth is typically locked up in buying and holding long-term, passive ETFs, I haven’t eliminated an allocation to broad US market funds like SPY or VTI. Instead, I’m looking hard around to find assets that can reasonably be expected to outperform the US market.

I recently wrote an article about the iShares International Small-Cap Multifactor ETF (ISCF), which is probably one of the most attractive ETFs to invest in today. However, today I wanted to look at another ETF in which I have been an investor for several years, Vanguard International Dividend Appreciation Fund (NASDAQ:VIGI).

VIGI invests in international companies – in developed and emerging markets – that have demonstrated at least 7 years of regular dividend growth. Its portfolio is allocated according to a modified market cap weighting. Functionally, this creates an ex-US, large-cap, global dividend growth ETF.

, the fund invests in emerging market stocks. In this case, this includes significant investments in India, with a weight of almost 13% in the portfolio. It also includes an 8.5% allocation to China, although I think, ironically, that China is much less of an emerging market than indexers perceive. China has evolved. Some investors may consider it risky to include emerging market stocks. At the same time, emerging markets may offer some of the best long-term growth opportunities today – with the cost of volatility along the way – and the Fund’s natural focus on dividend growers is likely to shift towards quality companies. higher in emerging markets.

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, the exclusive selection of companies that have grown their dividends for 7+ years leaves the portfolio invested in a group of high quality companies. There are always exceptions, but most companies that can increase their dividends for a decade tend to be better: having quality balance sheets, being shareholder friendly, and growing predictable cash flows that to have

Therefore, it is the portfolio of high quality international companies. The top 5 holdings are Nestle (OTCPK:NSRGY), Novartis (NVS), Roche (OTCQX:RHHBY), Tencent (OTCPK:TCEHY), and Reliance Industries, each powerhouse in their respective industries.

, because the portfolio follows a “modified” market cap weighting, the ETF is *functionally* a large cap ETF. Although 293 total stocks are held, about 1/3

Of the value locked up in the top 10 holdings. If you don’t find companies like Nestle, Novartis, Roche, Tencent, or Reliance Industries attractive, you might want to look for another ETF, as just these 5 make up almost 20% of the portfolio. The index does, however, cap the weighting of any individual company at 4%, redistributing any excess weighting that would be reflected among the other securities in the index.

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While the ETF is heavily weighted toward large caps, holdings dip into the mid-cap and small-cap arena, with the smallest component weighing about $250 million. The weighted average market cap is $118 billion.

If I could wave a magic wand and make this ETF exactly what I wanted it to be, I would probably weight it equally to capture the small factor premium, which would swallow the cost of higher volatility. However, potential investors may prefer the large-cap weighting.

, the focus on dividend earners has changed the geographical orientation of the Foundation compared to more standard international ETFs.

For example, if we compare VXUS, Vanguard’s International Total Stock ETF, a few things immediately jump off the page. Notably, Switzerland’s allocation in VIGI is 16.1% compared to just 5.3% in VXUS. Again, this goes back to the quality of the companies, as Switzerland has a handful of dividend growth powerhouses such as Nestle, Novartis, and Roche.

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, the fund has $3.6 billion of assets under management and is run by Vanguard, one of the top ETF managers. In other words, you’re unlikely to see this fund liquidate or run into trouble anytime soon.

Furthermore, at 0.2% the expense ratio is quite reasonable, especially for an international ETF with a new strategy. You probably won’t get much better than this.

The core of the strategy as well as my interest in this ETF is based on its focus on dividend growers. Dividend growth is a long-term, permanent investment “factor” that has led to outperformance.

The idea here is that companies that are growing their dividend tend to be quality companies with conservative balance sheets as well as growing cash flow streams from which they are paying these increased dividends. These tend to be companies in more durable and less cyclical industries with more predictable income and revenue streams. While there are always exceptions to general statements, companies that are focused on growing their dividends tend to be companies that are focused on creating long-term shareholder value – and are shareholder-friendly – and less focused on show. Wall Street Dogs and Ponies Quarterly. .

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The returns for dividend growers compared to the wider market are promising in the long run. To illustrate this, I’ve borrowed a chart from a recent Ploutos article that shows the performance of several factors relative to the S&P 500 over various time frames. I feel like I say this in literally every article, but really you need to go to Ploutos profile and click the follow button.

As you can see, the time frame is important here. Dividend growth stocks have failed to outperform the stock market over 1, 3, 5, and 10 years, although they have outperformed over the past 20 years.

I always think that when strategies fall out of favor, they usually mean a return to outperformance. The past decade has also been “atypical” to say the least, and the bubble-like performance of ridiculous S&P 500 stocks like Tesla (TSLA) over the past 12 months has further distorted the data. I expect that our dividend growers – with their strong balance sheets, predictable cash flows, and shareholder-friendly management – will continue to outperform in the future.

Unfortunately, despite VIGI’s many attractive features as described above, today’s valuation is hard for me to swallow.

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The portfolio sports a PE ratio of 26.4 and a PB ratio of 3.8 against earnings growth of 11.3%. Double-digit earnings growth is obviously attractive, but it’s being offered here at a rich price.

Although the PEG ratio is an imperfect measuring stick, VIGI’s PEG ratio of 2.34 suggests that it is overvalued. We can compare the valuation characteristics of VIGI with the aforementioned VXUS (Vanguard Total International Stock ETF) and VOO (Vanguard’s S&P 500 ETF).

As you can see, VIGI doesn’t scream cheap by any measure, and if you blindly follow the PEG ratio, the S&P 500 seems like a better bet.

In an overvalued stock market, you could argue that overpaying for the quality of VIGI’s portfolio isn’t entirely unreasonable… but I think that narrative is a bit too self-serving. In the end, this aggressive valuation leaves me waiting for a better price to add to my VIGI holdings. Rather, I see ISCF as a better opportunity for international investment, as I described before.

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Income oriented investors should note that this is a dividend growth fund, not a dividend yield fund. The current TTM yield is 1.1%. Keep in mind that this fund is designed to capture dividend earners, not high dividend stocks. In addition, the aggressive valuation of the portfolio also applies to this. If we cut the valuation by a third, the yield would suddenly be much closer to 2%.

While some may not be excited about this result, personally, I like that the fund is relatively tax efficient. Second, my thesis behind VIGI investing has much more to do with total return than current income.

Without beating a dead horse, the main risk with VIGI right now is overvaluing its underlying ingredients.

The companies in the portfolio are of extremely high quality. The vast majority of them are still going to be around and still going to be growing in 10-20 years, and

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