Macro Affairs Portfolio – Q3 2018

Detailing the Asset Allocation for the Macro Affairs Portfolio.

Macro Affairs is proud to be introducing the Macro Affairs Portfolio. The goal is to outperform the portfolio benchmark, which is the MSCI All Country World Index (ACWI) – a total world stock market index. Every quarter, the portfolio will be compared to its benchmark and may get an update.

Macro Affairs Portfolio Asset Allocation

Although the benchmark is an all-stock investment portfolio, the Macro Affairs portfolio can invest in all liquid asset classes. These may include stocks, bonds, commodities, (crypto) currencies, arbitrage, or any other liquid asset.

The ACWI benchmark contains small, medium, and large sized companies from developed and emerging markets all over the world. The weight of each company in the index is proportional to the value of the company – and the weight of each country is proportional to the value of that country’s companies. As a result, about 50% of the benchmark is U.S.-based companies, 8% Japan, and 3.6% China. The Macro Affairs Portfolio is different.

Below is an overview of the Macro Affairs Portfolio and a brief explanation of the decisions made.

Macro Affairs Asset Allocation

Currently, the portfolio targets the following asset allocation:Macro Affairs Portfolio Asset Allocation

As you can see, the portfolio is fully invested in value-producing assets, as opposed to commodities like gold or oil. It also doesn’t hold any bonds.

Looking one layer deeper in the chart, you can see that 42.5% is invested in developed markets, 42.5% in emerging markets, and 15% in Real Estate Investment Trusts (REITs). These three allocations are discussed separately below. The implementation of this allocation is done mainly through index tracking ETFs and is detailed in a table at the end.

Developed Markets

The developed markets portion of the portfolio (42.5%) is split equally between the U.S. and Europe. Macro Affairs is unsure about both of these markets.

In the U.S. the current political climate and wealth inequality leads to weaker long-term growth. However, the strong U.S. monetary and capitalist system is a safe heaven of sorts.

While the S&P 500 is the typical stock market benchmark for the U.S., this benchmark is not tax-efficient for (retail) investment from Europe (where Macro Affairs is based) because of dividend taxes. Instead, the U.S. allocation in the portfolio is 1/4 Amazon and 3/4 Berkshire Hathaway – two companies that don’t issue a dividend.

Berkshire is a broadly diversified company that shows very similar performance to the S&P 500, but retains earnings. While Berkshire doesn’t own a lot of tech companies, Amazon is mostly tech and like Berkshire gets a high portion of its earnings from the U.S.

In Europe, there is a monetary system which is unsustainable if there is no major reform – and reform doesn’t seem to be coming. But socio-political problems and wealth inequality are not as big a concern in Europe as they are in the U.S.

In most Europe-wide indexes, the U.K. accounts for about 30% of the index. That is too much for the Macro Affairs portfolio and that is why the U.K. is treated separately from the mainland. Within the Europe allocation, about 15% is put in small and large U.K. companies. The rest of Europe (the mainland) is also evenly split between small and large companies. The idea behind having small European companies in the portfolio is that the European states are lowering their tax rates to attract U.K. businesses and populists across Europe may try to help their smaller, local firms.

Emerging Markets

Map with emerging markets
World Map with Emerging Markets in Green

While emerging markets are only about 12% of the ACWI benchmark, they make up 42.5% of the Macro Affairs portfolio. Currently, the price/earnings ratio of emerging market stocks is a little bit lower than that of developed markets. But emerging markets are growing twice as fast as developed markets. On a GDP weighted basis, emerging markets should already make up 40% of a portfolio, but emerging market companies are small relative to their countries’ GDP. For a full explanation of the large emerging market allocation, see our macro thoughts on investing in emerging markets.

China already is 30% of the MSCI emerging markets index. But Macro Affairs bumps China to 50% of the emerging markets allocation. This is because Macro Affairs sees China is a stable, well-managed, state-capitalist country that invests heavily in foreign and domestic development activities.

Other Emerging Markets make up the remaining 50% of the emerging market allocation. The biggest emerging markets beside China are South Korea, Taiwan, India, and Brazil. Yes, Macro Affairs believes that South Korea is an emerging market.

The emerging markets are bought with an index that includes small, medium, and large sized companies.

REIT

Real Estate Investment Trusts currently have an extremely low price/earnings ratio. Especially in Europe, where REITs have a price/earning of less than 10. This means that even if valuations don’t go up and operations continue as they are, you can expect 10% earnings on investment per year. The reason that European REITs are so cheap is that they have large loans which could become expensive if interest rates rise. But Macro Affairs doesn’t think that interest rates will rise significantly in Europe, or globally for that matter. Another possible reason REITs are cheap (globally, not just in Europe) is that the 2008 financial crisis hit real estate particularly hard and investors may be over-cautious with this sector.

For real estate, as with stocks, the U.K. represents 30% of the Europe-wide REIT index. In the Macro Affairs portfolio, U.K. REIT is limited to 15% and 85% goes to the rest of Europe.

Implementation

The benchmark implementation is done by Deutsche Asset Management’s Xtrackers with the following ETF: MSCI AC World UCITS ETF – ISIN IE00BGHQ0G80 – with a cost of 0.4%. The ETF automatically re-invests dividends.

The Macro Affairs portfolio is implemented as follows:

Asset NameISINAllocation
AmazonUS02313510675%
Berkshire HathawayUS084670702616.25%
MSCI China UCITS ETFLU051469569012.5%
iShares Core MSCI EM IMI UCITS ETFIE00BKM4GZ6630%
Stoxx Europe 600 UCITS ETFLU03284757925.3125%
MSCI Europe Small Cap UCITS ETFLU03222539065.3125%
iShares MSCI EMU UCITS ETFIE00B53QG5625.3125%
iShares MSCI EMU Small Cap UCITS ETFIE00B3VWMM185.3125%
FTSE Developed Europe Real Estate UCITS ETFLU04893376907.5%
FTSE Developed Europe ex UK Real Estate UCITS ETFIE00BP8FKB217.5%

What do you think of this asset allocation? What does your asset allocation look like? Let me know by leaving a comment below!

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