We all know it’s important to diversify our investments. But, says Vitaly Veksler, founder and CEO of Beyond Borders Investment Strategies, most people don’t have enough exposure – if any – to overseas markets.
It might seem counterintuitive, but having 40% to 50% of your portfolio in overseas markets actually minimizes the volatility of your portfolio.
Vitaly explains how you can experience significant returns if you put your money into frontier, emerging, and even developed markets around the world. There are dozens of places to potentially invest, but Vitaly shares the systematic approach he uses to determine the best places to invest and when… and how to mitigate risk.
He also shares…
- The best places to invest in times of economic crisis
- Why you shouldn’t buy individual stocks overseas and the investment vehicle you should use instead
- Differentiating between long-term and short-term obstacles to your gains
- A systematic approach for accounting for unknown unknowns in your portfolio
- And more
Mentioned in This Episode: www.bbistrategies.com
Jay Sparks: Hello, this is Jay Sparks, your host of Finding Unique Value, where I interview business owners that have found unique value in their business or industry that others have not yet seen or explored. I’m excited to be joined today by Vitaly Veksler, who’s the founder of a registered investment advisory firm based in Massachusetts called Beyond Borders Investment Strategies. If you’ve ever wanted to invest some of your assets outside of the US and wanted an economical way to do it that incorporates both fundamental analysis and quantitative analysis, Vitaly calls this quantimental, his is the only firm that I’m aware of that uses this sort of very unique strategy. On top of this unique strategy, he’s also spent time at some very large well known institutions such as Fidelity Investments, State Street Global. He is a chartered financial analyst and he holds an MBA from MIT. It’s with great pleasure that I introduce you to Vitaly. Vitaly, welcome to the podcast. It’s great to be speaking with you today.
Vitaly Veksler: Thank you so much Jay. It’s a true pleasure to be speaking to you. I enjoyed listening to your podcast and it’s a great pleasure to join you.
Jay Sparks: Great, great. Well, could you take a minute, and I only touched the very surface of your background, but could you just take a minute and just let us know a little bit about yourself, what you’re currently doing, where you came from, and we’ll go from there.
Vitaly Veksler: Yeah, perfect. Thank you. I am CEO and Portfolio Manager at Beyond Borders Investment Strategies, a company that I founded in 2014. Beyond Borders is a boutique investment management firm that provides investors with internationally diversified equity strategies aimed at the decreasing risks and increasing risk adjusted returns over a market cycle, usually three to five years. We do it by cost efficiently allocating funds to single country equity ETFs of emerging frontier and developed markets that are usually trading at large discounts to their long-term average valuation levels. It often happens during or after these countries went through significant crisis or just had a difficult economic time, difficult, for example, they went through a period of low demand for their exports.
Jay Sparks: No, that’s impressive. You’re right in the middle of a lot of places that are overlooked, right?
Vitaly Veksler: Exactly.
Jay Sparks: Because people are looking at the shiny growth tech companies and in this low interest rate environment, there are certainly many opportunities outside of our borders. I think that’s really incredible. Would you want to go over just a little bit about the particular problems that you’re trying to solve for your investors? Because with this strategy, there are a lot of things that you can do, but what are the typical types of things that you want to do for the people that you serve?
Vitaly Veksler: We are trying to help our investors alleviate their home country bias. Maybe you are familiar with this. It’s a tendency of investors to invest in local stocks and bonds, something that they are familiar with. The reason home country bias can be a problem is that it increases riskiness of a portfolio and potentially decreases its returns. Let me explain this. According to a recent white paper from Vanguard, adding from 40 to 50% of international stocks to a US stock portfolio minimizes volatility of the total portfolio. It makes sense because the US stock market is around 50 to 55%, depending on the year when you measure this. Even though the US market is the least volatile, adding international markets to it reduces the overall volatility of the portfolio because markets go up and down at different times, so we get benefits of diversification.
Jay Sparks: Very interesting. Yeah, because that’s a little counterintuitive, right? You would think that if you’re investing in a company, if you’re a US investor and you’re investing in a company outside of our borders, that you would be increasing your risk because you’re investing in an area that most likely does not have the same level of information that we’re required to provide here in this country. Is that something that you’re able to overcome through your selection or through diversification, or how does that work?
Vitaly Veksler: Yeah, usually it happens due to diversification. You probably, when you look at different markets, you can see that some of them go up and some of them go down, right? That’s exactly what we’re trying to help our investors with, to reduce the volatility of the overall portfolio. Second, our second important goal in alleviating home country bias is to help investors earn higher returns. We believe that … Actually, I know this. We measured that since the beginning of the 21st century, international markets outperformed US market in 53% of the time. We measured it on year over year basis and on month over month basis. It makes sense. We measured international markets by the performance of MSCI all country world index, equally weighted. In many cases, international markets outperform US market during non-crisis times. When the situation is good, they rally better, they rally stronger than the US market. During crisis, US market is a better bet as people go back to safe haven currency and safe haven stock markets.
Jay Sparks: Sure.
Vitaly Veksler: That’s how it works and that’s what we’re trying. Our strategies are a complement for investors’ exposure. Most people have very good exposure to the US market. According to, once again, to this report from Vanguard, an average US investor has 75% of his or her money allocated to US instruments, or specifically stocks. In the equity portion of their portfolio, 75% are allocated to the US stocks, while the US market capitalization is only 50%. We’re trying to help investors to have a slightly higher exposure to international and emerging market stocks.
Jay Sparks: That’s interesting. You’ve obviously done your research on doing back testing. That’s certainly important. Now going forward, that’s all that anyone really should care about, right? That’s what happened in the past. How do we know what’s going to be repeated? It’s not always a clear indication, because things change. For instance, the interest rate environment is very different than it was 20 years ago. It’s hard to use some of the same data.
If you are, you’re probably going make the wrong decisions. It sounds like you’re taking this into account. Now how do you … You’re doing good at measuring the risk, which I think a lot of Wall Street does a good job on. What you also do, which I think most people do not even consider, is I think you use a different term, but we just call it uncertainty, things that haven’t happened yet but could and then try to put some sort of probability on that. That’s extremely important because if you don’t do that, you’re going to have a very nasty surprise. That’s typically why the average US investor, if their investment vehicles are averaging 7, 8, 9%, which is typical, they’re averaging 4, 5, 6% because they’re typically adding money at the top and taking money out at the bottom because they’re getting nervous and listening to the media. How do you … On an international sense, it’s even more tricky because each country and region is very different. How do you account for that uncertainty and how do you try to mitigate that?
Vitaly Veksler: What we are trying to do is the most important indicator for us, it’s low valuation. We look at the whole universe. There are 49 countries including the US that have single country ETF associated with their markets. We look at all markets and we try to find the ones that have lowest valuations and then we calculate expected returns and see which countries have maybe a combination of lowest valuations and highest expected returns. Then we try to figure out what’s wrong with this country, especially the ones with low valuations, what caused their markets to go down. We use our quantimental process, which is half quantitative, which gives us breadth of coverage. After we manage the tool throughout several countries, we go in depth and analyze them in depth and try to figure out what’s wrong with their markets.
Maybe it’s political, their political issues. Maybe there is lack of demand for their products. Maybe something else happened with this country. If we cannot identify specific risks, we understand that political risks are understandable and acceptable, we understand the nature of the crisis and we can forecast what potential catalysts for stock market valuation improvement exists there. In this case, we start a position in this country, investment position in this country. We understand we will never know everything about the country and that any investor may be surprised, especially in the immersion market world, but in developed countries as well. In order to mitigate this, we never have our positions exceed 10% of our portfolio. This is very important. You don’t want a crisis or a bad surprise really surprise you.
Jay Sparks: Sure.
Vitaly Veksler: You want to live to fight another day.
Jay Sparks: Yes.
Vitaly Veksler: For most countries, we have a limit of 10% that’s for developed and emerging markets, but for more volatile emerging and frontier markets, our limit is 5%.
Jay Sparks: Okay. No, that’s great. Fees are a big issue, because fees compound just like returns do. I understand why you use ETFs, because they tend to be less costly, but not necessarily, particularly if you’re looking in the markets that you’re looking at, because they’re very labor intensive. I’m sure some of these may have some larger fees. How do you look at that and do you use similar fund families? Are there many different types of firms that you use? How does that process work?
Vitaly Veksler: There are several fund families that we use. The most dominant fund family is iShares by BlackRock. They have more ETFs for more countries, but then there is Global X and VanEck families. They cover some smaller markets. Recently, Franklin Templeton entered the field at the end of 2017 and they started offering their ETFs for a number of countries. I think they cover 21 different countries and they have a significantly lower fees. I think for an emerging ETF, emerging market ETF, their fee is 19 basis points. For a developed ETF, it’s nine basis points. As you can see … Previously the average fee was around 60 basis points or from 45 to 60 basis points for different ETFs. As you can see, they cut the fee structure dramatically. We try to be a low cost provider for our clients. We charge also relatively small fees on the top of this.
Jay Sparks: No, that’s incredible. All in, you’re still charging significantly less than the typical registered investment advisory firm that’s using a US based asset allocation model. You’re charging less. You’re providing a potentially greater return and less risk. That’s a great combination. Do you have any examples that you could share of any of the past investments? Because this all sounds great in theory, but I think a concrete example really helps us understand exactly how this can benefit us. I’m sure you have a few.
Vitaly Veksler: Let me talk a little bit about one of the very first investments that we made at the very beginning of 2014. It was an investment in a Brazilian ETF. We used iShares’ MSCI Brazil cap ETF. For those who are interested in this in particular, it’s EWZ. We invested on the first day of trading when we started building our portfolios. It was January 2nd of 2014. I remember talking to some of my colleagues about this investment. When I would mention that I just started the firm and I invested in a Brazilian ETF, their eyes would glaze over and one of them verbalized it. One of the colleagues said, “You seem like a nice guy, but why would you invest in a Brazilian ETF?”
The reason was this. At the time Brazil was going through a perfect storm. They had problems in their business area, in their political area, and on the top of this, they have Zika virus that prevented many people, many tourists, from going to the country.
Jay Sparks: Sure.
Vitaly Veksler: Maybe you remember, in 2014 Brazilian economy was shrinking. Dilma Rousseff just barely managed to win her reelection campaign, but she was involved in a scandal, actually several scandals that finally reached out and led to her impeachment and her removal from power. The people didn’t invest in Brazil because the sentiment was horrible. People were not sure whether Dilma would continue leading the country. There was very little confidence. What it all led to were very, very low valuations.
Jay Sparks: Sure.
Vitaly Veksler: We started our positions when valuations were cheap and then they went from cheap to dirt cheap.
Jay Sparks: The story hasn’t changed and that’s a screaming buy signal, but as you know, it’s incredibly difficult to help the typical investor understand that. Were you able to help your investors see that it was a better bargain and therefore if they had additional money they should continue to add? Was that something you were able to do?
Vitaly Veksler: Yes. I tried to explain to people. At the time our favorite valuation measure, global market cap divided by GDP, it was blinking green for us. It was showing at the time, Brazilian ETF was trading at the level which was one standard deviation below the average, which means that in 84% of the time, it trades at higher valuations. If you take a position, if you invest in something, it’s a good time to invest.
Jay Sparks: Sure.
Vitaly Veksler: We did this. It was interesting that I wrote at the time that anything, any developments in the political sphere that could impact the path of the country would result in the probably in higher returns. What happened was it was the announcement that the impeachment proceeding against President Rousseff was fired. It became this major catalyst for the stock, for the Brazilian market overall. That’s how we … In 2016, Brazilian market became the best performing market. It’s main index, BOVESPA, increased by 64.5% and MSCI Brazil rose by 67%.
Jay Sparks: Wow, that’s incredible.
Vitaly Veksler: We were adding to our position, we started … It’s very difficult to invest at the very bottom of the market, as you probably know.
Jay Sparks: Sure.
Vitaly Veksler: We were building our position patiently in 2014, 2015. The market was declining. We were taking small positions, but when we saw that momentum change, we added to our position and it worked out for us.
Jay Sparks: No and yeah.
Vitaly Veksler: Jay, one of the reasons for starting this firm was I had an experience before with investing in individual stocks. It was a negative experience. We lost a lot of money in immersion markets when I worked for bigger firms. What was interesting that at the time as I was working with these ETFs, I was also reading about another situation when a corporate investor, Mitsubishi Heavy Industries, invested in an individual stock of a company that they knew extremely well and they thought probably that they cannot lose money. It was a stock of a ship builder whose main client, I think the only client, was Petróleo Brasileiro, which is Petrobras, a company that is owned mainly by Brazilian state. This company went out of business. Why? Because of the scandal that finally claimed Dilma Rousseff presidency, it got Petrobras in this … It was one of the scandal. It was later described in the Operation Car Wash.
What happened was the top management of Petrobras was involved in taking bribes from construction firms. They had nothing to do with this company, but what happened, Petrobras was not able to buy any more ships from them. As a result, Mitsubishi Heavy Industries and their partners had to lose. They lost their 300 million investments in 2016, roughly at the same time. For us, it worked out because we invested in a diversified ETF, a Brazilian ETF, but they were hit in this case by something described that was popularized by Donald Rumsfeld, by the concept of unknown unknowns.
Jay Sparks: Yes.
Vitaly Veksler: Something that keep, even though Mitsubishi Heavy Industries were working with them, they knew the company from inside and out much better than any outside investors, that investors would have been able to learn.
Jay Sparks: Sure, sure.
Vitaly Veksler: But Mitsubishi, nevertheless, lost money because of this scandal that they could not predict.
Jay Sparks: Even if they did, it would be very difficult to predict all those chains of events too.
Vitaly Veksler: Exactly right.
Jay Sparks: The way that you manage that is by not using individual securities but using the ETFs, but not using over-diversified ETFs, which is a mistake that some people make in this country. If you don’t know what you’re doing, then certainly buy a piece of everything, but if you’re trying to grow real wealth, it’s very difficult to do that because all 500 companies in the S&P 500 are not going to go up a dramatic amount over time. You’re going to own a lot of things that aren’t growing either. That’s how you are able to overcome the over-diversification issue. The other issue that I think comes up a lot is kind of the buy and hold mentality. You need to know when to … You don’t want to be timing necessarily, right? As you said, it’s hard to pick the bottom or the top, and certainly both, which is really what you need to do if you’re a good timer. I don’t know anybody in the investment industry that has ever been a good timer for any reasonable amount of time, right? They just don’t exist. It can’t be done. There’s too many things.
Your example with Mitsubishi is a good example. Those types of things happen all the time, but you can potentially see these trends, right? When certain things hit certain probabilities, it makes a lot of sense. It seems that you’re not, and correct me if I’m wrong, you’re not a buy and hold investor. You’re looking for opportunities and when things change, you change. How do you strike that balance to, for instance, if you get into something that maybe isn’t moving the way you thought, would you maybe leave and kind of take your losses or do you wait? I mean, how does that work in your firm?
Vitaly Veksler: We would leave if things, if our thesis becomes obsolete, if something happened and our story turned out to be incorrect. We would wait if everything is playing out and we’re not losing, let’s say, more than that, 10, 15%. We have this floor. We would start leaving if we lose a significant amount of money, just for the risk management standpoint.
Jay Sparks: Sure. Now if the data hadn’t changed, but it was basically fear-based or could be a political event or even a natural event, that can drive things sometimes in the short term, would you still use that 10, 15% stop loss, if you will, or would you actually add at that point? Because that would be movement that’s most likely driven by emotion, which is something that someone disciplined like yourself can capitalize on.
Vitaly Veksler: We would try to assess what’s happening in this situation. If we see that it’s a temporary event, more likely something that may I go away, we could add to our position. It’s very important. We would not necessarily … Sometimes it all depends on whether this disruption that caused the stock price is long term in nature or short term. For example, if a country imposes capital controls, it’s a long term impediment.
Jay Sparks: Sure.
Vitaly Veksler: We know that they would not change their strategy for, let’s say, for a year or two years, maybe three years. Who knows? It’s a long term. We would leave the country. We would sell our investment and just leave. If it’s a shorter term, as you said, maybe it’s an environmental issue or maybe kind of it’s a shorter term scandal or mini scandal, we would stay in this country. We would maybe even add, as you correctly pointed out, we would add to our position.
Jay Sparks: Yeah, no, and that’s probably one of the most valuable things you would do for anybody that you chose to work with, because that’s incredibly difficult to do for the laymen or even someone that knows something about investing because all the information that you’re getting in the media will tell you to do otherwise, right? That’s why most people aren’t able to generate wealth by themselves, even though they’re smart and they have common sense. It’s still a very emotional thing. I really like the quantimental approach. I’ve never heard it phrased quite that way before because many times people don’t want to make a decision so they just try to do a little bit of everything. That, as you know, doesn’t work. You do have to have some discipline and a point of view or you’re not going to be able to take advantage of these true dislocations.
Well, I’m really fascinated by this strategy Vitaly, because you found a way to not over-diversify. You found a way to invest outside of the United States. You found a way to do this in a way that lowers fees. You’ve also found a way to try to get away from the timing aspect of it that so many people try to do. Then on top of that you are trying to, as you brought out Rumsfeld’s unknown unknowns, you try to account for that in some way too, which is really amazing because I don’t know of anyone that has a systematized way of doing all of that. That is really impressive.
If somebody is listening to this and they really want to learn more, what is the best way for them to get in touch with you?
Vitaly Veksler: I have my email or they can go to my website. My company’s website is www.BBIStrategies.com. They can find all the information. There is also my … There is an option to send a message to the company’s email and I will receive it and I will respond.
Jay Sparks: Okay, great. Great. Well again, I appreciate your time Vitaly and I’ve thoroughly enjoyed this really fascinating conversation. Thank you for opening up a little bit about what you do. This tends to be a very secretive industry, but I love the fact that you’re open to sharing what you find and how you find value and how you create value and more importantly, increase value for people over time, which is really incredible. We know now how to reach out to you if we do have any further questions. For everyone else, thank you again for listening to Finding Unique Value and we look forward to next time. Thank you.