GLOBAL SALON
Leila Heckman, head of international equities at Lebenthal Asset Management, joined us for our monthly Salon to discuss the increased acceptance of global diversification among portfolio managers and the reasons behind her approach to investing.
“International investing, because of the increased ability to mitigate risk and weight countries more accurately, is now a mainstream portfolio strategy,” says Leila Heckman. Heckman is among the most prominent global strategists focusing on emerging and frontier markets. She gives a case in point for the value of diversification beyond a US-only portfolio: Between 1984 and 1993, using MSCI indexes, a completely non-US portfolio would have had an annual return of 21.3% and volatility of 19%. By contrast, an all-US portfolio would have returned 14.8%, but with a far lower volatility of 15.4%. However, by combining a US portfolio with a non-US portfolio (for example 60% US and 40% non-US), one could have increased the return and reduced the risk below that of a 100% US portfolio.
However, Heckman points out that emerging markets are becoming increasingly correlated with global markets, reducing the value of a simple US vs. non-US strategy. To truly diversify a portfolio, one must now be more selective, have greater data and insight and drill down into specific markets and sectors in choosing equities. Diversification is still a great strategy, but it takes increased sophistication to make it effective.
Global Finance: Why were portfolio managers slow to embrace a global portfolio strategy?
Leila Heckman: The correlation between the US markets and international markets was low, but there was greater volatility. And in the 1990s there was the Japan phenomenon: A lot of people were looking at the fact that Japan had disappointing results for most of the 1990s, and saying, “Well Japan’s a big piece of the non-US market, but it hasn’t being doing well for the last couple of years; why bother?”
GF: What changed?
Heckman: [Now] the non-US markets have evolved. Not only are they better regulated and governed, they also offer greater transparency and disclosure. Just as important, there is increased liquidity. Much of the international market at the time resembled the frontier markets of today.
GF: Your approach is based on multiple factors.
Heckman: It focuses on four factors: valuation, growth, risk and sentiment/momentum. Sovereign spreads are one of the investment factors we measure under our risk [assessment]. When sovereign spreads rise, it is a measure of increased riskiness of a market. When they narrow, it is a measure of reduced riskiness. An example would be the widening of the sovereign spreads of the PIIGS [Portugal, Ireland, Italy, Greece, Spain] during the height of the euro credit crisis and their narrowing following Draghi’s speech [of market assurance] in July 2012.
GF: Have the analytical tools that you use changed?
Heckman: Although there is a lot more media coverage of the markets and hedge funds move quickly into and out of countries, regions and sectors, I think the basic drivers of markets (such as valuation and earnings growth) still hold. It goes back to the theme that you have to have an investment perspective longer than a day or month.
GF: So now there is the recognition that international investing lends itself to a long-term strategy.
Heckman: As you go into the 1990s and 2000 and look at the data, if you are measuring month to month you are going to feel it. You really have to look at this on a longer-term basis. Your holding period has to be looked at as more than month-to-month.
