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By Andrew Gogerty | 10-04-2012 11:00 AM

A Closer Look at Foreign ETF Managed Portfolios

Accuvest Global Advisors' David Garff discusses the benefits of using CDS spreads in evaluating country-specific risk, how he looks at country correlations, themes driving non-U.S. equities, and more.

Andrew Gogerty: Hi, this Andy Gogerty at the Morningstar ETF Invest Conference, and we're looking at global equities today with David Garff, the president and CIO of Accuvest Global Advisors. David, thank you for joining me.

David Garff: Thanks for having me.

Gogerty: So, a lot of people--and even in the ETF managed portfolio space--there's this resurgent or this focus on U.S. equities. The S&P is up 10, we have an election, we have financial considerations and constraints in the market, but some of the global markets haven't exactly been a slouch. EFS is up around 10 and so are emerging markets. What are some of the key themes kind of driving non-U.S. equities this year?

David Garff: That’s a good question. A couple of things about the way we think about the world. First of all, we think about it from a country-by-country perspective. So, for example, if you said emerging markets are up 12, well, you might be surprised to know that India is up 25 and Brazil is down 4, right, because they are part of the BRICs. If you look at Europe and said oh, Europe's a disaster. You know, Spain is down 8, Italy is up 3, well, you'd be surprised to know that Germany is up 26 and Belgium is up 34. So there's a great difference from our perspective in terms of what the individual countries are doing, and so that's the way we look at the world.

If you look at the countries that have done well, they have a couple of characteristics. Number one: They have very strong fundamentals. So, earnings growth, sales growth, acceleration are leading indicators. They also have strong momentum. They've done well in the short and intermediate term. So those countries have continued that trend. They tend to have a little bit lower risk profile, so narrowing CDS is an example or currencies that are maybe a little bit less valued or less overvalued, more undervalued. And then the countries that really actually have not performed as well are those countries that were cheaper and so if you looked at them from a factor perspective, you know, value factors really didn't do anything well as momentum has been extremely strong.

Gogerty: How about the factor, you know, you mentioned some of the overarching or macro factors you would look at. You talked about earnings growth. Where does either GDP, or relation of debt to GDP, play in, because obviously the U.S. story is going to be one of the focal points this year especially with an election? But I think a lot of people might be not focused on it because the S&P is up 10 despite all this uncertainty. Where does that GDP debt consideration come into some of the factors and some of the outcomes this year of the different countries?

Garff: We don't look at GDP. Actually, we look at acceleration and deceleration of leading indicators. If you look at a correlation of GDP to performance, it's essentially 0.1 and so--because GDP is a lagging indicator and gets revised, it's not predictive of anything, so that's the first thing. The second thing is on the risk side we are very, very careful about thinking about things like CDS.

So, if you look at the CDS level of a country, it is one of those few numbers that you get that you can compare across countries that really tells you what the world thinks about “risk” in that country and so a country with the CDS like the U.S., which is 25 basis points, and a country like Spain, which has CDS of 350, there is a big difference.

However, Spain has come from 600 basis points to 350 basis points, and so the risk profile there, despite the fact that the CDS is extremely wide, has narrowed considerably and so the world is starting to vote with their money, if you will. So we take those into consideration a lot. The debt aspect of things really gets encapsulated into that number, which is one that’s very important to us.

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