Consuelo Mack-WealthTrack - September 24, 2010
CONSUELO MACK: This week on WealthTrack’s Great Investor series, balancing risk and reward in an unsettled world. BlackRock’s Global Allocation Fund master Dennis Stattman has delivered better returns with less risk than the market for more than 20 years. We’ll find out how he is doing it now on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. We live in an unsettled and unsettling world where the traditional economic “rules” are being turned upside down, and a new world order is emerging with significant implications for investors. Whereas the financial crises of yesteryear occurred in developing markets- the Mexican peso devaluation in 1994, the Thai baht implosion in 1997, and the Russian debt crisis in 1998- today’s financial blowups are originating in advanced economies- the bursting of the credit bubble originating in the U.S. in 2007 and 2008, and this year the Eurozone’s government debt problems.
Well, debt is another area where the old order is being shaken up. Several major emerging markets are now in better financial shape than some of the biggest advanced economies, including the U.S. Case in point, government debt as a percentage of gross domestic product or GDP. China’s debt is 16% of its economic output and Brazil’s is 39%. Compare that to Japan, where government debt is 196% of GDP, and the U.S., where it has reached 71%. Incidentally, in Greece, the epicenter of the Eurozone crisis, government debt is 101% of GDP.
Then there is the new world order of where growth is coming from. There is no question that the new kids on the block are running faster and packing more punch than the old timers. By recent estimates, emerging economies now provide 55.3% of global growth. China is the biggest single contributor, accounting for 15.5%, trailed by the U.S at 13.4%. Then comes Brazil at 7.4%, followed by the U.K.’s 4.7% and Japan’s 4.2%.
Now, history tells us that money flows to where the growth is. However, global stock market values do not yet reflect the new reality. The U.S. still has by far the largest, most liquid market in the world, accounting for 43% of the world’s global stock market capitalization, followed by Europe, the U.K. and Japan. Emerging markets account for less than 13% of the world’s equity value.
How long can this discrepancy last and what does it mean for your investments? This week’s “Great Investor” interview is with Dennis Stattman, the founding portfolio manager of BlackRock’s Global Allocation Fund (MDLOX), which he has overseen for 21 years. Stattman was a finalist for Morningstar’s International Fund Manager of the Decade award, delivering annualized returns of nearly 9% in the last decade with less risk than the markets. His mantra from the beginning has been go global, and he has, typically investing in over 700 securities worldwide, including stocks, bonds, cash, and some alternative investments and even shorting on occasion. I asked Stattman why he believes thinking globally is even more important for investors now.
DENNIS STATTMAN: Well, because, that’s where the growth is. That’s where the new production is. That’s where the new factories are. That’s where the savings is. That’s where the investment and infrastructure is. The world economy outside the United States is growing far more rapidly than it is inside the United States, and that growth is especially concentrated in emerging economies and especially in Asia. So it’s a matter of growth. It’s a matter of savings and investment.
CONSUELO MACK: As a global manager, which you are, you think that we as individual investors should have much more global exposure, as well. Does that mean that we should essentially abandon our own market, or how do you decide how one should allocate among all of the different global choices that we have?
DENNIS STATTMAN: Well, the good news is global still includes the United States of America.
CONSUELO MACK: Thank you. Great.
DENNIS STATTMAN: And we have a great economy. We have a big economy, a flexible economy, and one that has found a way over and over again to innovate. We also have some issues, and included in those issues are the fact that we consume more than we produce. We’ve built up a lot of debt in the process of doing so. We’re not saving enough money. And we will need to make some adjustments that will probably hamper the growth in our standard of living.
At the same time, outside the United States, some of the opposite trends are in effect. And so what I would suggest is rather than ignoring any particular area of the world, we should open our minds to as broad a range of possible investments as we can.
