The global equity markets started the third quarter off with a strong rally that erased the Brexit weakness and lifted many indexes to 52-week highs by early September. The markets have spent the back half of September attempting to consolidate those gains amongst a steady diet of news, from Brexit fallout to the Bank of Japan’s monetary initiatives to the concern over Deutsche Bank's (NYSE:DB) balance sheet. Cumberland’s International strategy exercises flexibility as to both allocation by market-cap size and the developed vs. emerging market ratio. The strategy analyzes fiscal and interest rate policy and complements that research with trading analytics to determine portfolio risk/reward levels and valuations. From a valuation standpoint, the broad international markets are historically cheap on a GDP basis compared to the US stock market. The third quarter saw a continued increase in our emerging-market allocation and a steady position in Japan, which is our largest individual weighting. Current allocations and brief thoughts are provided for your review. Please don’t hesitate to contact us with any comments or questions.
Developed Markets: (60%) Our developed exposure is dominated by our Japan allocation, which had a very solid move in Q3. We own both a currency-hedged ETF (WisdomTree Japan Hedged Equity (NYSE:DXJ)) and a non-hedged ETF (iShares MSCI Japan (NYSE:EWJ)). We have been hampered by the currency hedge, as the yen has remained strong vs. the dollar regardless of the wishes and plans of the BOJ. Although the position traded well through the back half of the quarter, we will continue to analyze the currency situation closely. The portfolio also owns a currency-hedged Europe security (WisdomTree Europe Hedged Equity (NYSE:HEDJ)) that has traded well with the euro/dollar ratio being fairly flat. Australia (iShares MSCI Australia (NYSE:EWA)) is a market in which we have increased our exposure, and we continue to be pleased with its performance. It is also worth noting that we have a respectable (18%) portfolio allocation toward small-cap (iShares MSCI EAFE Small-Cap (NASDAQ:SCZ), WisdomTree Europe SmallCap Dividend (NYSE:DFE)) in the developed-market space and continue to see strong relative performance from that group.
Emerging Markets: (32%) After a disastrous three-year run from 2013–2015, the emerging-market sector has strengthened and in many cases outperformed the developed markets YTD. Due to the volatility that historically accompanies this space, we tend to be very wary of entry/exit points and respect the drawdowns that can occur. Emerging markets have a history of peaks and valleys, and holding periods can vary depending on cycle strength. Much of our allocation consists of broad exposure on a regional basis. The largest current holding focuses on Asia (iShares MSCI All Country Asia ex Japan (NASDAQ:AAXJ)) and gives us exposure to Hong Kong, South Korea, Taiwan, China, and India among others. We also garner further global exposure through our Vanguard FTSE Emerging Markets (NYSE:VWO) and iShares Edge MSCI Minimum Volatility Emerging Markets (NYSE:EEMV). We have rounded out our emerging-market allocation with smaller weightings in iShares Latin America 40 (NYSE:ILF) and WisdomTree India Earnings (NYSE:EPI), both of which we can add to on a pullback.
Cash: (8%) The strategy currently has an 8% cash position. Although cash can act as a cushion during downside volatility, the lack of yield is a drawback. We are comfortable with the current position and will continue to attempt to identify strong risk/reward opportunities.