Community Spotlight: Vitaly Veksler

Vitaly Veksler , Beyond Borders Investment Strategies LLC
Global Macro Portfolio Manager, Beyond Borders Investment Strategies, LLC
Vitaly Veksler, CFA is CEO and Portfolio Manager at Beyond Borders Investment Strategies (BBIS). During his career, he has specialized in identifying global and country specific macroeconomic, political, business and valuation trends, and translating these trends into investment selections. At BBIS, he manages equity portfolios built from single-country ETFs of countries where markets trade at significant discounts to their valuation averages.

How would you describe your investment strategy?
Beyond Borders Investment Strategies (BBIS) is a boutique investment firm providing an internationally diversified equity strategy aimed at reducing risk and achieving higher risk-adjusted returns over a medium to long-term time horizon (i.e. 3+ years). We achieve this by cost-efficiently allocating funds to equity markets in developed, emerging, and frontier countries through single-country ETFs. By using the ETFs as portfolio building blocks, we provide our clients with exposure to countries where equity markets trade at low valuations compared to their long-term historical averages, thus, increasing the potential of expected returns. Importantly, the use of ETFs, or fund investments, also allows BBIS to significantly reduce company specific risks related to equities of individual companies in these countries. In our client portfolios, our strategy serves as a complement to domestic portions of these portfolios.

Our investment process is quantimental as it includes both quantitative and fundamental analysis techniques. It is based on decades of experience in the analysis of global and country specific macroeconomic growth, investment valuations, as well as political and regulatory risks gained at both industry and academic settings. These skills were honed over more than a decade at some of the world’s leading asset management firms, such as State Street Research & Management (now BlackRock), Fidelity Management & Research, Batterymarch Financial Management (a Legg Mason company), and BNY Mellon Asset Management.

Our investment process involves the following steps:

• Identification of countries where stock markets trade at low valuations compared to their long-term histories;
• Understanding reasons for these low valuations. Often, these countries go through some political, economic, or social crises. Sometimes, these countries just go through difficult economic times (e.g. low demand for commodities or manufactured goods produced by these countries);
• Identification of potential catalysts that would make these stock market valuations expand to their historical averages;
• Identification of risks to these catalysts and these countries' economic growth; and
• Construction of concentrated portfolios that consist of 10-20 ETFs of countries where markets trade at low valuations and have high expected returns.

What makes your strategies so different versus your peers?
Most of our peers in the international equity space invest through two types of investment vehicles: funds that focus on selecting individual equities or broad-based international indices. We believe that our firm’s use of single-country equity ETFs provides our investors with the advantageous combination of risks and returns versus both of these groups.

Advantages over Stock Pickers: While possible, it is extremely difficult to consistently find the best performing individual equities even in one country, let alone in fifty. Investing in individual equities also brings with it exposure to idiosyncratic risks that the individual companies face. The stock pickers often invest in just several companies per country, which in our view, does not provide investors with an adequate protection against the risk of stock prices of one or several companies falling dramatically, or even going all the way to zero if these companies go bankrupt.

Our strategy gives our investors targeted exposure to countries where stock markets trade at significant discounts to their long-term averages and, therefore, have high expected returns. In addition, our use of ETFs, or funds that have at least 20 equities in them, as portfolio building blocks gives investors better protection against one or several companies going bankrupt.

Advantage versus Broad Based Indices: There are two major problems with getting exposure to the international markets through the broad-based international indices. First, these indices give investors exposure to equity markets of several largest countries but do not give investors adequate exposure to smaller countries. For example, the weight of the top 7 countries in MSCI ACWI ex USA Value Weighted Index, an international index that we compete against, is more than 61% (as of December 31, 2015). This extremely high weight in the largest countries means that an investor would not be able to invest meaningful percentages of his/her international portion of the portfolio in the remaining 41 countries. Their weight within the index is less than 39%, or less than 1% per country on average. The second problem is also related to the high weights of several countries in the indices. When stock markets of some of the countries with the largest weights trade above their historical valuation averages, investors get significant exposure to the markets with low expected returns. Investors cannot do anything to change weights of countries in the indices as only index providers can do it.

At BBIS, we can also allocate much higher weights (up to 10% of our portfolio) to any country ETF depending on such factors as the country market’s expected returns, investment valuations, and ETF’s liquidity. We are also flexible in our country selection and can shift our investments from countries with lower expected returns to the ones that offer higher expected returns.

How would you describe your investment philosophy?
The investment philosophy underlying our “international country value” investment style is based on three major principles:
1. International investing as a way of reducing portfolio risks and increasing its returns;
2. Country selection as a way of getting diversified and flexible exposure to country markets; and
3. Value style of selecting country markets that trade at low valuations and offer high expected returns.

International Investing: International diversification of equity investments decreases portfolio risks while increasing its expected returns. Despite the fact that most investors know this, they still invest a disproportionate percentage of their portfolio in their domestic equities. This phenomenon is known as the home country bias. This bias is dangerous for investor portfolios for two reasons:

• It unnecessarily increases portfolio risks because it does not provide investors’ portfolios with diversification benefits caused by less than perfect correlations among different countries’ equity markets. Put it simply, diversification benefits arise from the fact that when some markets go down, others go up. As a timeless proverb says, “Do not put all your eggs in one basket”. Investing a large portion of one’s liquid assets in domestic stocks is riskier for investors than diversifying one’s investments among assets of many countries. For example, investors’ country might be hit by a political or economic crisis, or even a series of crises, as it happened in 2008 and 2011. During these years, the Global Financial Crisis and the European Sovereign Debt Crisis decimated portfolios of investors in many but not all countries around the world. If an investor allocated some money to the latter, it helped his/her portfolio returns.
• It lowers investors’ potential returns by limiting their investment opportunities to a single market that could underperform for long periods of time. The benefit of international diversification could be demonstrated with the following example. If a US investor put all his/her money in domestic US equities (S&P 500 Equity Index) on the first day of the 21st century, his/her total return profit, which includes price changes and dividend payments, over the first 8.5 years of the period since January 1, 2000 to June 30, 2008 would have been a paltry 0.5%. If the same investor put his/her money in the international value index that serves as our benchmark, MSCI ACWI ex US Value Weighted Index, his/her profit would have been much more impressive (92.8%). Over the next years since June 30, 2008 to June 30, 2016, the situation reversed. If the investor put his/her money in the international index, he/she would have experienced a loss of 0.5%. While the investor in the S&P 500 Index would have earned 95.3% profit. By allocating money to both domestic and international equities, the investor would have assured higher return per unit of risk each year. BBIS’ international strategy serves as a complement to domestic portions of the firm’s client portfolios.

Country Selection: A number of academic and investment industry studies found out that country selection is the most important factor, aside from individual stock selection, in determining performance of stock portfolios in emerging markets. Depending on the time periods, the regions selected and the researchers performing studies, it is also the first or second most important factor along with the industrial sector selection, once again aside from the individual stock selection, in determining performance of stock portfolios in developed countries.

Performance of the Greek stock market could serve as an excellent example demonstrating the importance of the country selection factor. Since the beginning of the sovereign crisis in this country in 2008, performance of all companies in this country’s index, regardless of efficiency of their operations and their management quality, was negatively affected by the debt crisis that the Greek government faced. At the beginning of the crisis, being a part of an industrial sector was a very important factor affecting performance of Greek stocks. Equities of Greek telecommunications and consumer companies, for example, were generally trading in line with stocks of other European telecom and consumer companies. However, as the crisis progressed, correlations of the Greek stocks with equities of other European countries have declined. Trading on the Greek stock exchange became the most important factor determining performance of Greek stocks.

At BBIS, we use both quantitative (i.e. evaluating correlations between a country’s stock market returns and commodity prices) and fundamental (i.e. political risk) analysis techniques to select countries to invest in.

Value Investment Style: A few industry and academic studies also demonstrated that valuations are the most important part of the long-term performance of stock markets. According to a recent study performed by Bank of America Merrill Lynch, stock valuations have historically explained 60-90% of subsequent returns over a 10-year investment horizon. At BBIS, we invest in countries where valuations of stock markets are low as these countries go through crises (e.g. economic, political, geopolitical, social, and legislative). Most of the time market valuations of these countries go back to their historical averages as the crisis pressures subside. This results in higher returns as not only valuations expand but also earnings growth accelerates in the post-crisis environment. Our investment strategies are best suited for institutional investors, family offices, and qualified individual clients who have a need for international equity diversification and long-term investment horizons (3+ years). Unfortunately, country crises do not get resolved overnight. But when they are resolved, investors are usually well compensated for their time.

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