Why Ray Dalio Has 60% of His Portfolio in Emerging Market ETFs

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Jun 30, 2015
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Ray Dalio (Trades, Portfolio) is the founder of the largest hedge fund on the planet, Bridgewater Associates. With over $160 billion in assets under management, his investment company has some of the best performance statistics of any manager over the long term. His Pure Alpha Fund (the largest) has lost money only three times in 20 years, producing a near 20% annual compound return before fees.

While you need an initial investment of $100 million and at least $5 billion in total investable assets to buy into his funds, individual investors can glean some of Dalio’s best ideas from his SEC filings every quarter. Two major holdings stick out.

According to his latest filings on March 31, 2015, Bridgewater has 36% of its investments in the Vanguard MSCI Emerging Markets ETF (VWO) and another 24% in iShares MSCI Emerging Markets Index ETF (EEM). This means that a combined 60% of the guru’s investment portfolio is in emerging market ETFs.

The bet isn’t new or short term, either. One year ago, his portfolio reported having 58.4% in the two funds, two years ago 58.7%, and three ago 35.3%. So the bet has been ongoing and actually nearly doubled over the last three years to comprise nearly two-thirds of his entire portfolio.



The basic pitch of emerging market ETFs is one of rapid industrialization, favorable demographics and growing consumerism. While these are still massive tailwinds, it looks like Dalio is simply playing a mean to reversion. Looking at the performance of emerging markets, it's clear that Dalio is making a contrarian bet. Despite spending the earlier part of the century consistently near the top of performance charts, emerging market funds (shown as “EME” in the chart below) have spent three of the past four years severely lagging nearly every other investment category.


Over the past five years, both the EEM and VWO funds have returned more than 100% less than the S&P 500 Index (SPY). It’s no wonder that current investor sentiment surrounding emerging markets is so low.

A survey last year of 700 pension plans, sovereign wealth funds, consultants, asset managers and fund distributors in 30 countries, with combined assets of $29.7 trillion, found that sentiment towards emerging markets is near all-time lows.

"About 59% of respondents are now either deserters from the developing world (saying “time to get out”), cynics (“just another fad”) or skeptics (“I remain to be convinced”). This is up from 39% in 2012. The believers have virtually halved, to just 20%. Emerging markets account for more than 80% of the world’s population, more than 70% of its land mass and foreign exchange reserves, and half its economic output, yet only 15% of global equity market capitalization."


This massive underperformance is a large contributor to

Jeremy Grantham (Trades, Portfolio)’s firm (Grantham Mayo van Otterloo) believing emerging markets will be one of the only asset classes over the next seven years to experience positive real returns. Using statistical analysis and mean reversion techniques, they believe that emerging markets are the best bet for any return on investment over the medium to long-term. Below is their latest seven-year forecast.


The valuation of emerging market funds is understandably low. Despite spending most of the previous decade at sky-high multiples due to high growth rates, emerging market funds now trade at a discount to domestic markets. While the S&P 500 trades at 20 times earnings, Vanguard’s emerging market ETF only trades at 14 times. With a current yield of 2.61%, this emerging market ETF also beats the S&P 500’s meager 1.87% dividend. In previous decades, this would be a rare occurence.


It’s no wonder one of the most successful investors of our time has over half of his assets invested in two low-cost emerging market ETFs. After a long period of underperformance, emerging markets are clearly out of favor. However, investors now get a rare chance to buy these funds at a 30% discount to domestic ETFs such as the SPY on a P/E basis. With a higher dividend yield as well, it looks best to follow the smart money.

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