Known for founding the world’s largest hedge fund, the $150 billion Bridgewater Associates, Ray Dalio (Trades, Portfolio) has allocated ever more of its portfolio to emerging markets in the recent quarter as the category sees improvement over the past months.
With the addition of two new emerging market ETFs and sharp increases to his existing ones, he built his cumulative emerging market position to 58.14% of the portfolio the portfolio, reflecting a meaningful increase from 48.94% in the previous quarter.
Dalio boosted his stakes in Vanguard FTSE Emerging Markets (VWO, Financial) by 14.9%, the iShares MSCI Emerging Index Fund (EEM, Financial) by 85.9% and the iShares MSCI Brazil Capped Index Fund (EWZ, Financial) by 10.02%. He started positions in the iShares Core MSCI Emerging Markets (IEMG, Financial) and iShares MSCI South Korea Capped Index Fund (EWY, Financial).
Though higher in priority this year, Bridgewater has invested heavily in emerging markets for around five years. It began around the fourth quarter 2011, when the category jumped from 15.8% of the portfolio to 32.7% and has not gone lower since. It last measured more of the portfolio than its current position in the second quarter 2015, when it was 65.3%.
The bet on emerging markets has not helped returns at Dalio’s biggest strategy, the Pure Alpha fund, which is said to have had an average annual return of 13% since its 1991 inception and a 7.6% annual return in the past five years. In the same stretch, his biggest ETF, Vanguard Emerging Markets, lost 8.4%, and iShares MSCI Emerging Markets fell 8%. Meanwhile, the Standard & Poor’s 500 index conferred an 80% return in a historic bull run.
But a favorable reversal for Dalio may have begun this year, with both ETFs up more than 10% year to date, and the S&P 500 trailing at 8.19%.
Casey Preyss, CFA, partner and portfolio manager at William Blair, said in a post in September that several factors are converging to support emerging market outperformance after their streak of gloom, such as a weakening U.S. dollar, improving corporate fundamentals in developing markets and comparatively attractive valuations.
The Vanguard FTSE Emerging Markets ETF, Dalio’s top holding, has a P/E ratio of 19.1, lower than the 24.19 P/E of the S&P 500. The iShares MSCI Emerging Markets ETF has an even more compelling 11.21 P/E.
More funds are getting behind Dalio’s vision. Emerging markets hedge funds set a record for assets in the third quarter, rising $9.8 billion to $199.66 billion, according to Hedge Fund Research. Investors were drawn by strong gains, with the HFRI Emerging Markets Index up 5.06% in the third quarter and 9.1% year to date through October.
See Ray Dalio's portfolio here. Start a free 7-day trial of Premium Membership to GuruFocus.
