Page 2 of 2
IU.com: What regions or countries are behind the curve in terms of urbanization?
Dent: If you take away oil, the Middle East is largely a third-world region. And most of Africa is still struggling to become more urban. So, they’re more frontier markets now. But our new ETF is only interested in investing in countries clearly on the way up.
IU.com: What is your favorite country on a longer-term basis at this point?
Dent: If I had to pick one country for the next 30 to 40 years, it’d be India. It wouldn’t be China. Their demographics are going to work against them. After 2020, urbanization will come at a slower rate since younger people generally are the ones to move the fastest out of rural areas. China’s policy of one child per family, which started in the early 1970s, will begin to catch up with them between 2015-2020. Someone said China is going to get old before they get rich, and we agree with that. By contrast, India’s demographics won’t peak until about 50 years after those of China.
IU.com: Does the new ETF follow your basic investment process?
Dent: It is simply a momentum model we’ve tracked for years. But it’s different than what we’ve done in the 1980s and 1990s – the methodology we tried to use in the past with some of our separate accounts and the old AIM mutual fund. We were subadviser to that fund and AIM just didn’t listen to us. The fund was supposed to be a blend of our models and those developed by AIM. But when markets crashed in 2000-2002 and our models were very cautious, the AIM models were favored and the fund remained quite more aggressive in stocks than our models preferred. That fund ended up getting merged into another one and we learned a valuable lesson: Joint ventures aren’t the best way to go with fund portfolios. We’ve got well-tested, momentum-based models and it’s either got to be our way or the highway in terms of working with fund portfolios.
IU.com: Is that why you decided to go with an ETF structure?
Dent: The ETF structure is very low-cost compared to similar hedge fund and mutual fund strategies. And they’re more widely available compared to hedge funds and mutual funds. Anybody can add our ETF to their portfolio. And we’ve got control over it and nobody else can tell us how to manage our investment model.
IU.com: Can you explain the process that this model follows?
Dent: This is a quantitative-based model. It looks at the universe of developed and emerging markets. It also includes commodities. So it has latitude to go anywhere. The key is how it decides to pull out of sectors and countries. The advantage of any momentum model is that when things are going well, the model does, too. But, of course, the difficulty is moving out of an area of the market, or back in, when things aren’t going so well. There’s always going to be a lag – you’d have to be a genius to time markets perfectly.
But this ETF’s model isn’t going to act like an actively managed hedge fund or mutual fund. This ETF will be on a monthly rebalancing schedule, so there’s going to be a lag time between shifts. So the key is going to be to get the general trends right. We’re not trying to time exact tops and exact bottoms. The model has some technical factors built into its methodology. But technical analysis isn’t always right. So, it also includes elements of fundamental analysis. We believe this is the best model for a market that’s heading towards an extended winter.