McLean Heuristics

Barron Article

Although our primary concern regarding the tragedies in Japan is for the families affected, we know that events like this impact the markets – which can create concern about your investment portfolio. Therefore, we wanted to provide a quick update on the direct impact of the events in Japan on the investment marketplace and our client portfolios. 

Is DFA making any adjustments as a result of what’s happening in Japan? 

As you know, we use Dimensional Fund Advisors (DFA) as the fund manager for all of our international positions in client portfolios. Dimensional’s investment committee has met, and is monitoring the situation in Japan for potential impact on the portfolios they manage. Aside from the human tragedy, one of DFA’s primary concerns is the impact of the earthquake on the functioning of the local markets. So far, this has not been an issue as the Tokyo Stock Exchange has remained open, and settlement has been uninterrupted. Given the volatility in global markets since the earthquake hit off of the coast of Japan, DFA has reset their market capitalizations and book-to-market breaks as well as country weight targets. 

How much exposure do I have to Japan in my portfolio? 

Speaking of country weightings, we took a close look at our client portfolios to determine the approximate direct exposure to Japanese companies in our clients’ portfolios here at McLean Asset Management. Using the fund weightings of our Traditional and Core Allocations in conjunction with the DFA Funds Country Weights 2010 dated 12/31/2010, we have calculated that Japan comprised approximately 4.1% of the total equity position for these allocations as of 12/31/2010. So, if you had a 60% equity portfolio, your direct exposure to companies in Japan would be about 2.46% (60% of 4.1%). Based on that exposure, and the method used to manage the strategies, we do not believe there is a need to make any changes to the allocation process we follow. Rather, we are confident it is best to leave these market capitalization and book-to-market breaks as well as country weight targets decisions up to DFA as they manage the underlying positions in client portfolios. 

Many investment advisers and analysts have warned against panic in the market to the crisis in Japan. Andrew Beal, director of Asian equities at Henderson Global Investors, warned against making a hasty response to the crisis. He said: “Knee jerk reactions are often the best way to lose a lot of money.” We couldn’t agree more. 

While this is a human tragedy of incalculable proportions, the reality is, the world has not been relying on Japanese growth for the last decade. If history is any guide, the initial market reaction is overly pessimistic. After the first two trading sessions following the earthquake, the Nikkei index was down more than 16%. In the third trading session, Tokyo shares gained back 5.5% of those losses. For comparison, immediately following the September 11^th attacks in the US, markets dropped by about 14% before stabilizing, and ultimately recovering their losses within a relatively short time period. 

Given that investing is a long-term process, and that short-term appearances are deceiving and can lead to speculative decision making, the considered long-term allocations of your equity portfolio should be continued.

It’s nearly impossible to see the images coming out of Japan and not be moved to want to help out in some way. As we did after the Tsunami in 2004, we are currently working with a firm that specializes in establishing “donor advised funds” specifically for situations like this. Details will follow within a few days, but we intend to create a means for McLean clients to donate appreciated securities, which can then be sold by the fund with the proceeds being delivered to specific named charities that will put the money to work to those who need it. Since DFA funds are only available through advisors who are approved by DFA, not all charities will accept DFA funds for donation. By creating a vehicle like this that accepts all DFA funds and other appreciated securities, it opens up the possibility for you to help those in need, while potentially saving significant tax dollars vs. making a cash contribution to a charitable organization. Please stay tuned for more details in the next few days!