This link is to an article, by Mark Hulbert, about a call to invest internationally by Doug Fabian that went against him, writes Roger Nusbaum. According to the article he picked three funds last fall to capture a foreign effect.

Two of them were disclosed in the article; iShares Global 100 (IOO) and Street Tracks DJ Global Titans (DGT). These funds are up 2.2% and 2.6% respectively since the call while the MSCI EAFE index is up 10% in that time.

Other than having heard of Mr. Fabian I don't know anything about him, how much he knows or how good his track record is. He made a call that would either work or not and it so happened this one did not work as he had hoped.

I think there is a chance to learn something by deconstructing his idea.

It is not clear from the article if Fabian was suggesting that his subscribers buy both IOO and DGT but given the tight correlation between the two, buying both would not seem to make sense.

The reason for the correlation is there is a lot of overlap in the top ten holdings and the country weights. The largest country weight is the US with more than 50% for both. In kicking the tires, if an investor wants to capture some sort of foreign effect, does buying a fund with a 50% weight in the US even make sense? Probably not.

I think the biggest problem with his picks is the composition of these two ETFs. Global mega cap stocks, as a group, have struggled badly over the last couple of years and that is what these two ETFs own. I think the reason for the struggle is that this has been the wrong time, historically, for mega caps. This is why I have kept the average cap size of the portfolios I manage below the median S+P cap size which is around $90 billion (this is something I have written about many times throughout the life of this site). The next time that it makes sense to have an average cap size larger than the market I am quite certain that both IOO and DGT will be outperformers.

The two funds have the following in common in their respective top tens; GE, BP*, C, XOM, HBC, JNJ*, MSFT, PFE and VOD. No wonder they have a tight correlation.

* Client holding.

I don't know if Mr. Fabian looked at the composition of these funds or not but I don't think it would have taken a lot of rocket science to avoid these two ETFs by assessing the probable, less than compelling near term prospects for most of the top ten.

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