About the Editor
Samuel Lee is an ETF strategist for Morningstar and editor of Morningstar ETFInvestor, a monthly investment newsletter. Prior to becoming editor, Lee was a fund analyst on Morningstar's passive funds research team, where he covered alternative, dividend, and actively managed ETFs and performed quantitative modeling of ETF strategies.

Lee joined Morningstar in 2008 as a data analyst, where he evaluated ways to measure and improve the firm's data quality.

Lee holds a bachelor's degree in economics, with honors, from Grinnell College.


Investment Strategy
Morningstar ETFInvestor scans the globe for value and improving fundamentals across virtually all asset classes. Editor Samuel Lee draws upon academic and practitioner research — including Morningstar's sizeable bench of stock, bond and fund analysts — to find reliable drivers of outperformance.

Morningstar ETFInvestor features two real-money portfolios.

The ETF Income Portfolio assembles a high-quality collection of income-generating ETFs with the goal of earning 5% in excess of the 30-day T-bill rate over a full business cycle. The portfolio adheres to a benchmark-agnostic strategy in its search for absolute returns.

The ETF Global Asset Allocation Portfolio, on the other hand, is more benchmark sensitive. It seeks undervalued asset classes with improving fundamentals. The strategy seeks to beat the 60/40 MSCI ACWI/Barclays US Aggregate benchmark over a full business cycle, with the least risk possible.

 
 
Oct 25, 2014
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About Editor Editor's Photo
Samuel Lee,
Editor, Morningstar ETFInvestor
Samuel Lee is an ETF strategist for Morningstar and editor of Morningstar ETFInvestor, a monthly investment newsletter. Prior to becoming editor, Lee was a fund analyst on Morningstar's
Featured Posts
Buy the Dip?
The October issue of ETFInvestor came out on Monday. Click here to download it, if you haven’t already.

The CBOE S&P 500 Volatility Index, or the VIX, briefly passed 31 on Wednesday. The VIX measures expected 30-day volatility of the S&P 500 and is derived from options prices. The last time VIX hit over 30 was Dec. 8, 2011. So, yes, recent market action was unusual in a narrow sense. However, bouts of volatility like this one occur every three years or so. Only the greenest investors get shaken out. What worries me is that many investors see recent declines as big buying opportunities. They are not.

Valuations are high. Combine that with negative momentum, and you get a toxic brew. Reflexively buying the dip can exhaust your capacity for risk-taking well before the market bottoms. Think of 2000 to 2003, when the S&P 500 continued to fall as it worked off the excesses of the dot-com bubble. For whatever reason, markets have a tendency to trend for years.

The right response to volatility in a time of high valuations is to exploit relative value while not greatly adding on to risky assets like equities. So rather than dumping bonds to buy stocks, one could sell overpriced U.S. stocks in favor of foreign stocks, and stocks in general in favor of high-yield bonds, which offer competitive returns for less risk. In fact, if you believe in momentum, it’s a good time to trim risk (so long as you’re willing to quickly add it back on when momentum tells you to do so).

The real buying opportunities appear when investors are terrified and the world is going to hell in a handbasket. During such times you will not find it easy to buy more; shoveling money into the abyss does not feel like you’re getting a good deal. Your friends and colleagues (and clients, for you financial advisors out there) will be selling like mad. People will cling to the words of the latest batch of doomsayers who got it right. The media will be uniformly gloomy.

Investors are not terrified yet. Many are sitting on nice gains and feel secure in their jobs.

If you are a young investor, declines are good news. But older investors reliant on their financial assets should not be aggressively buying at these levels. There’s the possibility of a long drop down, with no real valuation backstop.

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As I wrote in February's “The Asset Allocator’s Checklist,” there are three scenarios in which your capital can be truly impaired, defined as a loss from which you’re unlikely to recover for a decade or more. They are: 1) extreme valuations, 2) the unraveling of societal fabric, such as revolution and mass expropriation, and 3) physical devastation from total war or natural calamity. Most recessions and bad times do not even approach the severity of these extreme scenarios. If your gorge is rising, refer to the above scenarios and ask if any are at play. They’re not. Then go back to ignoring the noise.

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My colleague Mike Rawson clued me in on the wonderful new asset-valuation section of Research Affiliates’ website. It is, bar none, the best free valuation source on the Internet, which is to be expected of Rob Arnott and his team. Arnott does valuation right. He focuses on cash flows and grounds his analysis in history—you won’t see new-era thinking from him.

The site offers 10-year real expected return estimates for stock markets around the world, all the major fixed-income markets, currencies, and commodities. Each forecast is decomposed into yield, growth, and valuation components, so you can make adjustments as you see fit.

RA expects low returns for pretty much every asset class. Unsurprisingly, it forecasts emerging-markets equities, bonds, and currencies to offer the highest returns. These views are reflected in PIMCO All Asset All Authority PAUIX and PIMCO All Asset PAAIX.

In the upcoming issue I'll delve into RA’s forecasting methodology.

Best regards,

Samuel Lee
Strategist
Editor, Morningstar ETFInvestor

Portfolio Holdings
Income Portfolio
ETF
YTD Ret %
Price $
5.1
109.4
CASH$
N/A
1.0
2.3
59.6
1.0
62.2
2.1
11.9
-5.6
22.3
11.2
31.9
-0.8
38.3
5.7
23.1
Global Asset Allocation Portfolio
ETF
YTD Ret %
Price $
4.5
109.4
CASH$
N/A
1.0
2.3
59.6
-1.8
22.3
7.4
31.9
-0.8
38.3
-7.4
38.6
1.6
77.1
5.7
23.1
Most Popular ETFs
ETF Name
YTD Rtn %
3 Yr Rtn %
Trading Vol.
NASDAQ 100 Trust Shares
-10.76
1.45
125,000,944
SPDRs
-3.64
2.68
87,466,496
Semiconductor HOLDRs
-6.23
-11.66
26,838,700
iShares MSCI Japan Index
-6.59
7.18
17,256,500
iShares Russell 2000 Index
-7.46
6.43
16,210,700
Energy Select Sector SPDR
15.88
15.50
14,900,000
Financial Select Sector SPDR
-8.42
2.61
11,612,800
DIAMONDS Trust, Series 1
-3.75
2.21
7,350,600
Utilities Select Sector SPDR
6.84
6.82
3,848,200
Materials Select Sector SPDR
-4.31
8.50
2,179,300
 
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