Greece and China Flag

Exposure to Greece and China in Perspective

Greece and China Flag

Many of our clients have been concerned about the issues involving Greece. Likewise, the growth in China (the world’s second largest economy) has begun to slow causing concern for investors about what the future holds from one of the biggest contributors to the global economy. We believe most of the “hype” has been due to the financial media since their job is to sell stories instead of advice, so we felt compelled to help put things in perspective and provide our clients some solace.

To start, it is important to note that the overall size of the Greek economy is approximately half of the entire state of Ohio[i]. In terms of overall market capitalization, Greece makes up 0.03% of the MSCI All Country World Index as of the end of June 2015. If Greece happened be wiped off the face of the Earth, we could imagine their would be significant short-term volatility, but minimal permanent loss of investment value.

Within our actual IFA Index Portfolios, our investors hold 33 individual stocks based out of Greece as of the end of April, making up less than 0.05% of the overall portfolio equity exposure. Just to give this some context, our clients have approximately the same exposure to Conoco Phillips (TICKER: COP) by itself. For an investor who is in an IFA Index Portfolio 50, your approximate exposure to Greece is approximately, 0.03%.

Here is a good summary by Anil Kashyap from the University of Chicago, Booth School of Business on how Greece got to where it is today as well as some answers to some very pertinent questions that many investors have been asking.

In terms of China, our investors currently hold 463 individual stocks based out of China as of the end of April, making up 2.30% of the equity allocation within our IFA Index Portfolios. For an investor who is in an IFA Index Portfolio 50, they have approximately 1.15% of their entire assets invested in Chinese based companies. This is the greatest benefit of being globally diversified. Although there may be times when certain countries are underperforming the rest of the world, there is minimal impact on the overall portfolio.

Below is a table that gives the approximate percent allocation to both Greece and China combined in our IFA Index Portfolios.

What might be even more interesting to our investors is how we gain exposure to China within our IFA Index Portfolios. As reported from Dimensional Fund Advisors (DFA), we gain our equity exposure to China through the Hong Kong exchange, also known as H-shares. The large drop in Chinese shares that occurred in June came from mainland China on the Shanghai and Shenzen exchanges, also known as A-shares. Companies can be listed on multiple exchanges around the world and thus have different shares. The reason why DFA decides to buy H-shares instead of A-shares has to do with the restrictions placed on foreign institutions from these exchanges. Most of the restrictions have to do with the ability to access the invested funds at any given time. This as you may realize is a huge issue for open-ended mutual fund strategies, especially those that are rules-based like that of DFA.

Here are some characteristics of companies that have both A-shares and H-shares as of the end of March 2015:

  • Approximately 100 firms have both types of shares
  • These firms make up approximately 30% of the total market capitalization of firms with A-Shares
  • 70% of the entire A-share market is not accessible through H-shares

There can be significant performance differences between the two types of shares, which is why many investors may be confused when comparing their portfolio performance to what they see on the news. For example, in 2014 the MSCI China Standard Index (H-shares) returned 8.3% versus 46.9% for the MSCI China A-Standard Index. In 6 out of the last 14 years, there have been return differences in excess of 20% between the two indexes.

DFA is continuously looking to further diversify their investors in markets around the world, but they are also considering the risks involved in entering those markets. For now, gaining access to the A-share market involves extensive restrictions placed on them as an investment company and are therefore not currently entering that marketplace.

All things considered, investors have very little to worry about when it comes to the current rumblings going on around the world. While they make for interesting news stories, they have minimal overall impact on the value of your portfolio.


[i] Parker, Jim. Greece is the Word. Dimensional Fund Advisors, July 22, 2015.