Matterhorn, Switzerland

Is International Equity Outperformance Just Beginning?

4 minute read

Are you frustrated with your globally diversified equity exposure? Are you considering reducing your international equity allocation in favor of a more U.S.-centric portfolio? If so, we are here to say hold on! We totally get it, but please consider the following before hitting that sell button:

1.  Returns have begun to favor international equity over U.S. equity.

2.  Low correlations actually signal that now is time to maximize the diversification benefits of international equities.

International equity performance has been dismal for the last 10+ years. Since the financial crisis of 2008/09, U.S. equities have trounced international equities by +90% on a cumulative return basis through 2016.

RSQ 123 chart 1.png

*Source: Morningstar, Inc.

However, since the beginning of 2017, things have started to change. International equity, as measured by the MSCI ACWI Ex-USA Index NR USD (“ACWX”), has begun to outperform. From January 2017, ACWX has returned nearly +28% versus the +24% return of the S&P 500 TR (through February 28, 2018). Even a globally diversified portfolio has outperformed the S&P 500. For simplicity, we will use a portfolio allocation of 75% S&P 500 TR and 25% ACWX. Looking at this portfolio, the cumulative total return is +25% over the same time period, outperforming the S&P 500 TR by nearly +100 bps.

Time Period: 1/1/2017 - 2/28/2018

Index / Portfolio Cumulative Return (%)
S&P 500 TR USD 24.06%
75-25 S&P 500 TR / MSCI ACWI Ex USA NR USD 25.04%

*Source: Morningstar, Inc.; Data: Total, Monthly Return

Let’s take a closer look at the returns of the globally diversified portfolio. The chart below shows the rolling excess return of this portfolio relative to the S&P 500 Index TR. When the dark blue line is above the orange line, the globally diversified portfolio outperformed the U.S. and when it is below the orange line, it underperformed. Looking back over the past 15 years, we can see a globally diversified portfolio was beneficial to U.S.-centric investors before the financial crisis as the excess return over any one year period generally ranged from +2% to +4%. However, since 2008, this same portfolio underperformed the S&P 500 by around -2% to -6% over any one year. Investors were basically penalized for investing outside the U.S.

Now, you might need to squint, but all the way to the right, that blue line has finally moved above the orange one. Since mid-2017, the globally diversified portfolio has outperformed the S&P 500. International equity investors are finally seeing the benefits of investing outside the United States.

RSQ 123 chart 2.png

Only time will tell if this trend continues. We believe international stocks have begun to outperform U.S. stocks. Based on past performance shortfalls and current bargain valuations, we believe the potential for international stocks to play catch up is very large.

In our follow-up blog, we’ll discuss the low correlations currently being offered by international equities and why now is the time to maximize the diversification benefits of allocating outside the U.S.


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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.   

Richard Pell R Squared Capital ManagementFROM THE DESK OF RICHARD PELL

Richard Pell is CEO and Portfolio Manager at R Squared Capital Management.

Richard co-founded R Squared Capital Management in May of 2013. Prior to that, he was Chief Executive Officer and Chief Investment Officer of Artio Global Management LLC, a position he held since 1995 when the firm was part of the Julius Baer Group. Richard also served on the Board of Directors at Artio.

To read Richard's full bio or other RSQ team members, click here.  

Posted by Richard Pell on Mar 7, 2018 12:26:39 PM

Topics: International Equity



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