Are you underweight in international equity? You may want to rethink your allocations—sooner rather than later. Our international equity firm believes stocks outside the U.S. are very attractive relative to U.S. stocks right now for two primary reasons:
1. International stock diversification is a very powerful tool.
John Bogle, Vanguard’s former chief, stated recently that he favors a 100% U.S portfolio. U.S. stocks have outperformed since the end of 1969 but Bogle is ignoring the powerful benefits of diversification. Over the 45-year period from 12/31/69 to 12/31/14, despite U.S. stocks outperforming, the maximum return portfolio was 60% U.S. and 40% international. If we enter a period when international stocks actually outperform, benefits from diversification will be enormous. With the current 1-year correlation between MSCI ACWI Ex-US NR and the S&P 500 at 0.28, there is strong benefit to having international equity exposure within one’s portfolio.
2. International stocks have lagged the U.S. stock market by an enormous margin since the last market peak at the end of 2007.
Consider the table below highlighting the performance comparison between U.S. stocks and the rest of the world; cumulative total returns show the S&P 500 outperforming international stocks by 70-80%. While U.S. economic growth has been a positive, it is hard to justify such a relative outperformance.
We believe international stocks have begun to outperform U.S. stocks. Based on past performance shortfalls and current bargain valuations, we believe that the potential for international stocks to play catch up is very large. For portfolio allocators with significant underweights to international equity, now might be a good time to review that thesis.
To read our Q2 2017 Market Commentary in full, PLEASE DOWNLOAD IT here.
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.
FROM 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.