With globalization in full swing, the world is more interconnected now than ever. This secular shift requires investors to reassess the allocation of their capital. Exposure to global markets is increasingly important for any portfolio strategy, be it conservative or risky. Investments outside of the U.S. are no longer a novelty or specialty; they are a necessary component to any successful diversification.
Although the United States accounts for a smaller portion of the global GDP (22 percent in 2015 compared to 40 percent in 1960), investors continue to display a home country bias when it comes to market investments. U.S. investors hold more than 70 percent of their portfolio in U.S. equities, according to Strategic Insight. Even from a market cap perspective, U.S. equites comprise only 54 percent of the world’s market capitalization. Investors continue to allocate too much to the United States relative to its standing in the world.
[See: 10 Long-Term Investing Strategies That Work.]
This lack of global market participation is arguably a result of unfamiliarity. These days, there’s no shortage of global investments available. Morningstar has more than 650 funds listed in its World Large Stock category alone. When it comes to investment knowledge base, though, many remain concentrated on North America. As a result, some may perceive investing outside of U.S. markets to be challenging or even complicated. But to the contrary, these markets are as simple to transact as anything U.S.-based, and are ripe with a myriad of opportunity.
Compared to a strictly U.S-focused equities strategy, the advantages of approaching the markets from a global perspective are numerous. For one, global investing opens investors to an expanded landscape of strong equity positions. Data from three-year annual returns ending in 2014 shows that more than half of the top 500 performing stocks were located outside of the United States. In 2010, only 25 percent of the top 500 performing stocks were from the United States.
This highlights another important point, which is that global markets alternate turns as the top performer. The majority of the time, the top performer is not the United States. According to Morningstar Direct, between 2006 and 2016 the United States was only the top performer three times. Investors who focused solely on the U.S. during this time frame sacrificed returns and decreased their level of diversification.
[See: 10 Ways to Buy International Small-Cap Stocks.]
Investors often justify their limited global exposure with the fact that they already hold U.S. multinational corporations, which provide them with global exposure. Although, from an individual security perspective, companies have become much more global, the top U.S. companies still generate a majority of their revenue within the U.S. The average Standard & Poor’s 500 index company only generates 44 percent of its revenue from overseas. On the other hand, European companies generate 68 percent of their revenue outside of their home region. Even emerging markets companies derive 25 percent of their revenue outside of their home country.
Certain companies are even more drastic. According to FactSet in 2016, Nestle, Roche and Anheuser-Busch ( BUD) all generate 99 percent of their revenues outside of their home country. In order to properly understand companies and the markets at large, investors need to understand foreign economies.
Like U.S. markets, global investments come in all shapes and sizes, with some performing better than others. Today’s investor has a plethora of funds to choose from to gain exposure to global markets. These funds, which are typically classified in “international” categories, can range in focus, strategy and even investment vehicles. To assess these options, investors should look to a fund’s track record and the tenure of the management team. While previous performance is not always indicative of future performance, a historical track record combined with market experience is a critical combination. The ability to demonstrate performance in all types of markets is key.
Other factors such as high conviction should also be considered. A study conducted on the success of global investments found that active management delivered better results in comparison to passive counterparts. The report found, for example, “that active management in emerging market equity outperforms passive strategies by more than 180 basis points per year, and that this outperformance generally remains significant when controlling for risk.”
Be diligent about reviewing the available information, which is now readily available to any potential investor. Resources that track market performance will typically have an international section with as much detail as any U.S.-based investment. Investors should rely on this to decipher the best possible investment vehicle on the global landscape.
[See: 9 International ETFs That Are Off the Beaten Path.]
Like any strategy or asset class, global investments will play a particular role in a portfolio’s allocation. The point is that it must play a role. The world will only become more interconnected and investments should reflect this change on the international stage. Just as companies are looking to global markets for opportunity, so should investors.
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The Case for Investing in Global Markets originally appeared on usnews.com
