Sample Blog

By Randy Farina, Senior Portfolio Manager

 

Many international indices have significantly lagged behind their U.S. counterparts in recent years. From 2009-2019, the S&P 500 Index gained 256% while the MSCI EAFE Index only returned around 81% for the decade.1 The coronavirus pandemic has led to further underperformance for international markets as U.S. large-cap indices have been able to lean on their strong balance sheets since the outbreak began.2

With this in mind, investors could be left wondering if international stocks are still worth exploring and implementing in their portfolios. Below, we examine four key benefits of international investing.

  1. More choices. About 42% of the world’s market capitalization lies outside the U.S.3, but U.S. investors’ portfolios tend to skew around 90% domestic.4 As such, investors could be missing out on a myriad of foreign stocks and potential returns. For example, China’s Tencent is the world’s largest video game publisher and is up 58% this year, seeing revenue growth of 29%.5
  2. Value exposure. While U.S. markets tend to favor quality and growth-oriented sectors like tech, international benchmarks can offer investors more exposure to value-based areas like energy, materials and financials. There’s no doubt U.S. tech names have enjoyed strong gains this year6, but owning international equities helps safeguard a portfolio against a potential market rotation.
  3. Diversification. A major goal of investing is to have allocations among asset classes that are not 100% correlated. Because non-domestic markets do not directly coincide with U.S. markets, investing internationally offers a unique way to diversify a portfolio. Internationally-focused investors, for instance, reaped the benefits of this in 2000-2010 when overseas markets outperformed the U.S. by 27%7 cumulatively following the dotcom bubble.
  4. Currency. Finally, investors should consider international investing to hedge against a potentially weak U.S. dollar. If we were to see a sustained weakness in the dollar against global currencies, international stocks would be worth more once converted into U.S. currency.

Though U.S. investors focused on domestic stocks have fared well over the last decade, it’s important to be cognizant of home country bias when investing. We generally recommend around a 20-30% allocation to international investments due to the aforementioned reasons.

As we enter the new year, we’ll be closely watching non-domestic markets and will continue to seek out quality, attractively valued international names. If you have any questions, please contact me at rfarina@exencialwealth.com.

Sources:

  1. Bloomberg (data between 12/31/09-12/31/19) – SPX Index in comparison to MXEA Index
  2. MarketWatch (7/15/20) – Why the S&P 500 isn’t being punished despite U.S. inability to contain COVID-19
  3. Bloomberg (data as of 12/14/20) – Exchange market cap USD (Millions)
  4. The Balance (1/18/20) – How to build a diversified global portfolio
  5. Yahoo! Finance (data as of 12/10/20) – TCHEY
  6. FoxBusiness.com (11/30/20) – Dow books best month since 1987
  7. Bloomberg (data between 12/31/99-12/31/09) – SPX Index in comparison to MXEA Index

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries.

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971

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