U.S. equities are still on a tear, with the S&P 500 up over 10 percent year to date as of Monday—but that may mean it’s a great time to allocate more to international equities, according to a panel of investment strategists.
Looking beyond the U.S. opens up a broader range of opportunities for investors, said panelists at “International Equity Allocations: How Much And Where,” a discussion at Financial Advisor’s Inside Alternatives 2018 conference in Las Vegas on Tuesday. But they added that looking internationally creates more complexities in the investment process.
“You invest for opportunities, and the world is a big place,” said Steven Schoenfeld, founder and chief investment officer of BlueStar Indices. “As great as the U.S. has performed, and as great as the U.S. economy is, it’s still less than 50 percent of the world equity market. Just as you wouldn’t just invest east of the Mississippi, you shouldn’t invest just in the U.S.”
Abhay Desphande, founder and chief investment officer at Centerstone Investments, noted that there are 8,000 companies available to investors willing to look internationally, with the majority of those having market capitalizations between $1 billion and $10 billion—thus, international investing is an opportunity to access more of the size premium driving the outperformance of smaller companies.
While stocks in the U.S. have been on a tear, international indexes were down 3 percent for developed markets, and 10 percent for emerging markets, said Schoenfeld.
“The fact that there’s been such a long outperformance cycle in the U.S. suggests that you are doing the right thing by looking internationally,” said Deshpande. “You give yourself a bit of diversification and protection when things aren’t going well here versus overseas.”
Schoenfeld, an indexer, and Deshpande, a bottom-up stock picker, presented two different sides of international investing, one passively oriented, the other active.
While Deshpande argued that better results could come from accessing managers skilled in finding international opportunities, Schoenfeld questioned the logic of preferring active managers to indexes, as investors cannot know which manager will outperform in the future from looking at past results.
“The arithmetic of active management isn’t just a tautology, it’s math,” said Schoenfeld. “You can look back five, 10, 15 years, adjusted for survivorship bias, and find that active managers, as a group, have underperformed. The challenge is finding active managers before they outperform so you’re not chasing them.”
Deshpande countered that it is unfair to compare an index’s performance to an average of active managers, as an average of managers should represent middling performance that won’t outperform an index net of fees. Rather, investors should seek out products with higher active share to better ensure success.