Seasoned, educated investors know the historical and theoretical benefits of allocating a portion of their overall portfolio to international equities. The primary potential benefit is exposure to faster-growing economies and companies located outside of the United States, combined with better risk-adjusted returns because of diversification, when compared to a U.S. equity-only portfolio.
While some investors consider international equities “mainstream”, many do not realize the pool of U.S. listed companies is dwarfed by the number of international listings. According to The World Bank there are nearly eight times the number of foreign stocks as U.S. stocks.
Over the last 10 years the number of listed companies in the United States has decreased by 16 percent, while the number of foreign listed companies has remained relatively flat.
Additionally, the cumulative market capitalization of international companies makes up almost half of the world’s total equity investment universe, as measured by the market capitalization of the MSCI ACWI Index, a broadbased global benchmark.
Based on the sheer number of public companies listed in foreign markets, it is hard to argue that international equities can be as efficiently priced as their U.S. counterparts. It is also likely that most investors have little actual investment exposure corresponding to the market cap weightings in the index.
Because of domestic bias, many U.S. investors consider international equity to be mere window dressing and allocate minimal exposure to the asset class when devising an investment plan.
Until recently, international equities have not been particularly rewarding over the past 10 years, and investors with significant foreign exposure may not be feeling particularly predisposed in favor of the asset class.
One of the tenets of asset allocation between domestic U.S. equity and international equity is that they often take turns outperforming, and sometimes the outperformance is dramatic and long-lasting. The S&P 500 has made a significant run over the past 10 years outperforming the MSCI EAFE Index by 3.8 percent on an annualized basis through 7/31/18.
Statistically speaking, reversion to the mean—“what goes around, comes around”—appears to be in play. While we cannot guarantee if this trend is set to continue, we will point out additional factors in support of investing in international equity today.