Hetts adds that investors may achieve better diversification across sectors by investing internationally.
According to the study, technology, health care and financials account for more than half of the U.S. equity markets, with technology stocks responsible for 23 percent of U.S. market capitalization. Outside of the U.S., financials become the largest sector, accounting for 22 percent of the globe ex-U.S., followed by industrials, 14 percent; and consumer discretionary stocks, at 11 percent.
So diversifying a U.S. stock portfolio with a vanilla international index can help investors achieve better outcomes. The researchers argue that picking from individual countries or companies can lead to better diversification -- for example, the technology-heavy U.S. is complemented by the U.K. equity market, which is heaviest in financials, consumer staples and energy stocks; and Japan, which is most concentrated in industrials, consumer discretionary and financials.
“Global investing is not just about geographies; our research shows that it offers a greater level of diversity at the sector, currency and even the income level,” says Hetts. Investment income has become a major blind spot for advisors and investors, especially when it comes to equity income derived from international stocks.
While market participants have often complained that domestic equity indexes like the S&P 500 have suffered from sinking dividend yields over the past eight years, the researchers argue that attractive equity income is easily accessible overseas.
Investors aren’t buying it -- yet. When Janus Henderson broke down the stocks in the MSCI World Index with dividend yields of 3 percent or more, 59 percent of the opportunities were outside the U.S. Yet advisors’ portfolios concentrated more on domestic dividend payers. Within the average advisor’s portfolio, 78 percent of the equities with dividend yields of 3 percent or more were from the U.S., and only 22 percent were ex-U.S.
“Overseas markets are more fertile ground for investment income on the equities side of things, but income investors still have such a large bias towards U.S. equities, says Hetts. In particular, advisor portfolios overbought dividend payers from U.S. sectors like technology, financials, health care and consumer discretionary and under-bought from ex-U.S. sectors like financials, industrials, real estate and utilities.
“If equities are most of an investor’s portfolio, we can look internationally for yield,” he says. “Domestically, we might see companies yielding 1-to-3-or-4 percent, but internationally we see jumps to 3, 4, 5, 6, even 7 percent. Investors who look internationally can increase their total weighted average portfolio yield just by buying overseas equities.”