Global Portfolio Management
A core component of any long-term investment strategy is diversification. Savvy investors learn early on the pitfalls of focusing on a single part of the market. Investing your assets in this concentrated manner can leave your portfolio vulnerable to events that may affect some areas of the market, but leave others unscathed.
Investors commonly fail to diversify properly by not investing globally. For example, a portfolio with exposure to only US companies ignores roughly a third of global developed-market stocks—meaning the performance of US markets solely influences the portfolio’s success.
This “home-country bias”—a preference for domestic stocks—is common and can leave investors with overly concentrated strategies. Different categories of stocks tend to outperform other areas at different points in time. This “market leadership” tends to ebb and flow depending on a variety of factors. So when foreign stocks lead, the performance of a US-only portfolio misses out.
At Fisher Investments, we designed our global portfolio management platform to help investors achieve proper diversification and reduce volatility over time. By investing globally, we can offer our clients a wider set of opportunities and help them diversify against various market risks.
Global Investing Can Help Manage Risk
Failing to take a global approach can often leave an investment strategy with risks similar to not diversifying among different sectors. For instance, consider an investor who concentrates their assets into just a few sectors such as Health Care, Consumer Staples or Utilities. If the market declines, this type of portfolio may do relatively well because those areas are more “defensive” in nature. However, the investor may miss out if markets rise because they lack exposure to more “cyclical” sectors such as Information Technology and Consumer Discretionary.
Many investors understand how this kind of sector concentration can be limiting, but fail to extend the same logic when it comes to global market exposure. Countries can offer very different exposure depending on the types of companies that are common there. For example, many of the largest technology firms in the world are headquartered in the US. Imagine if a non-US investor avoided the US completely—they would have limited opportunities to gain exposure technology. Similarly, a US investor that ignores non-US companies fails to get adequate exposure to attractive trends outside the US.
Multinational Companies Don’t Equal Global Diversification
Investment managers sometimes tell clients they are globally diversified when they invest in US multinationals—companies that generate large amounts of revenue overseas. We don’t think this approach tells the whole story.
The home country’s performance can heavily influence a multinational company’s stock. So, even if a company does business overseas, its stock may not provide the same diversification benefits of owning non-US stocks. This is in part because a multinational corporation is generally subject to a myriad of factors—regulatory changes, currency fluctuations, monetary policy and access to credit—that affect its stock price beyond where the company generates its revenue.
No One Country Is Best for All Time
Investing your assets in just one country can limit your potential returns. Leadership in capital markets changes continuously and the US can see periods of relative strength or weakness in different years.
Exhibit 1 shows annual returns for the best-performing developed-market countries, along with US stock market performance. There isn’t much consistency among the top-performing countries from year to year. The US has been a top-five performer nine times in the last 20 years. However, many of these observations have occurred in the last decade. Non-US stocks handily outpaced US stocks in the years between the Tech Bubble (2000-2002) and the Great Financial Crisis (2008-2009). Investors who didn’t own at least some foreign stocks in those years missed a chance for better returns.
Exhibit 1: Global Leadership Shifts
Source: FactSet, as of 1/31/2022. The above returns reflect the Total Returns of the top-5 performers of the 23 developed countries that compose the MSCI World Index, 12/29/2001-12/31/2021. Country returns are represented by the respective MSCI World country index. All returns are presented in USD. All returns are presented inclusive of dividends net international withholding taxes, except for US returns, which are presented inclusive of gross dividends, as international withholding taxes would not apply.
We believe geographic diversification is central to risk management and vital to longer-term investment success. In addition to providing a wider set of investment opportunities, a geographically diverse portfolio can help reduce portfolio volatility by blending non-correlated investments—assets that behave differently. Over time, this approach can leave investors less exposed to sharp ups and downs. With less volatility, investors may not only sleep better at night, but could also be less likely to make emotional, short-term decisions that may hurt their long-term goals.
Global Investing Considerations
While we believe geographic diversification is good overall for most investors, it’s important to be aware of certain risks a global investing approach can bring.
For instance, foreign political systems and regulations may operate very differently from the ones here in the US. At Fisher Investments, we believe political developments can heavily influence investment returns. So, we spend the time necessary to assess political risks and opportunities, relative to the benefits of investing in that country.
Other risks of global investing include currency impacts and taxes. Currencies fluctuate in value relative to one other and these exchange rates can experience periods of price volatility, which can affect the underlying performance of a portfolio. Foreign tax rates can also have an impact and vary by country. Note that Exhibit 1 references returns that include the effects of currency swings and tax deductions.
Mutual Funds and ETFs Don’t Automatically Deliver Proper Diversification
Many funds—whether mutual funds or exchange-traded funds (ETF’s)—offer the promise of low-cost diversification. However, the fund industry has evolved dramatically over recent decades and some of these options are less diversified than they might appear.
For example, some funds only focus on one country or sector. Others may only invest in one size (large or small) or style (growth or value). For investors with less to invest, certain broad-based funds can be great tools to obtain diversification. However, high net worth individuals can often achieve diversification more efficiently.
Fisher Investments has managed global investments on behalf of institutional and private investors for decades. Contact us for a portfolio evaluation and learn more about how we can provide a global asset management solution tailored to your needs.
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The world of investing can seem like a giant maze. Fisher Investments has developed several informational and educational guides tackling a variety of investing topics.