Content Provided by Konstantin (Kostya) Etus, CLS Associate Portfolio Manager
International investing has been a recurring topic in financial news recently, and many institutions have released white papers on its benefits. Much of this heightened coverage can be attributed to this year’s strong performance of international markets versus that of the U.S. International markets have been underperforming the U.S. for so long that the outperformance is coming as a shock to many investors.
At CLS, we have always had a place for international markets in our asset allocation funds. Although we do see tactical attractiveness in the current environment from valuations and growth potential, it is really the diversification benefits that make international investing a consistent strategic allocation. I’m proud to say CLS was one of the first to market with the publishing of “Why International: The Case for International Investments” earlier this year. In this paper, we do not talk about why international markets are attractive “now,” we simply focus on why international investments should always be part of a fully diversified portfolio.
One of the topics we discuss in our white paper is multinational corporations. There are giant companies that are based in the U.S. but have operations in countries abroad, where they also produce a majority of their sales. These companies are typically very recognizable (think companies listed in the S&P 500). Because they are so large with varying revenue streams, they tend to be higher quality and better able to outperform in times of market turmoil because their managers are more confident in the future. This leads to more stable performance over long periods of time and typically higher returns with lower volatility. But these types of companies are not a U.S. phenomenon. There are similar companies headquartered abroad that do a majority of their business outside their borders.
So, if you do not invest on a global scale, you may miss out on some significant opportunities.
Quiz time! I’m looking at the most recent top 10 holdings of the MSCI ACWI Index, which market weights a majority of the large and mid cap companies in the world.
- Let’s start easy: What is the largest company in the world? Yes, of course it is Apple, which has a market cap almost twice the size of the next largest: longtime rival Microsoft.
- How many companies in the top 10 are not from the U.S.? Three.
- Two of those companies are from the same country. Can you name it? Switzerland.
That’s right, Switzerland! Nestle and Novartis (a healthcare company) make the list for the Swiss. Toyota Motor Corp. from Japan is the other foreigner. Although you may not know Novartis, I know you have heard of Nestle and Toyota (which is also the top car company on the list).
View the full list here.
The story is simple: International markets and economies are growing rapidly as advancements in technology and political reforms continue to enable progress, and the companies within those markets are benefiting. The U.S. now represents less than half of the world market cap (just over 49 percent). If you want exposure to the advancements of these overseas giants, international diversification is the way to go.