In our conversations with investors, one of the most common questions we hear is “How much international exposure should we have in our equity portfolios?” Admittedly, it is difficult to answer that question without knowing a number of factors about an investor, including his or her risk tolerance, goals, life stage, and planned retirement date.

That said, we have a simple way of determining whether you own enough international stocks. In our Equity Strategy Playbook, the U.S. Macro and Market Snapshot reveals the weight of the MSCI USA Index in the MSCI All Country World Index (ACWI).

Do You Own Enough International Stocks

Specifically, U.S. equities represent 52% of the global equity benchmark, which means that international stocks capture 48% of the worldwide stock market. Many investors are surprised to see that non-U.S. equities represent almost half of a passively indexed global equity portfolio. Moreover, what they thought was a generous allocation to international stocks – typically 20% – is far below the planetary benchmark.

The reality is that anything less than a 48% allocation to international stocks in equity portfolios represents an underweight position in a significantly outperforming asset class. Over the past 12 months, the MSCI USA Index was up 16.4% while the MSCI ACWI Ex USA Index was up 21.6%.1 That’s an excess return of 5.3% in favor of international equities, which we expect to continue outperforming for the following reasons:

  • Valuations are more attractive compared with U.S. equities.
  • Many international markets and economies are in earlier, better stages of their cycles.
  • Faster economic, sales, and earnings growth can be found outside of the U.S.
  • Non-U.S. developed (e.g., euro, yen) and emerging market currencies have appreciated versus the U.S. dollar.
  • In many cases, inflationary pressures are easing across the developing world and in select developed economies, such as Europe and Japan.
  • Monetary policy is generally accommodative.

In our view, investors who are underweight non-U.S. stocks are missing out on a tremendous opportunity, and should consider increasing their international equity exposure accordingly.

Be sure to check back in April for a bi-annual update of our views in the Equity Strategy Playbook.

The Equity Strategy Playbook leverages our resources as a leading global asset manager, including decades of research experience, to gather and present the indicators that matter most for equity performance in a visual and digestible format. Our multi-factor framework for equity portfolio positioning is a consistent, systematic method that’s well-suited for thematic, big-picture investing. Investors can use this straightforward, transparent framework to see how we arrived at our conclusions, and to form their own.

 
  1. ^Source: Bloomberg, net total returns in U.S. dollars, as of 2/28/18. Past performance does not guarantee future results.