Long-Term Equity Investors: A Global Perspective

January 31, 2020 |
2 minute read
|

Over the past decade U.S. equities have consistently outperformed international markets, leading many investors to question the role of non-U.S. equities in their portfolio. While the current cycle of U.S. outperformance has certainly been prolonged, it is by no means unprecedented relative to history.

Relative performance between U.S. and international equities has always been, and in our view will continue to be, cyclical with long periods of one region outperforming the other. Furthermore, there have been several recent examples of the U.S. and other regions outperforming the rest of the world by a much greater extent than the U.S. in the past decade.

ExhibitA-USvsIntlReturns

ExhibitB-USvsWorld

U.S. equity markets have certainly had an impressive run in the 2010s, but there is no evidence to suggest this relative outperformance can continue in perpetuity. And while it is difficult to predict when this current cycle will end, when it does it could spell trouble for relative and absolute returns of U.S. equity markets, as regional equity markets have generally struggled in the 5-year periods following similar winning streaks.

ExhibitCRather than casting international equities aside due to recent performance trends, we believe international equities will continue to play a critical role in client portfolios by providing diversification, exposure to future areas of growth, and enhanced opportunities for active returns.

The table below illustrates the correlations between U.S. equities and the largest international market indices by market capitalization.

ExhibitD-DiversificationA correlation less than 1.0 indicates that there is some diversification benefit to investors who allocate a portion of their U.S. equity portfolio overseas. While correlations have increased across most regions over the past several decades, the benefits of diversification still exist today. Furthermore, it is possible that global trends such as the rise of protectionism will impact correlations and increase the potential benefits from international diversification in the future.

International equities can also provide U.S. investors with exposure to new and emerging economies. A clear example of this is China, which currently accounts for 16 percent of global GDP but represents only 1 percent of the market cap weight of the MSCI All-Country World Index. Investment strategies focused on emerging markets can position investors to benefit from economic growth, social development, and future investment flows to markets outside of their home country.

ExhibitE-Exposure

Finally, by expanding the investment universe to global companies outside of the U.S., equity managers have more degrees of freedom to identify opportunities and access to less efficient markets. Historically, this has meant that on average global and emerging markets have offered a greater ability to enhance returns through active management.

ExhibitF-ActiveReturns

While the current cycle of U.S. outperformance has lasted nearly 10 years, we expect that relative performance between U.S. and international markets will continue to be cyclical. While it is difficult to predict exactly when this period of U.S. outperformance will end, history suggests that when it does, diversification via non-U.S. exposure will benefit investors. Beyond diversification, international equities can also provide exposure to emerging economies and enhanced opportunities for active returns. Therefore, we continue to encourage long-term equity investors to take a global perspective despite the recent outperformance of U.S. markets. View the webcast below. 

 

Stay connected with the Insights Blog

Popular Blog Posts


Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.