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Wow, That’s a Lot of International!

January 25, 2022

The Christmas season is meant to be a time of relaxation and celebration. Most people use it to wrap things up for the year and spend time with friends and family.  I used it to look over  the international exposure in my clients’ portfolios and check to see if it was still academically sound. For me, that IS relaxing. And when you have three kids under the age of four, you find relaxation in weird places. Stop judging me.

If you’ve been a client of mine for any amount of time, you already know  I don’t believe in “gut feelings” or market timing when it comes to investing. All I know is data. I want to know what can be academically proven.. Once I understand, then I deliver  what I know to be true to my clients and add in a healthy dose of behavior (stay the course, don’t market time, no speculation, etc.). 

However, for me to help clients behave prudently with their finances, I need to be certain that we are following the data and what history has proven to be true. If I can be certain that we are allocated in a manner consistent with what academia teaches us about security prices, then it makes my job easier to help teach my clients about the data and how it pertains to their portfolio.

In the last 5-8 years, I have seen many portfolios that were almost 100% in the S&P 500 index. While I can’t say for sure, I at least believe in my heart that these people, their advisors, or the fund companies were just chasing the “hot hand”.  It’s no secret that large U.S. companies have had a great run relative to some other indices. But chasing the hot hand isn’t something that can be repeated with any level of certainty. If you are chasing returns, you need to be right twice every time (when do I get in and when do I get out). If I let my clients do this they would, at the very least, miss out on asymmetric returns in other asset classes over short periods of time. Instead, we allocate client equity portfolios across (at least) 17 different markets around the globe and domestically.

That phrase, “around the globe” is what I focused on in my “down time” during Christmas. In a 95% equity portfolio, my clients will almost be evenly split between equities in the U.S. and internationally. We allocate to large, large value, small, small value, and emerging markets both large and small outside the U.S. In a conversation with another advisor about   this weighting, he said “Wow, that’s a lot of international.”  Then proceeded to tell me how foolish this was. My immediate thought was,  “Is he right?” As your advisor, one of my jobs is to continually be learning and  constantly be worrying for you so you don’t have to. Thus began my Christmas break excursion into reams  of data to understand if he was right.  

I should start with this, I asked the advisor why he said what he did. I was looking for data, of course. I thought maybe he had researched something I hadn’t but turns out that wasn’t the case. He just said I was too heavy in international markets. When I pressed a little more, he also thought I was too heavy in small cap and value stocks as well. In other words…he thought we should put the vast majority of clients’ money into large cap U.S. stocks. At first, I wrote it off as another case of “chasing the hot hand” but then I became curious enough to look deeper into the returns.  

I began looking at every asset category over 10 and 20 year time frames. I was comparing them to the S&P, as well as other indices. For simplicity, I decided to focus on  two main asset categories: U.S Large Cap Value (USLCV) and International Large Cap Value (ILCV). The sources I used are:

  • Fama/French US Large Value Research Index (1926-Present) – The index portfolios include all NYSE, AMEX, and NASDAQ stocks for which Fama/French have market equity, and (positive) book-to-market equity data.
  • Fama/French International Value Index (1975-Present) – Includes all firms with Book to Market Value data in EAFE and within the top 30% highest book-to-market value.

A very important note, PLEASE READ:

Every time I write an article about returns , I get this response, “ But what if I am not invested over that long of a time frame?” and the answer will always be, the shorter the period you are invested (if retirement is looming, for example) then the less exposure to equities you will have. The point of this article is to comment on the allocation of whatever equities you hold with me. For some, only 20% of your portfolio is in equities and for others that number is 95%. Whatever percentage you have, we are allocating the equity portion equally between domestic and international.

Now for the findings: I am only distilling a month’s worth of reading and calculating into a few data points to show generally what is true over time. In this case, I looked at several 20 year rolling time periods. Today, we will look at the two indices mentioned above.

Here are three 20-year periods I looked at:

1994-2013

1975-2004

2001-2020

For comparison, I am investing $100,000 lump sum into each category and not accounting for taxes or fees. In all three time  frames, ILCV beats USLCV. The largest difference was by $800,000 in the 1975-2004 period. In the most recent (2001-2020) USLCV produced $290,000 vs. $367,000 in ILCV.  And this is during a time when the U.S. equity market was on fire.

To be fair, the international portfolio does come with an increased risk (standard deviation). But this is why we allocate the way we do. We are looking to capture market returns (risk premiums) and offset that risk with non-correlated asset classes, both in the equity and fixed income markets and outside (annuities and cash value life insurance).

The bottom line? I am a data nerd. But also,

International may not be the “hot hand” now but it more than pulls its own weight over long time periods when allocated to and rebalanced over each quarter and year. At the end of the day, we aren’t comparing your portfolio to the S&P 500 or to your friends’ portfolio. We are building a portfolio that over time has the potential to achieve the personal rate of return necessary to accomplish the plan we have built together. And part of that plan will now and forever be a healthy allocation to international stocks.

The other bottom line?

This is what I do all day, every day. I do it so you don’t have to. However, that doesn’t mean you shouldn’t question or challenge me.. If you would like a deeper dive on any of the data , let me know and we can review. While I always want to be the one who “worries for you so you don’t have to,” I never expect you to just believe anything I say. The data will always prove the truth!

Michael Palmer is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WESTPAC WEALTH PARTNERS LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number – 0L49687.  Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice.  Consult your tax, legal, or accounting professional regarding your individual situation. | 2023-158307 Exp. 07/25

This material is for informational purposes only and contains the current opinions of the author but not necessarily those of Park Avenue Securities LLC., The Guardian Life Insurance Company (Guardian), New York, NY or its subsidiaries.  Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. Investing in foreign securities may involve heightened risk including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information and changes in tax or currency laws. Such risks may be enhanced in emerging markets.

This website is intended for general public use and is for educational purposes only. By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity. Please contact a financial professional for guidance and information that is specific to your individual situation.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 Carroll Canyon Rd, Suite 300, San Diego, CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number - 0L49687. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC.  (619) 684-6400. PAS is a wholly-owned subsidiary of The Guardian Life Insurance Company of America® (Guardian), New York, NY. CA Insurance License #0L49687 | Terms of Use | Online Privacy PolicyImportant Disclosures |  2023-158307 Exp. 08/25