By J. William G. Chettle, Vice President, Marketing, Loring Ward
What a difference a few months can make.
Whether it was Brexit, Grexit, worries about China or “expert” predictions of imminent global financial collapse, many investors in the last few years turned away from investing internationally – or at least questioned if it really made sense for their portfolios.
In 2014, of the nine asset classes Loring Ward includes in its portfolios, the worst sector performers were all international: Emerging Markets Value, International Small Cap and International Large Value. 2015 and 2016 were only slighter better.
A USA Today article on January 16, 2015, asked: “Why invest in international funds? It’s a mystery.”
Even the esteemed John Bogle, founder of the Vanguard Group, has bluntly opined, “You don’t need to own international stock.”1
As so often happens with investing, conventional wisdom was not only wrong, it was potentially harmful to investors like Bogle who stayed out of international markets. In the first half of 2017, markets around the world came roaring back, rewarding many who had ignored the pundits and stayed invested internationally. The top performing asset classes were all international: International Small Cap, Emerging Markets Value and International Large Value. And in fact, from 2002 through June 30, 2017, Emerging Markets Value has been the top performing asset class, returning 10.6% annually.
All of this should have come as no surprise to students of history. International returns can stay negative for extended periods, but can also turn positive quickly as is happening now. This has happened several times in the last few decades, including in 2009, when a five-year decline for the international market index (MSCI EAFE Index) went from a five-year loss of 10.44% ending March 2009 to a five-year gain of 3.36% ending April 2009.2 It took only one month to turn five years of losses into five years of gains.
In recent years, international markets faced the headwinds of a strong dollar. Currency moves can have a greater impact than market moves on returns, and can wipe out a positive stock return or make a losing stock a winner. From 2010 through 2015, the cumulative impact of foreign-currency exposure on international value stocks was negative 18%. However, from 2000 to 2009, this impact of foreign-currency exposure was positive 29%3.
Recent declines in the dollar have provided a tailwind for international dollar-denominated investment performance and helped boost strong market results. For the first half of this year, the dollar has been the worst performing of all major currencies, down roughly -5.5%, fueled largely by investors feeling more bullish about economic recoveries in Europe and other parts of the developing world, as well as fearful of a U.S. slowdown.
The declining dollar’s impact has been substantial. In the second quarter of 2017 alone, it resulted in a 3.3% outperformance for the dollar-denominated MSCI World Ex-US index relative to the same index denominated in local currency.
Based on past experience, over the long term, we expect the cumulative effects of foreign-currency changes to be zero.
In fact, if we look back at the relationship between U.S. and international stocks over the past 29 years through 2016, (that’s how far back index data will take us), U.S. markets and international markets have outperformed each other an almost equal number of times.4 But there was no clear or identifiable pattern of when one market was ahead or behind.
This is why we believe it is important for investors not to try to time when to get in and out of international (or U.S.) markets, but be patient and stay invested.
The average U.S. investor has a portfolio made up of about 75% U.S. stocks. While that may seem like the patriotic thing to do, it can mean missing out on a world of opportunity. You might be surprised by the number of familiar companies and household brands that are internationally owned, such as Lego, Miller Beer, Samsung and even 7-Eleven.
We like to think of the U.S. as a world leader but over the past several decades, America has never even ranked in the top five in annualized performance of global markets.
Over the last 10 years, for example, the top performing markets were Thailand, Peru and the Philippines. Ten years from now, the top performers will almost certainly be very different, though unpredictable.
Nobody knows what the future will bring. But if you invest internationally and own a lot of companies around the world, you can worry less if any one company or even one country experiences losses. Nor do you need to be concerned about picking countries that might outperform or even how the U.S. is doing versus the rest of the world.
As 2017 has shown so far, international markets can be very rewarding, overcoming several down years in a short space of time. Investors who take a long-term perspective may be rewarded for their patience.
International markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. As a result, they may not be suitable investment options for everyone. Diversification does not guarantee a profit or protect against a loss in a declining market. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.
1“John Bogle says investors don’t need to own international stocks,” Investment News, 4/28/17
2Morningstar Direct 2/2016
3Morningstar Direct 2/2016
4Morningstar Direct; U.S. stock returns represented by Russell 3000 Index, international stock returns represented by MSCI All Country World ex USA Index (gross dividends).