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In the previous blog piece, we explained that global investing is one of the core tenants of our investment philosophy. We explained the ‘Why’ or our belief in global investing. This piece will describe the process or ‘How’ of our global investment strategy.
The global investing process (How) - An all or nothing approach to investing, e.g. 100% in the market or 100% in cash, has never resonated with us. This requires omniscient timing skills. Therefore, with the US stock market representing approximately 50% of the globe’s stock market capitalization, in our opinion, it would be imprudent as an investor in today’s world to exclude international investments in an equity portfolio.
The benefits are many to being a global investor. You are diversifying your investments among more companies, countries, economies and currencies. Valuations and growth rates can vary among these attributes constantly creating an ongoing source of investment opportunities.
In developing a portfolio strategy, discipline and risk management are enhanced by having a framework. The framework defines the asset classes, types of investments and how the assets are allocated.
Ultimately investing is managing risk and return. Optimizing the return for a minimal amount of risk is ideal, but elusive. Our studies have led us to believe that an allocation to international stocks between 20% and 50% is an appropriate diversifier and helps manage the risk/return relationship (manage volatility) between the US market and international markets. Our framework begins with a baseline allocation of 60% US stocks and 40% international stocks.
The next step is to develop an international stock portfolio. Our framework for the asset classes is based on ‘core’ assets being 75%+/- of the allocation and ‘explore’ categories representing 25%+/- of the portfolio. The core assets are large/mid cap international developed markets funds. This asset class will generally be composed of countries and companies that have established economies, business communities and long-tenured rule of law.
The explore assets are international developed small cap stocks and stocks in the emerging markets. In these asset classes, businesses are often smaller and/or countries have more recently established economic, business and legal structures. They have historically produced higher returns than core developed market large cap funds, but with more volatility.
We employ active investment teams to manage the underlying portfolios that contain the developed large cap, developed small cap and emerging market equities. We do believe there are inefficiencies in these markets and that active managers can provide excess returns over the broader markets. There are approximately five different management firms which invest in both a value-oriented and growth-oriented style. The managers possess characteristics which we believe assure consistent and superior results. They include low manager turnover, long manager tenure, low fees, low portfolio turnover, disciplined processes, and significant capital investment in the funds.
In Part I of this series, we provided the basis for our belief in being global investors. In this second part, we have provided the framework for how we invest the international equity aspect of our portfolios. In the third and final part, we will provide our insight into the current environment and opportunities for international investing as well as our current strategic international allocation.
Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The process of rebalancing may carry tax consequences. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The MSCI World Index is designed to measure the equity market performance of developed markets. It tracks 23 countries including the United States. Past performance may not be indicative of future results. It is not possible to invest directly in an index.