International stocks have strongly underperformed U.S. stocks over the past few years (at least until the end of 2021). Such a large gap may lead many to question the value of owning stocks outside the U.S. We see the inclusion of international equities as a natural extension of the diversification one should pursue in most all portfolios. Indeed, we see diversification across a range of historical periods as having allowed stronger performance among particular segments of the equity universe to offset weaker returns from others. The range of differences in performance and shifts in ranks among the segments over time may surprise some readers. That surprise is chief among the rationale for our pursuit of diversity.
Jump Around! Jump Around?
While U.S. equities have seen several recent years of relatively strong outperformance, that outperformance has not always been a given. Indeed, coming out of the technology bubble in the early part of the 2000s, U.S. stocks generally ranked among the worst performers of the group. Our point is in no way to suggest that the U.S. won’t continue to outperform from here on out. Neither we, nor anyone else, has a way of knowing. The best way we know to answer that uncertainty, though, is through diversification.
Matters Little How You Slice It
Some investment strategies seek to expose portfolios to international equities through a separate investment (e.g., mutual fund or exchange traded fund). That approach, however, tends to draw focus to the differentiation in performance between the various regions (e.g., United States, developed countries outside of the U.S., and emerging markets). We can slice markets into thematic buckets in myriad ways, however, generally speaking with similar results in terms of the range of performance between the groups. Dissecting broader-market performance by sector is an often seen example. In Figure 2 we show historical performance of the S&P 1200 Global Index by sectors from 2006 onward. Readers may note the wide gap in 2018 between the best- and worst-performing sectors, Health Care and Materials, respectively. In 2019, however, Materials turned in second-best performance, while Health Care was in the middle of the pack. And the latter was the worst performer in 2016.
Benefits of Being Random
The sheer randomness of it all lies at the heart of the rationale for portfolio diversity. Most of the success to be had from investing comes from being invested, we think. And we have found, both through experience and continued research, that our clients are best served with an approach that seeks to ensure they are able to maintain exposure to investable markets, despite the randomness and oftentimes challenging near- and medium-term results they may present.
The S&P Global 1200 provides exposure to the global equity market, capturing approximately 70% of global market capitalization. The 10 S&P Global 1200 sector indexes consist of all members of the S&P Global 1200 that are classified within the respective GICS® sector.
The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US market. The MSCI Canada Index is designed to measure the performance of the large- and mid-cap segments of the Canada market. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe. The MSCI Pacific ex. Japan Index captures large- and mid-cap representation across four of five Developed Markets countries in the Pacific. The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese market. The MSCI Emerging Markets Latin America Index captures large- and mid-cap representation across five Emerging Markets countries. The MSCI Emerging Markets Asia Index captures large- and mid-cap representation across nine Emerging Markets countries. The MSCI Emerging Markets EMEA Index captures large- and mid-cap representation across 10 Emerging Markets countries in Europe, the Middle East and Africa (EMEA). These indexes reflect net dividends reinvested using dividend minus-tax-credit calculations, but subtract withholding taxes retained at the source for foreigners who do not benefit from a double taxation treaty.
The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the "MSCI Parties") expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
This material is for informational purposes and is intended to be used for educational and illustrative purposes only. It is not designed to cover every aspect of the relevant markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. This material does not constitute investment advice, nor is it a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Altafid, PBC or its affiliates, as to its accuracy, completeness or correctness. Altafid, PBC or its affiliates do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Altafid, PBC or its affiliates have no obligations to update any such information.