We would expect this differentiation to continue. The next 12 months will witness significant opportunities and risks, many of which will be idiosyncratic to particular parts of the world. Will the United States avoid the fiscal cliff? Will China engineer a soft landing? Whether China or the United States stalls or thrives will be reflected most in their respective equity markets. Given the potential for significant divergence in performance, investors with a view can be well served by having the flexibility to express their outlook in the most granular manner possible.
In addition, there is another potential advantage to a more granular approach. Because each region or country has its own unique risk profile, building an equity portfolio with regional- or country-specific funds can offer the potential for higher risk-adjusted returns. Implementing through regional or country funds allows an investor – even one without a strong view on country performance – to assemble a portfolio that may be better diversified than a traditional cap-weighted benchmark. Through better diversification, we believe that it’s possible for investors to assemble portfolios with a higher return-to-risk ratio.
For investors looking for a diversified, single ticket solution and with no particular views on country performance, a fund based on a broad benchmark can be an appropriate choice. However, both from a return and risk perspective, a more granular implementation may offer more opportunities, particularly if countries start to go their own way – for good or ill.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
