• The 50–50 Foreign–U.S. Blend: The U.S. represents just 50% of the global equity opportunity set1. A 50–50 U.S.–foreign allocation, regardless of whether one hedged currency risk, had significant risk-reduction properties. Volatilities of the 50–50 U.S.–foreign blends ranged from 15.0% to 15.7%, down from 22.36% for just the Russell 2000 by itself. The lowest risk profile of these three 50–50 blends was having international wholly represented by small caps without the currency risk.
• Importance of the International Small-Cap Mix: We recognize that currencies tend to move in waves and that this 10-year period might be one in which foreign currency exposures faced a particular headwind. Therefore, an interesting baseline could involve looking at mixes of international small-cap exposure that were 50% in local terms (without currency) and 50% in U.S. dollar terms (with currency). This would minimize the risk of being fully exposed or unexposed to fluctuating exchange rates, given that there is no way to know precisely how they might behave in the future.
1Source: Bloomberg; refers to the MSCI ACWI Index universe, with data measured as of 5/22/15.
Important Risks Related to this Article
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