Exchange traded fund investors should consider the worldwide opportunities that may help diversity portfolios and potentially improve returns.
On the recent webcast, Going Global in Your Portfolio with Active ETFs, Christopher Davis, Chairman and Portfolio Manager for Davis Advisors, tried to put the global investment opportunity in perspective, pointing out that the U.S. only makes up a portion of the world market but many investors remain doggedly focused on domestic markets. The U.S. is only 5% of the world population and U.S. listed stocks make up 10% of the world total.
Meanwhile, there is a growing opportunity in international markets. The global middle class could support the growth as rising income levels fuel increased consumer spending. According to the United Nations and OECD, the global middle class is expected to grow to 3.2 billion by 2020 and 4.9 billion by 2030. Middle-class consumer spending in North America made up 26% of $21.3 trillion in 2009. However, according to the OECD, overseas middle class spending is expected to make up 90% of $55.7 trillion by 2030.
International markets also remain relatively cheap. Since March 2009, U.S. equities have outperformed non-U.S. equities by 65.3%. U.S. investors have capitalized on this outperformance as have a domestic bias toward U.S. equities, but this bias could cause many to miss out on a opportunity once foreign markets catch up, especially as U.S. stocks are either fairly priced or overvalued.
Davis pointed out that there are a number of factors that could cause the economy to slow from the rapid pace of yesteryear, singling out things like extreme or unpredictable politics, rising deficits, isolationism trade talks, fair valuations and normalizing rates.
Opportunity in Europe, EM
On the other hand, investors may find opportunities in developed Europe or emerging markets. Europe continues to recover from the financial crisis, and companies remain strong with long-term global growth prospects. Meanwhile, the emerging markets are attractively valued, with companies that are increasing market share in enormous and quickly growing economies.
Danton Goei, Portfolio Manager for Davis Advisors, argued that the rise of online consumer spending may be a key factor in global market growth. Specifically, the number internet users doubled since 2010 to 3.5 billion and is still growing at 10% per year. Meanwhile, global online purchases rose 17% per year, with 75% of online purchases occurring outside of the U.S., but only accounts for 7% of total retail sales worldwide, which leaves a lot of room for further growth.
When it comes to investing styles, Davis argued that investors should be considering actively managed strategies, especially in an aging bull market when a more nimble manager may be better suited to navigate quickly changing conditions. Actively managed strategies have historically outperform during a more variable market condition, whereas passive products outperform in very strongly trending markets. Additionally, active managers have exhibited a strong track record for international stock picking, with 84% of large-cap international stock fund managers outperforming the benchmark MSCI ACWI ex US Index over the past 5 year period ended 2017.
Active managers are able to exploit market inefficiencies through time arbitrage; intangibles such as management, capital allocation or competitive moats; sector inefficiencies, accounting arbitrage; business bias versus profession; and geographic inefficiencies, like knowledge of foreign markets.
Investors may look to a time-tested active approach to potentially enhance returns. For example, the actively managed Davis Select International ETF (NasdaqGM: DINT) and the Davis Select Worldwide ETF (NasdaqGM: DWLD) are backed by Davis Advisors’ focuses on long-term opportunities and incorporate the money manager’s judgement experience, high conviction, low turnover, accountability and alignment. The Davis team screens for fundamental characteristics, including cash flows assets and liabilities, and other criteria.
DINT includes the 32 highest-conviction holdings or the best non-U.S. equity ideas among developed and emerging market picks that Davis has focused on. DWLD takes a more unconstrained approach as it includes both the best 36 U.S. and non-U.S. equity ideas.
For example, Davis has a high conviction regarding growth among global internet names. Consequently, DINT is benchmark agnostic and includes overweight positions in Alibaba Group 6.6% and Naspers 5.9%, among others. In contrast, the MSCI ACWI Ex U.S. Index only includes 1.0% in Alibaba and 0.5% in Naspers.
Financial advisors who are interested in learning more about global investment opportunities can watch the wabcast here on demand.