When considering a well diversified investment portfolio, investors should look to worldwide opportunities and international ETFs that may potentially enhance returns.
On the recent webcast (available on demand for CE Credit), Avoiding Portfolio Isolationism, Christopher Davis, Chairman and Portfolio Manager of Davis Advisors, pointed out that investors who focus too much on domestic markets may be missing out. The U.S. GDP makes up 25% of the world GDP, and U.S.-listed stocks only make up 10% of the world total market capitalization.
Danton Goei, Portfolio Manager of Davis Advisors, also mentioned how improving discretionary spending in the developing world may also contribute to faster growth. The global middle-income class is expected to rise to 3.2 billion in 2020 and expand to 4.9 billion in 2030, compared to the 1.8 billion back in 2009. Meanwhile, total global middle-income class spending is expected to increase to $35.0 trillion in 2020, with North America only making up 17%, and spending is projected to jump to $55.7 trillion in 2030, with North America accounting for 10%.
Davis also outlined the current U.S. outlook, revealing an economy that is more or less in its later stages of its economic business cycle, which includes relatively full employment, moderate growth and peak margins and valuations in the equities market.
On the other hand, Goei highlighted the ongoing recovery and potential greater growth opportunity in international markets. For instance, the European economy continues toward recovery from its financial crisis, and the emerging markets exhibit attractive valuations and rapid growth, especially in economies like China and India.
Davis Advisors also argued that there are three main themes fueling the global growth story, including the rise of the online consumer worldwide, expansion of global transportation and boom in global education.
The growing global middle-income class is also becoming increasingly connected through the Internet in our information age. The number of Internet users doubled since 2010 to 3.5 billion and is growing at a 10% rate per year. The increased Internet usage comes shifting habits, such as global online purchases growing at 17% per year. Online retail may be a potential growth opportunity as it is still in its nascent stages, accounting for 7% of total retail sales worldwide.
The expansion of world trade and rising middle-income class have all contributed to a rapidly expanding global economy. However, the world’s transportation infrastructure has not kept pace with rising demand, which may also open an opportunity to further develop the world’s infrastructure and raise infrastructure investments.
The boom in global education will also improve human capital by raising more highly educated working class. For example, college admissions in Asia have become hyper-competitive, with over 200 million K-12 students all competing for admissions to top universities in China alone.
As investors consider the potential benefits of international exposure, some may also look into actively managed strategies. Goei argued that international stock fund managers are better positioned to add value. Over the years, active managers have exhibited a better track record in the international category. For example, 71% of large-cap international stock fund managers outperformed the MSCI ACWI ex US Index over the past year. Around 84% of large-cap stock fund managers outperformed the MSCI ACWI ex US Index over the past decade.
ETF investors interested in an active strategy to tap into international markets can consider something like the Davis Select Worldwide ETF (NasdaqGM: DWLD), which is managed by Goei. DWLD focuses on long-term global opportunities that incorporate Davis Advisors’ judgement experience, high conviction, low turnover, accountability and alignment.
The ETF also incorporates the same principles found in Davis’ winning international mutual fund strategies. The Davis International Fund has shown an average annualized 9.9% return over the past five years, compared to the MSCI ACWI ex US Index’s 6.8% return. The Davis Global Fund has exhibited a 15.8% average annualized return over the past five years, compared to the MSCI ACWI’s 10.8% return.
Financial advisors who are interested in learning more about international markets can watch the webcast here on demand.