A careful study of the “international bucket” reveals dramatic differences – the opportunity set is not homogenous! Culture, history, policy, and regulation vary dramatically, leading to divergences in economic performance and market outcomes. In many cases, countries are not synchronized in their approaches to currencies, interest rates, and monetary policy. We also recognize that geopolitical assumptions change along with more assertive foreign policies (Russia). Countries like China have become too big to ignore. Entire regions realign alliances or old frictions re-emerge (the Middle East). We see growth-friendly reforms contrasted by increased totalitarianism. We identify economic liberalization contrasted by centrally planned economies. Continued corruption is contrasted with rising rule of law. Conditions are dynamic, as regulations adjust, elections change policy, and even normal economic cycles drive the relative attractiveness of different countries, sectors, and currencies.
As investors, we see large dispersion in the performance of individual countries, currencies, sectors and factors. Typically, there is little, meaningful effort to capture this differentiation. Good or bad, high or low, it lands in the international bucket. This “catch-all” mindset towards international investing is the behavior that “must be unlearned.”
What should we learn about international investing?
There are new tools and disciplined strategies that provide the opportunity to capture growth and manage risk within the international bucket. Exchange traded funds (ETFs) allow targeted, transparent, and traded exposure to specific segments of the international bucket. What kinds of opportunities? How about the opportunity to own India’s equity market in an ETF? How about owning an international Healthcare sector ETF? If you think the Yen will weaken against the U.S. Dollar, you can own the currency-hedged Japan ETF. Do you want to capture a specific international factor? You can own the International Developed High Quality or Low Volatility ETFs. The list is almost endless. We can be deliberate in the countries, sectors, currencies, and factors we include or exclude within the international basket! These allocations can adapt and tactically rotate in an attempt to capture changing economic and market conditions.
“Many of the truths that we cling to depend on our point of view.”
– Yoda from Star Wars Episode VI: Return of the Jedi
It’s time to change our collective point of view: A U.S. investment core allocation must be complimented by a growing international allocation. However, a general, international bucket will not do. This international allocation should be deliberate in what it includes and excludes, and it should adapt as political, economic, and market conditions change.
What do we conclude?
Over the next decade, the way the industry invests in international equities will change more than any other asset class. The opportunity is available to skate to where the puck is going to be.