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Client Conversations: Investing Abroad: Opportunity Knows No Boundaries

February 2018

For many investors in the US, the rest of the world has faded into the background just as global markets begin showing signs of a rebound.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


With a renewed sense of nationalism sweeping across the country, many Americans are increasingly focusing their attention Homeward. The “America First” approach of the current presidential administration has taken the attention of many in the United States away from the global stage. The combined effects of those political policies and the continued strength of the US stock market adds up to one undeniable result: The rest of the world faded into the background just as global markets began showing signs of a rebound.

In fact, US investors have historically shown a general pattern of favoring domestic equities and bonds throughout the years. Many exhibit a “home-country bias,” meaning that they invest a majority of their investments in domestic markets, not in foreign securities. While nearly 75% of the world’s gross domestic product (GDP) is outside of the US, just 15.6% of the average US mutual fund investor’s total equity allocation is overseas.1

So, it seems the expected upside potential of international equities couldn’t come at a more inopportune time. Reluctant investors awash in today’s news headlines may not be looking beyond our borders for ways to help diversify their portfolios or increase their return potential. Maybe they should start.

 

A decade of domestic dominance

After years of strong domestic equity returns, it’s not surprising that many investors continued to favor companies and opportunities found right here in the good ole’ US. They’ve performed well. The US has been the best-performing major region for equity investors over the last 10 years.2 Between 2008 and 2017, the average returns of US stocks dominated. US Mid Caps—as measured by the Russell Mid Cap Index3—returned 9.1%. US Small Caps— as measured by the Russell 2000 Index4—returned 8.7%. US Large Caps—as measured by the Russell 1000 Index5— returned 8.5%. That placed these three domestic categories on the top of investment performers. However, there are early signs overseas that equities are beginning to turn the corner as global markets continue to rebalance. We’re starting to see the beginning of greater performance for international equities not seen in a number of years. 

 

The turning tide

This cycle of outperformance is nothing new—there’s been a back and forth swing between domestic and international markets for years now. FIGURE 1 shows the cyclical nature of periods of outperformance alternating between the two types of stocks during the past 45 years.

 

Domestic stocks and international stocks alternate periods of outperformance

1/1/70-12/31/17 (5-Year Rolling Returns)

CCWP022_1

Domestic stocks are represented by S&P 500 Index.6 International stocks are represented by MSCI World ex USA Index.7 The chart shows the values of the S&P 500 Index’s returns minus the MSCI World ex USA Index’s returns. When the line is above 0, domestic stocks outperformed International stocks. When it is below 0, International stocks outperformed domestic stocks.

Past performance is not a guarantee of future results.

The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only. | Data Source: Morningstar, 1/18

 

International equities outpaced US stocks in the early 2000s. As mentioned earlier, what followed was years of US stock outperformance. The cycle appears to be turning once again toward overseas. Starting in 2016, international equities began to pick up speed. During 2017, international regions outperformed the US.8 The top performers included Emerging Markets (37.8%),9 International Equities (27.8%),10 and Europe ex UK (26.2%).11

 

An opportune time to look abroad?

Because international markets are so large and dynamic, an actively managed strategy may be a choice for investors who want to diversify their portfolios. Have a discussion with your trusted financial advisor about how you’re allocated to international stocks for today and the future. He or she can help you decide what percentage should be focused abroad to help accomplish your financial goals—and help you stay diversified no matter what’s going on back here at home.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


1 Data Sources: World Bank, 2/17; Morningstar, 4/17
2 Data Source: Morningstar, 1/18
3 Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership.
4 Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.
5 Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
6 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.
7 MSCI World ex USA Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of 23 developed markets, excluding the U.S.
8 Data Source: Morningstar, 1/18
9 MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of 21 emerging market country indices.
10 MSCI ACWI ex USA Index captures large and mid cap representation across developed markets (excluding the US) and emerging markets countries.
11 MSCI Europe Index is a free-float adjusted market-capitalization-weighted index designed to measure the equity market performance of the developed markets in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece,Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, excluding United Kingdom.

 

All investments are subject to risk, including the possible loss of principal. Foreign investments can be riskier and more volatile than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions (e.g., “Brexit”). These risks are generally greater for investments in emerging markets. Diversification does not ensure a profit or protect against a loss in a declining market.

This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds. 

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