International Versus US Equities
I was on a conference call this week and explained to a bright collection of foundation investment committee members why we have chosen to not follow the standard allocation philosophy of having significant assets in foreign domiciled equities. I thought it might be helpful to outline our thinking regarding this investment allocation strategy.
30 years ago, a foreign company derived most of its revenue from foreign sources. Likewise, many US companies primarily sold to US consumers and businesses. For that reason, buying international vs. US equity assets often provided a level of diversification as these two asset groups often were not closely correlated with each other.
So, what’s changed the last 30 years? The word global has really overtaken the subset of geography regions. Companies that are domiciled in the United States often derive a significant percentage of their revenue from outside the United States. One only needs to look at Apple’s recent struggles related to sales outside of the United States (in China) as evidence of the impact of foreign demand.
Likewise, other companies such as Coca-Cola, McDonald’s, Boeing, and others are global powerhouses that rely on international sales. In other words, just because the company’s headquarters is in the United States doesn’t mean that 90% of its revenue comes from U.S. consumers and businesses. We live in a global economic community where boundaries are now being erased.
Also, just because a company is domiciled outside of the United States does not necessarily mean that all of their sales come from the particular country they’re located in. Nestle, for example, derives a significant percentage of their revenue from other markets around the world including the United States, South America, and Asia. In our view, it would be a mistake to categorize Nestle as a purely international asset just because its central office is located in Europe.
Because of this global meshing of economies, international and US assets have higher correlations then have had in the past. Said another way, it does not necessarily follow that the US equity market falls when international assets rise. Nowadays, asset groups are closely correlated and so the diversification one receives from dividing assets by geography has been reduced.
This is not to say we do not buy international assets (companies that are domiciled outside of United States); we do. But remember that many of these assets have a global component to their sales of products and services. The line is blurred, and they are not necessarily international positions in terms of primary revenue streams.
So, while we may be underweighted in international equities relative to more traditional allocation models, we believe this makes sense given our perspective that US equities provide a higher degree of transparency, oftentimes greater dividends, and are able to export products and services around the world. It’s one way that we have adjusted portfolio strategies over the years and we think it makes sense.
I trust this information gives you better insight on how we adjust portfolio strategies as macro conditions change. I suppose one strategy would be to not look at today’s headlines or trends and simply look at past information as indicative of what the future might be. A wise man once said, “past performance is no guarantee of future success” and we think that’s quite right. Likewise, we think allocations that might have been appropriate 30 years ago, those allocations might not be appropriate now giving changing world economic dynamics.
If you have questions about this information, please let us know. Always happy to answer questions.