Years ago, a fast food chain ran a catchy ad campaign featuring a focus group of meat and cheese lovers. In the commercial, the presenter describes the companies new burger, and one of the test subjects responds “I like the meat and cheese part, but why a bun?”
As investors, if we consider domestic stocks to be the “meat” and core bonds to be the “cheese,” sometimes we may ask ourselves “Why a bun?” too, although the question might instead be “Why international stocks?” or “Why emerging markets?” With large company domestic stocks being one of the top performing asset classes in recent years, outperforming foreign and emerging stocks, are these non-U.S. investment strategies worthwhile?
Exposure to international equities has important benefits. With international stocks becoming a larger share of the investment universe, higher potential growth rates abroad, the potential to reduce overall risk in the portfolio by investing beyond the U.S., and the added diversification benefit of multiple currencies, these foreign asset classes have much to offer the long-term investor. U.S. stocks, International and Emerging Market stocks are each influenced by a different set of economic and market factors, and each asset class has had its periods of investment glory, as the returns by decade show:
(S&P 500 Index annualized returns)
(MSCI EAFE annualized returns)
|Emerging Market Stocks*
(MSCI Emg. Mkt annualized returns)
|1970 – 1979||5.9%||8.8%||n/a|
|1980 – 1989||17.5%||22.0%||n/a|
|1990 – 1999||18.2%||7.0%||11.0%|
|2000 – 2009||-0.9%||1.2%||10.1%|
|2010 – 2016||12.8%||3.8%||0.8%|
Year-to-date through June 30, 2017, U.S. Stocks are up 9.3%, International Stocks are up 13.8% and Emerging Market Stocks are up 18.4%(*). Are the tides shifting in favor of international and emerging markets stocks? Time will tell.