Are U.S. Investors Missing International Opportunities?

Eric Franklin is the managing principal and owner of Seattle, Wash.-based Prospero Wealth, an advisory firm working primarily with technology industry professionals.

Jeff Benjamin: Why are U.S. investors generally ignoring non-US markets?

Eric Franklin: Our clients at Prospero Wealth are U.S.-based tech professionals. So, we tend to see a couple of different reasons that they disregard non-US markets.

The first is just market capitalization weighting. Even for the low cost, cap-weighted, and diversified crowd, which are a minority of our clients, their starting point is nearly two thirds in U.S. companies.

Layer in the additional facts that most of our clients are younger, have done some stock picking on their own, and are generally employed at companies like Amazon, Meta, and Reddit. It is not abnormal for us to find new clients coming to us with upwards of 90% of their holdings in the U.S.

JB: Where are you allocating clients assets, globally?

EF: Our core portfolios are more global than most. We are 50% U.S. and 50% non-U.S.

Within the non-U.S. bucket, we are currently 50% developed markets and 50% emerging markets, ex-China at this point. 

JB: How do you make the case for such large non-U.S. allocations?

EF: We’re not contrarian or controversial as a business strategy, so if things start to look more normal, then we will too. We take probabilistic bets when we think they’re in our favor. This happens to be one of those.

It’s also not something we took lightly. We looked at research and reporting from Meb Faber, Dimensional, and Vanguard that were all in alignment on long-term valuations and then we took an additional step of reviewing our models with the research team at Vanguard prior to implementing this for our clients.

Meb’s research on global allocations shows that tilting global has historically come at a small overall performance cost. As of mid-year, the average CAPE ratio for U.S. stocks was almost 34, developed markets were at 20 and emerging markets were at 15.

I think this kind of disparity in valuations creates a higher likelihood that an active global shift today can outperform or at the very least provide a better risk-adjusted return than cap weighting.

Finally, while I like this allocation for everyone, our tech clients, in particular, tend to have concentrated positions in employer stock that are difficult or impossible to wind down quickly. Pushing a heavier shift away from the U.S. makes a lot of sense just in correcting what they have and continuing to pile on.

JB: How does your performance stack up against U.S. benchmarks such as the S&P 500?

EF: It is true that clients look at the S&P 500, but that’s not how we benchmark or discuss performance in the company. Since we are actively seeking something that improves on low-cost diversified cap-weighted approaches, we use those approaches as our benchmark. We benchmark against the Vanguard Total World Stock ETF and the Vanguard Total Bond Market ETF. We’re seeking long-term opportunities to do better than that net of fees, and that’s what making shifts like these is all about.

The particular portfolio shift we’re talking about here is one we really only started making in April, so it’s not something we have a lot of time to report on.

JB: Are you finding everything you need on the international side through ETFs?

EF: Broadly speaking, yes. Most of our international exposures are built with ETFs from Dimensional Funds, Cambria, and Rayliant. 

The industry shift to ETFs has been a huge boon to us. It has improved our operational efficiencies as we push a lot of mutual funds out. We also continue to see a broad flourishing of tactics and strategies in the space, which has allowed us to create more value in our products. ETFs have been massively empowering to us.