This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by David Allen, a portfolio manager at Walnut Creek, California-based Accuvest Global Advisors.
Individual investors have become increasingly pessimistic about international investments and have reached the point that they are pressuring their advisors to eliminate them from their portfolios. This sentiment has been growing for the past five years and is strengthened by home-country bias that these investors often have.
What the majority of these investors do not realize is that the cycle of domestic outperformance has reached an inflection point, and now is the time to invest globally.
For smaller accounts, we are increasing our international allocation by adding the Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (DBAW | D-61) to our core U.S. position. DBAW offers ACWI Ex-USA exposure with the added benefit of hedged currency exposure at a time of dollar strength.
For larger accounts, we are taking a country-by-country approach in building out our international allocation. Our top three overweights are to the First Trust China AlphaDex Fund (FCA | F-26), the Deutsche X-trackers MSCI Germany Hedged Equity ETF (DBGR | B-69) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP | B-64).
Why Are Investors Giving Up On International?
There are two main psychological reasons investors are ready to give up on international. The first is that most U.S. investors, as noted, do have a significant home-country bias. Put simply, they want to invest in what they “know,” and think they can control the outcomes better by doing so.
The second reason is that they have a confirmation bias. In practice, investors will interpret new performance data as confirmation of their already-existing beliefs.
If we look at what equity investors have experienced in the past five years, it becomes clear that U.S.-centric investors have plenty of data to confirm their home-country bias. In four out of the last five years, the U.S. market outperformed international.
From an individual investor’s perspective, the most significant years were 2011 and 2014. In both of those years, the U.S. stock market made them money, while international investments lost them money.
Not keeping up with “the market” is one thing for advisors to explain to their clients, but when it comes to investments that impact the odds of success in a goals-based financial plan, those conversations can be exponentially more difficult.
Relative Performance: International Vs. U.S.