For as long as I have followed Vanguard Group founder and former CEO John Bogle, he has never embraced investing in foreign stocks. “I wouldn’t invest outside the U.S.” he said during an interview with Carla Fried for Bloomberg Business. “If someone wants to invest 20 percent or less of their portfolio outside the U.S., that’s fine. I wouldn’t do it, but if you want to, that’s fine.”
This isn’t a new position for Bogle. He has been lukewarm on foreign stocks for decades. I don’t agree with him, and neither do most advisers. The data show that allocating 20–40% in foreign stocks has provided a diversification benefit in long-term portfolios. That said, Bogle’s viewpoint is worth exploring because it leads to an interesting discussion about revenue generated by S&P 500 Index companies—specifically the revenue earned from their overseas operations.
Many U.S. corporations do significant business overseas. According to S&P 500® 2014: Global Sales data, the percentage of S&P 500 sales from foreign countries increased in 2014 after five years of stagnation. The overall rate was nearly 48% in 2014, up from around 43% 10 years ago, as illustrated in Figure 1. While a roughly 2% increase isn’t huge in the grand scheme of things, it indicates that foreign business has at least remained alive and well among S&P 500 companies.
Figure 1: S&P 500 Foreign Sales as a Percentage of Total Sales
Source: S&P 500 2014: Global Sales; Howard Silverblatt, Senior Index Analyst, Chart by R. Ferri
To Bogle’s point, sales of U.S. goods and services to foreign countries have a significant spillover effect in the U.S. equity markets. Growth overseas parlays into growth for U.S. multinational corporations, and news of slower growth has the opposite effect. A sizable portion of foreign sales are conducted in foreign currencies providing U.S.-only investors with exposure to currency diversification.
So is it necessary for U.S. investors to directly own foreign stocks given these exposures? Bogle’s point appears valid from a foreign revenue perspective. However, before deciding, let’s dig deeper into where the foreign revenue is coming from. We can start by looking at the countries generating foreign revenues and measuring how much business we do with each. The S&P 500: 2014 Global Sales report does not have complete data on this because not all companies break down foreign sales by country. Table 1 is a summary of foreign revenue by region from the data that is available.