By Gary Brooks, CFP®
With an 18 percentage-point difference in total return between the S&P 500 Index of large U.S. stocks and developed international market stocks in 2014, you may wonder why to even bother with investing abroad.
Add to the 2014 performance the fact that S&P 500 companies generate more than 40% of their revenue from outside the U.S. and you have even more support for already being a global investor simply by owning U.S. companies that do business around the world.
In 2014, the S&P 500 had a total return of 13.7% assuming dividend reinvestment. The MSCI EAFE Index of developed international markets returned -4.48%. Stretch this period of evaluation back to the beginning of 2009 and the S&P 500 holds nearly a 10% average annual return edge over five years.
Most U.S. investors don’t split U.S. vs. international evenly. Even though the actual size of the global market place is split nearly 50/50 between the U.S. and international stocks, most U.S. investors tend to hold about double the amount of U.S. stocks. For example, in a balanced portfolio of 60% stocks, 40% bonds/cash, the 60% stocks might be 40% U.S., 20% international. While this home-country bias has worked for U.S. investors over the past five years, the performance edge has experienced cyclicality over the past couple decades.
If we skip 2008 when all global stocks were in free fall and look at the previous five years, you can see a reversal of the present trend. From 2003 through 2007, the MSCI EAFE Index had nearly a 9% average annual return edge over the S&P 500. Developed international markets posted an excellent growth rate of 22.5% per year while the U.S. had average annual returns of 13.15%.
The five years prior to that? The lead reverted again. From 1995 through 2002, the U.S. led by almost 10% per year with the S&P 500 posting 12.6% average annual returns and EAFE just 2.1% average annual return.
The five-year pattern doesn’t continue to hold deep into the past, but going back to 1973, U.S. and international market performance has experienced a very active tug-o-war, with each side holding a large edge but ultimately coming back to approximately even. Collectively over the past 42 years, U.S. and international returns are within 1% of each other on an average annual basis with returns between 11% and 12% per year.
The global economy’s rapid advance has made many more companies, regardless of where they are headquartered, multi-national. They generate revenue in many regions of the world. This means they have variable influences of local currency value, demographic changes, and consumer trends. While many U.S. companies provide meaningful international exposure, many companies headquartered outside the U.S. also participate in the global economy.
Increasingly, we believe, investors will want access to the greatest companies of the world and there will be less distinction between U.S. vs. foreign stocks.
This won’t make it any easier to pick the winners and losers, or identify the overvalued and undervalued. But, we believe, broad participation in the innovation breakthroughs and profitable ideas of the future will be rewarded by thinking beyond borders.
~ Brooks, Hughes & Jones Wealth Advisors – Tacoma, WA
Past performance is not indicative of future results.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom*.
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.