Portfolio management: multiple avenues for international exposure
In a previous article, we reviewed the changing role of the United States in the overall global economy and financial markets. While the U.S. remains an important part of the global picture, other economies are growing at a faster pace and claiming a bigger share of the world’s markets.
Given, then, the expected robust growth in many foreign countries (particularly emerging countries) and the chances for slower U.S. growth in the near future, it’s quite possible that returns from international investments may continue to be more appealing than those in the U.S., following the pattern of the last few years. In addition to the attractive return possibilities, investing in markets which do not move in lockstep with the U.S. equity markets can have valuable diversification benefits, lowering the volatility (risk) of one’s portfolio. To exploit these advantages, we at Westmount can—and do—use several strategies when constructing client portfolios.
First, in the pure stock portion of most clients’ portfolios, we currently allocate 31% directly to foreign securities. This allocation is distributed among larger and smaller companies in established foreign markets, and to foreign emerging markets. In addition, some of our alternative asset holdings have meaningful foreign exposure. The international real estate fund is of course completely invested overseas; in addition, our main natural resources fund has about 40% of its portfolio in non-U.S. securities. (Even the low volatile merger arbitrage fund that we own in most clients’ portfolios has identified attractive investment opportunities overseas, representing approximately 15% of its portfolio.)
Foreign exposure is also achieved through the ownership of U.S. stock funds. Many of these funds own foreign companies, with some holding as much as 20% overseas. Beyond that, most large U.S. companies held in these funds generally participate in, and draw a significant part of their revenues from, global commerce, thereby directly participating in global growth as well. In fact, about half of the total revenues for companies in the S&P 500 come from outside the U.S.
Finally, our bond allocation includes a 20% allocation to foreign bonds, although bonds are not as directly impacted by the global growth story as stocks.
Although Westmount’s allocation to international securities has evolved over time, we have always been strong believers in the importance of participating in global markets. Over the past few years we have increased the portion of our clients’ portfolios dedicated to foreign investments, and expect that if conditions remain favorable we will continue to do so in the future.