International Asset Allocation Revisited
by Craig MacKinlay
Investments in the U.S. stock market have in recent years had a stronger return than investments in international stock markets. For the three years 2014, 2015, and 2016, the average annualized return of the S&P 500 index was 8.87% whereas the average annualized U.S. dollar return of the MSCI ACWI ex US was -1.78%. As Marshall Blume pointed out in his cover letter of September 2016, this has led to questions about the benefits of international exposure in the portfolio of a U.S. investor. Marshall noted that while there will be periods when international markets underperform, international stocks do deliver significant benefits from diversification. Combining this benefit with the view that future returns are unpredictable does justify international exposure. The amount of international allocation should be determined as part of the risk control process.
Now that the first three quarters of 2017 have passed, we can consider how the domestic versus international allocation decision has influenced performance this year. While nine months of history in the stock market is too short a period to base investment decisions on, it is interesting to look at the role international allocation. This role is the issue considered in this edition of Partner Talk.