Equity Envy: Should Investors in Global Stocks Shift to U.S. Equities?

Over long periods, global diversification as opposed to U.S.-centric investing is hard to beat, a GersteinFisher report argues

Gerstein Fisher CIO Gregg Fisher says the global portfolio beat the U.S.-only portfolio 100% of the time over 10-year periods. Gerstein Fisher CIO Gregg Fisher says the global portfolio beat the U.S.-only portfolio 100% of the time over 10-year periods.

U.S.-only stock portfolio investors may be the subject of equity envy with their globally invested peers, but to load up on American stocks while ignoring international equities these days may be a bad idea, says a GersteinFisher report released Wednesday.

The recent strong performance of U.S. stock markets has caused many American investors to feel anxious about international investing and to question the merit of globally diversified portfolios. That concern is understandable, considering that U.S. stocks have gained 19% year-to-date on the S&P 500 Index versus a 7% gain for international developed country stocks as measured by the MSCI EAFE Index and a 12% loss for the MSCI Emerging Markets Index.

Yet believing that the U.S. market is the only place to be flies in the face of GersteinFisher’s strong data suggesting the contrary, according to a report written this week by Gerstein Fisher CIO Gregg Fisher.

(Click to enlarge) Individual asset class performance. Source: Bloomberg, Gerstein Fisher Research.The New York-based investment management and advisory firm looked at global versus domestic portfolios across rolling periods, using the S&P 500 Index as a proxy for the U.S. portfolio and rebalancing quarterly. The global portfolio had an overweight to the U.S. and a market neutral balance between developed and developing countries.

The result? Over 157 three-year rolling periods, the global portfolio outperformed domestic 68% of the time. And as the investment horizon extended to 10-year rolling periods, the global portfolio beat the U.S.-only portfolio 100% of the time, with an average outperformance of two percentage points annualized.

“In other words, the longer the time period examined, the better diversification performed,” Fisher writes. Is It Time to Abandon a Global Stock Portfolio? “It just seems more prudent to own a broadly diversified global portfolio of stocks than one limited to domestic-only stocks, wherein the investor is subject to the vagaries of a single economy’s business cycle, politics and currency.”

World Bank data show that in 2012, the U.S. economy generated 23% of global, and yet as of May 31, U.S. stock markets accounted for 49% of global market capitalization, according to indexing firm MSCI Inc. “That doesn’t sound like a sustainable situation,” Fisher concludes.

“There will always be one asset that returns more than others, but that winning asset will almost always be different for every one-year or even six-month period,” Fisher argues. “Neither we nor anyone else we know can reliably pick the winning asset class out of the myriad of options every year in advance.”

U.S. large cap value stocks (see color chart) were the best performer among 12 different global asset classes that GersteinFisher surveyed as of June 30. But if this situation holds until the end of 2013, then it would be the first year in a decade that U.S. large value will lead the pack – and the first year that it even places in the top three.

“In a similar vein, gold was at the bottom in the first half of 2013, yet dominated in 2010 and 2011,” the report asserts. “The point is that no prudent investor should attempt to pick the highest-performing asset in advance.”

Read Signs of ‘Great Rotation’ as Inflows Hit Record for U.S. Equity Funds at ThinkAdvisor.

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