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January 29, 2013 at 04:31 AM
If you ask Frank Armstrong how long he’s used foreign investments in client portfolios, he’ll say “since inception.” He’ll go on to say that of the firm’s $650 million under management, 50% of equity assets are in foreign holdings—a strategy that in 1993, when he launched Investor Solutions, was considered both “highly risky” and “quite aggressive.” However, Armstrong has found such an approach a good one for his clients that has paid off over the long haul. “Additionally, we like the almost perfect dollar hedge that a 50% foreign equity position provides,” he points out.
How did Armstrong get started along the foreign investing path? By looking for asset classes with low correlations to one another, he says, in accordance with modern portfolio theory (MPT). “At the time [foreign investing] was considered quite aggressive,” he says, “but the data was compelling that it would in fact both lower risk and increase returns, and that’s been the story since then.” While most people, if they considered foreign investing, he explains, would “consider maybe 10–15%, … data pointed to a much higher exposure.” So that’s what Armstrong used.
“If you put yourself back in 1993, foreign investing was not at the top of most people’s mind,” Armstrong said. In spite of the fact that it actually lowered portfolio risk, people thought of it as a chancy move. Still, asked if it was hard to find clients to go along with such a radical (for the time) strategy, he says not.
“Clients sought me out because they identified with that kind of strategy,” Armstrong said, “People who thought that [MPT] was nuts probably didn’t call me, but people who identified with it did. If I had gone into a bar and said, ‘Hey, guys, we really need to increase to 50% foreign,’ I wouldn’t have gotten much of a reception,” he said.
Armstrong’s approach doesn’t include focusing on specific countries or regions. Instead, he and his firm use index funds and ETFs that offer access to ex-U.S. investments. Initially, the firm used the MSCI EAFE (Europe, Australasia and theFar East). However, now its approach is broader, including now-available emerging markets and the most recent addition: foreign real estate.
