Over the past few years, a number of his clients have told Riaan Nel, managing partner of Eugene, Ore.-based financial advisory firm Detlefsen Nel & Associates, they’re not sure there’s much point in investing in international markets because the U.S. stock market has been such a great performer—a far better performer, in fact, than most international markets.
“The argument I give them, though, is that we are a financial planning firm that’s planning for the long term,” Nel said, “and although the U.S. is a very large presence and dominant on a relative basis, in the long-term, other countries will increase their portion of the world economy, so if an investor is planning for the long-term, then they have to have exposure to those countries.”
And anyway, even if an investor isn’t directly buying securities from companies in other countries and isn’t directly invested in an international or an emerging markets fund, almost every company these days, and that goes for U.S. firms as well, is deriving some portion of its revenues from abroad, he said.
“Over time, the integration of the markets has led to very few things being disconnected from one other, and even a significant number of companies in the S&P 500 derive a major portion of their profits from abroad, which means that most investors have some kind of exposure, direct or indirect, to international markets,” Nel said.
For any investor with a long-term outlook, this exposure is important, not least because more than half of the publicly traded companies in the world are not in the U.S., and because three-quarters of the world’s GDP is produced outside of the western world, supported in large part by the rising middle class in many countries.
For Nel, taking advantage of those dynamics for his clients means choosing to place their money with tactical managers who have the ability to move quickly between markets even when things get volatile, and who can actively shift assets around depending on where the opportunities are.
His choice of managers, investment funds and the amount of international market exposure varies from client to client, he said, and depends on an individual’s age, investment goals and which phase of the financial planning cycle they’re in.
“We choose active, tactical managers because many of our clients are on the older side and don’t have time for passive investing, and many of the managers we have chosen have outperformed the S&P 500 over a five- to 10-year range because they don’t use a static investment model and can hold cash positions even in foreign currency, which is what we prefer,” Nel said. “And because I believe that tactical managers also outperform in down markets, this makes it easier to convince clients and to get them to stick with their investment plans.” In terms of selecting managers and funds, the firm has its own filtering system that’s based on its view of the world in the longer-term.
Nel has a bias toward the emerging markets because “we believe that all of them will become a more important portion of the global economy because of demographics, a rising middle class and the aging population in the developed world, combined with systems that are overburdened with debt and though delivering, will continue to be strained by the pressure on their social welfare systems, which will impact growth in a negative way,” he said. “That’s why in the long-term, we will see better growth in emerging markets.