While clients may have to be educated about the value of international diversification in a portfolio, William Suplee of Structured Asset Management, Inc. is a firm believer that it’s worth the effort. Putting international exposure into client portfolios via ETFs and mutual funds provides both bigger opportunities, through a broader investment universe, and helps to spread risk—something else that benefits a portfolio.
“While we recognize that international markets are slightly over 50% of the investment universe, we generally start our client portfolios at around 30% international,” said Suplee. “This is because we realize that people live and eat in U.S. dollars, and have a natural preference for their home country’s allocations,” he said.
“We’re a big believer in diversification because it allows us to have higher expected returns at lower levels of risk. We realize that to take these tilts towards international portfolios, you have to be patient, and we have to explain that to clients—that in order to capture these expected returns in other markets through diversification, you need to stick with a strategy over time,” he said.
That strategy over time includes rebalancing when the situation warrants, and as an example, Suplee said, “in the first quarter of this year we were buying more emerging markets funds. A rebalancing strategy is important. If we determine that international should be 30%, and it goes up to 50%, we would sell some of that and put it back into allocations. And if it dropped, we would buy it. [You have to] sell winners and buy losers, but you want to do it with a strategy in place, and even when it doesn’t feel comfortable,” he said.
Everybody has a home bias and while it makes sense to have more invested in your home country, the home bias is not as marked among Europeans as it is among Americans, according to Suplee. In fact, most Americans don’t have enough international exposure, despite the fact that portfolios with international diversification have better risk return characteristics, he said.
Suplee said that he relies on most developed markets, and for emerging markets uses mostly mutual funds that have constraints. That can be valuable to screen out certain countries if their legal protections of investors aren’t strong enough—such as China in some sectors, and also “years ago [we] had problems with South America.” The volatility of emerging markets also demands a longer time frame, he said, especially as regards rebalancing. “You have to be more patient with them if you have a rebalancing strategy, and let emerging markets trend longer”—especially if volatility is extreme and spooking investors.
Suplee sticks with mutual funds and ETFs rather than individual stocks, because they provide “broad-based diversification and reasonable costs for small investors.” He feels that ADRs are geared more toward large institutional investors. “You can’t really go out and do it yourself; it’s hard to buy enough securities to get a reasonable [level of] diversification,” he said.
Rebalancing strategies and international diversification, Suplee said, “are patient value-oriented strategies; part of the challenge of using them is the proper education of clients.” While some people are resistant to international, feeling more as if they’re in control with U.S. stocks, “there are greater growth opportunities internationally than in the U.S. over the next five years. Most people understand,” he said. “We show them an example of just [U.S.] stocks and bonds, and then break down the stocks and show them that with international [exposure as one of] the characteristics of the portfolio, over time, the risk goes down; over time, the portfolios look better.”