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Your Portfolio May Be Less ‘International’ Than You Think

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Considerable bias to U.S. investments persists in advisor portfolios, according to research from Janus Henderson.

To focus on home bias and other prominent industry trends, Janus Henderson tracked the average allocations across the thousands of advisor models it analyzes.

Based on this proprietary model analysis database, the firm finds that the average advisor’s global developed equity allocation consists of only 22% international equity, while the MSCI World Index allocates 40% to international equity.

“Portfolios may be missing out on international equity income opportunities, not to mention the potential diversification of both growth and risks compared to U.S.-based holdings,” according to Janus Henderson. “While international investments can present a unique set of risks investors should consider carefully, adding foreign exposure can enhance portfolio diversification, potentially lowering risk over long-term horizons while allowing investors to take advantage of growth potential outside the U.S.”

The firm then addresses three of the most common concerns it hears about investing abroad and international exposure.

It’s wrong to think multinationals make a portfolio global.

Because many of today’s larger companies have global sales and suppliers, Janus Henderson sometimes hears the argument that there is little benefit to diversifying stocks by geography.

According to the research, 30% of the total revenue of companies in the S&P 500 comes from outside the country.

“It is true that companies are more global than ever,” the firm admits. “However, investing in multinationals through domestic markets doesn’t necessarily provide broad or balanced international exposure.”

As Janus Henderson points out, no two countries have the same sector exposure footprint.

The U.S. is skewed toward technology and health care sectors, while the ex-U.S. portion of MSCI World has its highest concentration in financials and industrials.

Therefore, according to Janus Henderson, an equity investor in solely U.S. equities may be subject to large biases to a short list of U.S. sectors.

Some global fund managers aren’t so global.

Janus Henderson often hears that financial advisors are going global by using global managers in portfolios.

“In fact, the Morningstar World Stock category is the second most popular category in the Morningstar International Equity group for active managers and its constituent funds are held in 21% of our advisor portfolios,” according to Janus.

However, the firm thinks that investors might not realize how U.S.-centric many of these global strategies are. 

The research looked at three global funds and found that if an advisor moved 10% into one of these global managers – given the U.S. exposure in these funds – only about 40% of that position on average or 4% of the model is actually being allocated to international equities.

Income portfolios may be a blind spot.

A third refrain Janus Henderson hears is that traditional equity portfolios do not offer enough yield to satisfy income needs.

“We believe this is a half-truth at best, because the yield on many portfolios is suppressed due to home bias and the resulting concentration in crowded, relatively low-yielding U.S. stocks,” the firm states.

The report then compares the average advisor global equity portfolio to stocks in the MSCI World Index yielding at least 3%. The top 5 sectors in the MSCI World Index are all international – ex-U.S. financials, ex-U.S. industrials, ex-U.S. real estate, ex-U.S. consumer discretionary, and ex-U.S. utilities. Meanwhile in the average advisor portfolio, the top five sectors include U.S information technology, U.S. financials, U.S. health care, U.S.  consumer discretionary and U.S. industrials.

— Check out ‘Buy’ Signal Persists in September: Merrill on ThinkAdvisor.