Global diversification remains the mantra for most advisors. But in case you haven’t jumped on the bandwagon, it is time to sit up and take notice.
The relative amount of investment opportunities outside the United States has been growing for years. And with China and India ready to take leading positions in the global economy, that trend will only accelerate.
Currently, the United States accounts for about 42% of the world’s market capitalization, down from 67% in 1970.
In other words, your dad’s generation could get away without diversification, but your clients cannot.
But forget market cap for a second and think about the overall economy. The United States also accounts for 25% of the world’s economic output, which is a lot when you consider that that output is generated by less than 5% of the world’s population.
But after a burst of patriotic pride, think pragmatically: 75% of the world’s output comes from somewhere else.
Mike Welden, the director of investor and advisor education at Lord Abbett, said that the United States’ economy is service-oriented. So, if your clients want exposure to certain industries like metals and mining, building products or shipping, they really have to go global. Even wireless telecommunications is dominated by non-U.S. companies, with six of the 10 largest companies based outside of the United States, according to Lord Abbett’s research.
There are a wide array of mutual funds and exchange-traded funds that you can put clients into for global diversification. One of the newest ones, Absolute Asia Dynamic Equity Fund, is a multi-cap stock fund from Natixis Global Associates and Absolute Asia Asset Management Ltd. The fund, launched earlier this month, invests in Asian equity markets, excluding Japan and is designed to maximize total return while offering investors exposure to both the developed and emerging markets in the Asia Pacific region.
“The economic vitality of the Asia Pacific region is quickly converting one of the world’s most diverse geographic locations into an international marketplace of large-scale commerce, investment and development that is capturing the interest of many investors,” said Bill Sung, chief investment officer of Absolute Asia and co-portfolio manager of the new fund.
China remains one of the most interesting international investment opportunities, but Weldon suggested that the first step for your clients should be buying a broad international fund instead of focusing on a specific area or country.
Geography-specific funds are fine, but they are better suited for clients who have already taken the step of establishing a broader global allocation and now have a specific reason to invest more heavily in one area, he said.
For its part, Lord Abbett has an international fund that sits at an interesting crossroads: global investing and the quest for dividends. Launched in mid-2008, the International Divided Income Fund still has few direct competitors, Weldon said. Its universe consists of non-U.S., dividend-paying companies with a market capitalization of $1.5 billion or more. In 2009, class A shares returned 40.6%.
So what percentage of your client’s portfolio should be allocated to global investments?
Weldon said that’s tough to answer as a general rule because an advisor needs to understand their clients preferences first. Welden said that the old notions of 5% to 10% won’t really do much, but at about 15% to 20%, an investment in international markets can start to make a difference and even 40% isn’t out of line, depending on the individual.
It all boils down to growth, and right now there just isn’t going to be a lot of sustained growth in domestic investments. We can expect short bursts here and there domestically, but for broader growth we need to look abroad.