The Case For International Diversification
Since 2007, investing in the US market has done really well for investors and many have questioned the benefits of allocating to other markets. After all, buying an S&P500 index tracker seems like a no-brainer.
However, zooming out and taking a long-term view (seen in the chart above), especially when comparing the relative outperformance between the U.S. and EASEA index (Europe, Australasia and South East Asia), one period of underperformance is almost always followed by a period of outperformance of almost equal magnitude.
In this study by AQR in the Journal of Portfolio Management, it was discovered that since 1990, the US outperformance against the MSCI EAFE Index (Europe, Australasia and Far East) on a currency hedged basis had been a huge +4.6% per year. However, after controlling for valuation changes, this advantage is reduced to +1.2%. This means that the majority of returns in the US stock market had been driven by investors willing to pay more for a dollar of fundamental earnings compared to other markets. Can we assume that investors around the world will continue bidding this up? It is wise not to bet too much here.
The case for international diversification bears even more merit today. This rings true for both investors in the US and in Singapore. We tend to exhibit a home bias, preferring to hold assets that we understand and are familiar with; but exposing your investments across international boundaries helps lower risk and reduces the possibility of higher impairment of capital should a systemic risk event occur.
GYC’s core portfolios are designed to have a diversified approach across geographies and countries such that you are able to target markets that have higher expected returns. A value bias allows us to systematically invest with a margin of safety even in expensive markets without having to give up returns.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
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