The lead article in Barron’s this week said, “After getting comfortable overseas, U.S. investors may find it tough to come back”. They pointed to the recent outflows from US oriented funds and the inflows to non-US oriented funds, with an emphasis on emerging markets.

Let us add some additional history to that story. We have been tracking monthly net flows to US focused equity funds and to non-US and world equity funds since 2002.  Over that time mutual funds in the US (still a far larger asset pool that ETFs) had a net inflow of new money in the amount of $445 billion, of which 93.23% was to non-US and world equity funds.  Less than 7% was net to US focused funds.  Investors favored non-US funds with about $13 for every $1 to US funds.

Investors have awakened to the fact that the US is “a market”, not “the market” — yes, still the largest market, but now well less than 1/2 of world’s free float equities market-cap, at about 41%. About 59% of the world’s free float equity market-cap is someplace else.

If you consider the total market cap of world equity markets, including government held and closely held shares, the US market is considerably smaller yet.

We recommend beginning the equities allocation process with neutral world weights, and then deviating from there toward higher economic growth and away from lower economic growth, toward financial strength and away from financial weakness, toward competitive advantage and away from competitive disadvantage, with an appropriate eye toward reasonable valuation and awareness of liquidity, geopolitical and other risks.  That would apply to both individual companies and to countries.

SPY (S&P 500), EFA (MSCI EAFE) and EEM (MSCI emerging) are important representatives of the key parts of the world’s equity markets.  Getting the broad categorical mix that they represent right within the equities allocation is the primary order of business.  After that supplementing exposures to sectors and countries, probably comes next, and then subsequently styles and market-caps, in the secondary and tertiary design.

Compliance Disclosure:

We own SPY, EFA, and EEM in some, but not all managed accounts, and do not currently own any other funds discussed in this article. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. This report is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance. Do not rely solely on this research report when making an investment decision. Other factors may be important too. Consider seeking professional advice before implementing your portfolio ideas.

Richard Shaw
QVM Group LLC